Hype does not equal profits. Hype may actually mean losses in the crypto space. Unless you are deep into the weeds on what is new and trending, if you hear about the next great thing, it’s possible you are at the end of the road and that opportunity is about to turn into a bust. A much better plan, if you don’t want to spend half your day researching items, is to find the projects that seem to have sticking power and invest when the market is down overall.
Over the past few years, the Cryptocurrency industry has been making headlines nearly every week. Many people have gotten very wealthy investing or leading the cryptocurrency industry. At the same time, many people have lost a lot investing in the industry. In addition, more people have been scrutinizing the ecological impact of crypto mining, as well as its potential facilitation of illegal activity. What is being done and what can be done to address these concerns?
In this interview series called “5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency” we are talking to leaders in the cryptocurrency industry, as well as successful investors, who share insights from their experience about how to successfully invest in Cryptocurrency.
As a part of this series, I had the pleasure of interviewing Michael Denny of theinvestmentnerd.com
Michael is a CPA and CFA charterholder and has been investing in cryptocurrency since 2012, he has been through several cycles which has given him a longer-term perspective as compared to most investors in the space. Michael has worked as a Deputy CIO of a multi-billion dollar college endowment for over a decade, where his day job includes portfolio management and investment manager evaluation. Michael shares his investment and personal finance thoughts at theinvestmentnerd.com.
Thank you so much for doing this with us! Before we dig in, our readers would like to get to know you a bit. Can you tell us a little about your backstory and how you grew up?
I was the nerdy 10 year old asking the bank teller what their CD (certificate of deposit) rates were, at our local BofA branch, never mind I didn’t have the minimum needed to open one. Numbers and money have always been a core fascination of mine. I grew up in a relatively poor community, and I watched my parents make a lot of mistakes with their finances, but I did have a “rich” aunt who used to call me her little “millionaire,” After she passed away and I had a bit more exposure to the world, I realized she wasn’t actually “rich” but just a middle class person who had saved and invested her whole life so she could live without worry in her retirement. Her example and belief in me was a big reason why I am where I am. My goal is to hopefully inspire a few others and show people that being financially independent is not out of reach for most people.
After college I pursued a career in finance. I began by working my way up from the bottom at a credit union, helping start and maintain financial institutions in the developing world with a non-profit, and in the last ten years I have worked at a college endowment helping to invest their assets.
As to my crypto back story, that started about 10 years ago when I first heard about Bitcoin. I have a bit of a Libertarian streak so was exposed to some of the people and writings in that arena. I recently found an old email with a couple of friends talking about it back then but unfortunately, like most people, it took me another year or so to really look into it seriously and then buy my first Bitcoin. From there it has literally been an intellectual love affair for me. I just can’t get enough info and news on the space, I really do love it. It combines economics, money, computer science, the magic of cryptography, politics, freedom, and the future of humanity all in one intense ever evolving ecosystem!
Is there a particular book, film, or podcast that made a significant impact on you? Can you share a story or explain why it resonated with you so much?
I recently read “When Money Dies,” by Adam Fergusson. The book chronicles the hyperinflation of the Weimar Republic after WWI. I have a particular worry about inflation right now, and its impact over the next 10–20 years. The book was a great way for me to look at what that means in an extreme example. There were things that were eerily similar to issues we are facing currently, and there were other things that seemed very far from today’s world. I think the biggest impact was showing me how nations and people can get trapped in a situation where they don’t have a good exit strategy. This can lead to scary and uncertain times.
On a lighter and more crypto related note, I’m an avid listener to the Epicenter.tv podcast. They do a great job of providing a little more technically focused angle on different crypto projects. The interviewers ask great questions, and they aren’t afraid to point out flaws in a project. They aren’t selling anything to their audience so it’s a pretty good unbiased source of information.
Is there a particular story that inspired you to pursue your particular career path? We’d love to hear it.
I don’t have a story but I do have an idea that has inspired me. I think it’s best summed up by former president John Adams’ quote, “I must study politics and war so that my sons may have liberty to study mathematics and philosophy. My sons ought to study mathematics and philosophy, geography, natural history, naval architecture, navigation, commerce, and agriculture, in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry, and porcelain.” Though I have been fascinated with numbers and money since I was a child, I have also loved science deeply. I had a fork in the road after high school. Go try and become a scientist or study finance and business. I ended up taking the finance and business path for the exact reasons Adams spoke of above. If I could understand and master money, then I knew I could provide my children with the base for them to go further and do more than I have. That’s my goal for my family and all the people around me.
Can you share a story about the funniest mistake you made when you were first starting? Can you tell us what lesson you learned from that?
There have been several times that I thought I had figured out a way to play the market and win big only to discover that I was not as clever as I had thought. But those lessons have been invaluable in teaching me how the markets work, and how specific mechanisms within those markets work. But if there was a particular lesson or mistake I’d share it’s probably regarding leverage, and being too sure of yourself. Back just as the financial crisis was rumbling to life, I had read an article about Bank of America. I did some research, and since I worked at a credit union I figured I had some ability to analyze its financial statements. I bought some stock in the 40 dollars range thinking I was getting a bargain because it had just been trading in the 50 dollars, and it was the largest, best run bank. As the financial crisis unfolded, BofA stock began to fall. I kept looking at it and thinking, ”wow, this is just such a deal! I need to buy more!” Once I ran out of cash, I opened a margin account and told myself, “You’ve looked into this. You know what’s going on. You work for a financial institution. This is your opportunity to make a big score!” So, I leveraged my account and bought even more. Well for those of you who don’t know, BofA ended up trading all the way down into the 2 dollars range. By then I was done, I had to keep putting money into my account to make up the difference and was so stressed about the whole thing I could hardly sleep. I could go on and on about what this and several other major events and decisions taught me during the financial crisis, but the summary was that leverage is VERY dangerous and don’t be too sure of yourself. You can be right in the end but also be way too early and lose big time.
None of us are able to achieve success without some help along the way. Is there a particular person who you are grateful towards who helped get you to where you are? Can you share a story about that?
I talked a little about my great aunt earlier, she was a big early influence on me. But if I had to pick another person or two, I think I would pick the CFO and President of the Credit Union I worked for during college and after I graduated. At first, the CFO was skeptical of me as a young kid, but she took a chance by making me an accounting supervisor. After a couple years when she was leaving, she recommended me for her job. The president of the credit union also took a leap of faith and helped make that happen. They handed the reins over to a 25 year old, it was one of the most stressful times in my life, but in the end gave me tremendous self-confidence about what I was capable of and of what other people are capable of.
Are you working on any exciting new projects now? How do you think that will help people?
Well theinvestmentnerd.com is a relatively new project for me. We aren’t quite sure where it will end up, but my goal is to help people understand their money and teach them how to invest. When I talk with people there is such a huge gap in knowledge. I want to present things in an approachable, but useful way. Many people I meet guard their money lives more closely than almost any other part of their lives. That secretiveness and insecurity has led to a country where a good portion don’t have 400 dollars saved for an emergency. I know this might be a controversial statement, but that isn’t due to a lack of money. It’s due to a lack of understanding of how important saving is. Saving is a discipline, like eating right or exercise, it’s fundamental to a well-functioning life. The crazy thing is I’ve been to Uganda, Rwanda, Kenya, Cambodia, Sri Lanka, Swaziland and have seen incredibly poor people work hard, save money, and improve their lives. So I truly believe if they can do it in countries that have so much less, we in the US can do it as well.
Ok super. Thank you for all that. Let’s now shift to the main focus of our interview. The cryptocurrency industry seems extremely dynamic right now. What are the 3 things in particular that most excite you about the industry? If you can, please share a story or example for each.
I’d say Defi, DAOs and NFTs are the most exciting for me right now.
Defi is short for decentralized finance, which is the overarching word used to describe all of the things going on in the crypto space that have to do with utilizing money in some form. It includes lending, saving, derivatives, trading, etc. Defi is something that you need to experience to really understand. To be able to take an ETH, sell it for USDC (a US dollar equivalent), then deposit that amount in a lending protocol and earn an interest rate that is multiples of what you could in a bank is just magical. I don’t know if you’ve interacted with a bank recently for anything important, or any larger dollar amounts, but they can be a real pain. There is hoop after hoop to jump through, some of them regulatory but a lot of them are there as a way to protect themselves. Using crypto to move money around is like a breath of fresh air in so many ways. There are lots of user interface issues and other problems that are still being worked on and improved but you can see what the future holds when you start using Defi.
DAO’s is short for Distributed Autonomous Organizations. The idea here is you can basically run a co-op/company/club/corporation all on the blockchain in a secure fashion. A lot of the organizations in the Defi space are actually DAOs now. The space is developing rapidly, and the tools used to run these organizations are getting better and better. There is a group that I follow called Bankless. It was started by a couple of people, with a podcast and newsletter, and they formed a community around them. Well this community spontaneously created the Bankless DAO, and it’s been amazing to watch their progression. They have started organizing themselves around this token that they created, and are literally becoming a kind of economic co-op with the goal of helping the world become “bankless” using all the tools in Defi. They have some interesting content on the space for anyone interested. As a disclaimer, I was a part of their original token distribution because I was following them and still hold the token because I’m interested to see where it all goes.
NFTs is short for Non-Fungible Tokens. I’m sure many of your readers have heard this in the news with NBA top shot and other projects using them. The idea here is that you can use the same blockchain technology to not only represent fungible tokens, or bunches of tokens that are the same (think ETH or USDC,) but you can also represent individual unique tokens to represent one particular thing. This unique token can represent anything at all, from a slam dunk video, to the title on your house. I think you can see how powerful NFTs could be if used with property title, or identification and Defi. Right now though there are just a lot of experiments in the space when it comes to collectibles and games. For fun, I’ve followed several games over the last few years just to see how the space might progress, I even had my kids play a game for a while called Axie Infinity. Recently I went to look at their game items to see what they were worth (because you can easily trade and sell NFTs), my jaw dropped at the price. When I told them, they collectively told me to sell! So now my kids actually have a little bit of ETH to decide what to do with, it should be a fun lesson for them on many fronts.
What are the 3 things that concern you about the industry? Can you explain? What can be done to address those concerns?
- The first and foremost concern I have about the industry is the level of sheer gambling and as people in the industry call it “degen” activity that exists. There are a lot of people who don’t have a full understanding of how markets work and the risk they are taking. There are lots of stories of people betting everything on this random coin or that random NFT and losing it all.
- Second, because of this level of frenzy from people there are a lot of scammers looking to make a buck off a person who has dollar signs in their eyes. As to what can be done about those things, I think the first step is for people to talk about it, like we are here. People need to share their mistakes, watch each other’s backs, and learn from their own decisions and others.
- The third thing that concerns me, is just how complicated the industry still is. The vast majority of the exciting stuff going on in the industry requires a certain familiarity with things that many older people are just not used to. To be frank, it’s stuff that many younger people also struggle with. I’ve sat with several people walking through the process of setting up their first wallet, or trading or staking something in Defi, only to see the frustration build for them because there is so much to learn. This technology, though very exciting, has a long way to go until it’s accessible to most of the population. That being said, that is exactly why investing in it has a lot of potential right now, fighting through the pain of learning the ins and outs means you are on the bleeding edge of what is going on, and that has been very rewarding for the last 10 years.
What are the “myths” that you would like to dispel about cryptocurrency? Can you explain what you mean?
One of them is that this whole industry is a big get rich quick ponzi scheme, and that there is no substance to it. I hear that myth a lot, and honestly it’s usually people’s first thought when they see the industry, but many of those same people when they dig into all of it change their tune. The whole crypto thing is weird and hard to grasp, but once you do, it’s like your eyes are opened to a brand new world. This set of technologies and all the things that are currently being developed, at an incredibly rapid place, will end up being the base layer of how society is organized in the future. Just like the law and contracts and companies are the base layer right now, that is going to largely be replaced by these technologies. Human history is a story of us figuring out how to coordinate and work with each other better and better, and crypto is the next great step in that process.
How do you think cryptocurrency has the potential to help society in the future?
Continuing on this thought of human coordination, I think it was probably hard for people to understand the enormous gains in efficiency and hence the enormous wealth that was partially brought about by the creation of rule of law and the corporation. Crypto is a new breakthrough along those lines. Like I mentioned before, the Bankless DAO has been an eye opener for me. This group of people created this token to organize around, and are now creating a co-op to create value for others and themselves. It’s the power of the internet and the power of economic incentives aligned to coordinate a group of people for mutual benefit, that is society at its core, and this technology gives a new way to do that. I think we will see an explosion of experiments that will help people express themselves and create new and incredible things together because of crypto. I know that sounds a little over the top, but just watch what comes of all of this over the next 20–30 years, it’s going to be exciting.
Recently, more people have been scrutinizing the ecological impact of crypto mining. From your perspective, can you explain to our readers why the cryptocurrency industry is creating an environmental challenge?
Bitcoin is the primary focus of environmental criticism because of its size compared to all other cryptocurrencies. The way Bitcoin is “mined” requires a computer processor to run lots of calculations. And as you know when you are running your phone a lot, it warms up, it’s using energy. Without going into all the details, because of how valuable bitcoin is, it means a whole lot of people are running a ton of computers around the world to compete to win/mine those bitcoins. All those computers require a lot of energy, about as much as a small country. Most energy is still produced from fossil fuels around the world, so that means Bitcoin burns a lot of fossil fuel to run.
From your perspective what can be done to address or correct these concerns?
I think there are two primary points to make. Bitcoin and the other crypto currencies that are mined with proof of work (this is using the computers to run all those calculations) are just using energy, like everything else in the world. Bitcoin does not require fossil fuels to run, it can run on solar power just as easily, electricity is electricity. So the real concern is actually how our power is produced in general which of course is a much larger subject, and whether using that power is worth it. Because of the power Bitcoin uses, it is extraordinarily secure, like so secure a country would have a hard time disrupting it. What is that worth? To someone who thinks cryptocurrency is a scam, or stupid, then it’s a giant waste of energy that should be stopped. To someone who sees the value in that security, it’s a necessary piece and cost of making the system work and remain valuable.
The second big point is that many cryptocurrencies are transitioning to a proof of stake method. What this means is that instead of using machines to do all those calculations, people put value up as proof that they have the best interest of the network in mind. Ethereum, the second largest cryptocurrency, and where most activity is taking place, is planning to transition to this proof of stake model over the next year or so. This means that people will lock up some of their ETH in order to help run the system and receive the rewards for providing that service. This method is way more efficient from a power perspective, we are talking 1/10,000 of what’s needed to run proof of stake vs proof of work. Now anyone deep in the weeds of crypto will know that all of these things are a bit controversial, there are some who swear proof of work is the only truly secure way of doing things, while others believe proof of stake is superior in many ways.
Recently, more people have been scrutinizing cryptocurrency’s impact on illegal activity. From your perspective, can you explain to our readers why cryptocurrency, more than fiat currency, is seen as an attractive choice for criminals?
This is another one of those persistent myths about cryptocurrency. Every study I’ve seen on the subject suggests that as a percentage of activity, there is less illegal activity using cryptocurrency than there is using cash. Yet you hear this narrative over and over, because it’s a fun sci-fi thing to think about… cyber criminals using the dark web to accomplish terrible things. Crime definitely occurs with cryptocurrency and it does make certain things easier, but it is very much the minority of transactions, I think the last number I saw was less than 1% of transactions.
But to answer your question more directly, what cryptocurrency does help a criminal accomplish is anything that does not require a physical presence and therefore it becomes easier to engage in international crime. If someone is selling illegal guns or drugs to someone locally, cash is a way better and more anonymous method to facilitate that crime. But if you are going to take over a pipeline’s computer network and you want a large payment that can be sent internationally, cryptocurrency is your ticket. The only problem is that at this point cryptocurrency, most of the time, can still be traced, and it is not as straightforward as taking your payment and converting that into something usable locally without getting caught along the way.
From your perspective what can be done to address or correct these concerns?
I understand the desire for many people to feel like they are doing something about a perceived problem, but many times that comes with consequences that might outweigh the benefit. Crypto has the power to transform the world, and any powerful technology has certain downsides. At this point, if you commit a crime it’s still a crime whether it uses cash or cryptocurrency. My preferred method would be for lawmakers and law enforcement to use the transparent nature of blockchain as a method to track and catch criminals (which they are doing). There is a company called Chainalysis that already provides this service and has been quite successful at it.
As a society long ago we determined that there is an acceptable level of downside in order to preserve our privacy and freedom by having cash. The same concept applies to the requirement of proof beyond a shadow of a doubt in court. We have collectively stated that convicting an innocent person and making it easy to prosecute a person is much worse than letting a guilty person get off unpunished. Allowing crypto currency transactions unhindered follows the same concept, that we default to privacy and freedom at the price of some crime. That being said, I think we should have a wait and see attitude at this point despite the headlines, crime using crypto is pretty small. If that changes then there might be some targeted interventions that could be helpful, like additional regulation on the stable coin side of crypto, which is what most individuals will want to use to exit the crypto universe.
Ok, fantastic. Here is the main question of our interview. What are “The 5 Things You Need To Understand In Order To Successfully Invest In Cryptocurrency?” (Please share a story or example for each.)
One, the cycle is everything! For its entire history and most likely for another 10+ years, the crypto market operates on an extreme cycle. People get excited, bid the prices up, everyone thinks crypto is going to take over the world tomorrow and then when it doesn’t everyone declares it “dead” or “stupid” and prices fall back down. The diehards keep at it, build new things, projects grow and change and then after a while people start getting excited again. This cycle has literally happened at least 5 times, each time getting exponentially bigger. What does that mean for an investor? You need to play the cycle. When things are down and out, you need to be brave and start adding, and when things are awesome and you (and everyone else) are sure the price will keep going up, you need to be selling! Have predetermine places where you will start to get out of your positions, and just nibble away on the way up and way down. You don’t have to be all in or all out, you can be adding a little when things go down, and selling a little when things go up, this has served many people, myself included, very well over the last decade.
Two, participation pays. Most people don’t realize that crypto is sooooo much more than Bitcoin. As we have been discussing there are so many projects being built in this space. And if there is one thing I’ve learned it is that being an active participant, experimenting, trying out new and different tools can get you richly rewarded in the future. As projects gain traction, many times early adopters are rewarded with perks or tokens for taking the chance and being a trailblazer. That’s how I came across the Bankless DOA and was included in their hand out of tokens. That being said, there are a heap ton of scams in the crypto space, so buyer beware in all circumstances. It may not pay to be the very first one to do something.
Three, it’s the frosting, not the cake. For any normal person’s portfolio crypto should be considered the frosting not the cake of their portfolio. Crypto is high octane, crazy volatile, and risky. It is the sugary topping for your otherwise well diversified boring cake of the rest of your portfolio. The amount you put into crypto should be related to how secure the rest of your financial life is. I’ve seen way too many people taking a flyer on crypto thinking it’s going to make them rich when they can’t even pay their normal bills, that’s not a good plan.
Four, hype does not equal profits. Hype may actually mean losses in the crypto space. Unless you are deep into the weeds on what is new and trending, if you hear about the next great thing, it’s possible you are at the end of the road and that opportunity is about to turn into a bust. A much better plan, if you don’t want to spend half your day researching items, is to find the projects that seem to have sticking power and invest when the market is down overall.
Five, diversification costs you less than you think. There is a general idea in crypto that you have to pick your favorite crypto and root for it and hiss at the other projects. There are many “Bitcoin Maximalists” that will literally say that everything else that is going on in Crypto is a big scam, and Bitcoin is the only real project. That is ridiculous in my book, but it does speak to how you build a crypto portfolio. Bitcoin Maximalists will only hold bitcoin, and in general that has done okay for them (and extremely well the further back you go). But what if they are wrong? What if Ethereum in the end becomes the king that the world builds most of its infrastructure on? Or Polkadot, or Solana, or Cosmos? If you are only holding the one true chain and you’re wrong, long-term that could be a massive problem. Diversify, be humble and spread your bets. The nice part about crypto is that for now, when things go up, almost everything goes up the same. Over time there are differences but overall, you may not miss out on much upside if you diversify while we all wait to see what the future holds here.
What are the most common mistakes you have seen people make when they enter the industry? What can be done to avoid that?
There are a whole lot of mistakes people make. To be very clear this industry is kind of the wild west, it has gotten better and better and the landscape is being settled, but there are still outlaws out there, and not very many safety nets for a new user. I think the three biggest mistakes to avoid are, losing your crypto, getting scammed, and falling for hype.
When most people start out in crypto, they buy from an exchange like coinbase. The next step is pulling your crypto off the exchange to use it for something or keep it safe. This is where people might get a little careless. You need to understand what you are doing, take things slow, ask questions and always start with a small amount when you are attempting to do something to make sure it works before moving on to larger numbers. Also ensure you are keeping good records of your private keys and passwords in whatever way you know will mean you can always get access to them.
There are so many scams out in the crypto world, because the scammers know that a big chunk of the crypto population, especially during a big run up, are only looking to get rich quick. So they give people a story about how they will get rich quick, and given that so many people have made so much money with crypto, people feel like they are justified in believing the story. Do your homework, for a long time while you are starting, stick to the big well known projects. Try to find a crypto guide to help you navigate all that is going on.
Finally, hype and fear of missing out broadly is such a powerful thing in the crypto world. That “get rich quick”, “number go up,” mentality really sucks people in. People think, “Wow, if this goes up 100X I will make so much money, I should put everything I have in it.” The crypto world is littered with many stories of people destroying their financial lives with thoughts like that. I think you can see how excited I am about crypto in general, I do think there are further gains ahead in this market in general, but who knows what that looks like exactly. The market might fall off a cliff tomorrow and take years to recover like it has done in the past. Investing and investing in crypto should always be approached humbly.
Do you have a particular type of cryptocurrency that you are excited about? We’d love to hear why.
Oh that is a hard one. I literally have over 50 tokens in my personal portfolio, and most of them I’m excited about for one reason or another. If you’re asking about a type, I think I’m still super excited by the smart contract platform cryptocurrencies, such as Ethereum, Solana, Cosmos, Tezos, Cardano… Ethereum being the biggest of all of them and by far the most used. These are the chains where all the new and interesting things are being built, so many experiments and ideas are all being tried. And the incredible part is within any given chain, each of these experiments can work with each other and leverage each other’s functions. Meaning each new piece created and added makes the whole system more powerful and interesting.
You are a person of great influence. If you could inspire a movement that would bring the most amount of good to the greatest amount of people, what would that be? You never know what your idea can trigger. 🙂
This is going to sound old fashioned but I’d love to see a movement of personal responsibility. People face lots of terrible things in their life, there are many victims in our world, and we should all do our best to make sure unjust things don’t happen. That all being said, at an individual level focusing on how the world has wronged us just doesn’t help you. I have seen many people who come from similar backgrounds and end up in massively different situations, and it wasn’t because of luck, it was, as far as I can tell, because of how they approached life. By taking a set back as a challenge to overcome, and not as a reason to quit. You’d be amazed at what you can do. It’s also a virtuous cycle, as you overcome that setback, you gain the confidence to overcome the next. One good decision leads to more opportunity and “luck”, success has a way of compounding on itself, becoming more than you would have expected as time goes on.
We are very blessed that very prominent leaders read this column. Is there a person in the world, or in the US with whom you would like to have a private breakfast or lunch, and why? He or she might just see this if we tag them 🙂
That is a hard one, there are so many interesting people out there in the world. I’d say in keeping with the theme in this interview, Vitalik Buterin would be a very interesting person to speak with. If your readers don’t know, he is the co-founder of Ethereum. Listening to him over the years you can tell he thinks very deeply about the stuff he is interested in and I’m sure if you got him onto subjects beyond cryptocurrency it would be very fascinating!
Thank you so much for these excellent stories and insights. We wish you continued success and good health!