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In my last article I talked about the myth of Bitcoin being a great store of value and established a first part of the ethics of lying:
This time I want to talk about index investing. I think there is room for improvement when it comes to truthful statements about that topic too.
One of the most important lessons I learned from picking stocks is, that I suck at it. I knew I should buy an index and thank god, that was what I did with most of my money. When it comes to stocks, index investing is the smartest thing you as an retail investor can do. Because there are professional investors out there who know, which stock is under- or overvalued long before you do. Therefore you are buying a stock where every information you have about the firm or the stock or anything else is priced in. Except if you are an insider, but then you are not allowed to use that information. On the long run 80% of all traders perform worse than the MSCI World Index. Of course there may be some lucky retail investors but most of the 20% are professionals, who have teams of analysts working all day long analyzing the market. My ( and Jack Bogle?s) suggestion would be: stay real, be smart, buy an index.
But we are not interested in stocks, we love crypto and we have about 10.000 Cryptocurrencies out there. Therefore index investing is a great idea, so buying the haystack instead of searching for the needle should apply to cryptos too. Nathan Sloan thinks so and I am a big fan of his channel Investing made simple:
A crypto index is buying the top cryptos by marketcap. For example, the Bitpanda Crypto Index 25 is buying the top 25 cryptos by marketcap. At the end of every month when a crypto fell out of the top 25 the crypto will be sold and the new crypto who took his place gets bought. And it rebalances the top 25 cryptos by marketcap. So you always have the top 25 Coins compared in size to their marketcap and don’t have the risk of a coin loosing all its value. Of course you won?t have the same gains because you will buy the cryptos when there are already big. Less risk means less gains, and there are a lot of both in the cryptospace, so a form of a less riskier investment sounds good.
But there is a huge problem with that sort of index investing. There are countries like Germany where you don?t have to pay taxes on crypto gains if you hold them longer than 1 year. If you sell in less than a year you will pay taxes around 40% on the returns you made. If you hodl more than a year you pay 0% taxes. An Index who automatically sells your cryptos once a month will crush every German investor, because he would pay huge taxes every month.
But there is another form of crypto index investing like the C20 Token. The basic idea is the same but you only buy a single token and it represents the value of the top 20 cryptos. The company behind C20 -Invictus Capital- is buying and selling the shares of the top 20 cryptos. So you would not have the tax problem, because you just simply hodl the token. That is a nice solution for this problem.
That could be a reason why Nathan Sloan is recommending the C20 token in his channel, also he holds a lot of C20 and he is sponsored by Invictus Capital. But mostly he is recommending indexing in the crypto space for the same reasons as for stocks.
Let the numbers talk
But lets take a closer look. If you bought the S&P 500 Index 10 years ago you would have made a lot of money. Of course if you had bought just Apple Stocks 10 years ago you would have made more money. But it would have been far riskier to just buy a single stock, because 10 ago you didn’t know that Apple would be such a success. So clearly, the smarter thing would have been to buy the index. Buying Apple would have been more like gambling. But is it the same with crypto?
In Crypto the number one by market cap is BTC. Therefore, it could be a good idea to compare BTC to C20. But C20 is only around for 4 years and 10 years ago even ETH didn’t exist. So lets take the last 3 years on those 3 coins:
We see a picture that is quite similar to stocks. You would have more gains if you just had been invested in BTC, or just EtH, or both lets say 50/50 (that’s what I did when I started with crypto).
If you would have been invested in C20 you would have had less gains but also less risk of a single asset dropping to 0.
But here is the big problem with indexing in crypto: You would not have less risk if you bought an Index than buying just BTC!
When BTC drops the whole market drops with it. So if BTC would go to 0 or near that the whole index would also crash. And altcoins tend to crash harder. So you have even more risk than just buying BTC. But Altcoins tend to rise faster than BTC in a bull run, so you should be compensated for that extra risk. But the numbers show, that you don’t make more gains. So you end up with more risk and less gains. That makes the whole idea of index investing obsolete in the crypto space.
Except you really want to have altcoins lets say Dogecoin and you know its very risky so you rather have the index. Then you would have less reward but also less risk than just holding Dogecoin on its own. But still this would be weird. You want to have these altcoins, shitcoins and memecoins because of their great potential to 10x, 100x or 1000x. But you loose most of that potential when you buy the index. When altcoins make it to the top 20 they already had this insane growth behind them. So again the question may be why not hold BTC and ETH instead with less risk and more gains?
So why doesn?t indexing work for crypto?
One of the reasons why the index is not working is because of so called “performance chasing”. Its one of the biggest mistakes when it comes to stock picking. You buy the stock because it performed incredible in the past. But if it did so its very expensive and there is often not a lot of room to grow any more. That is why a lot of people are underperforming compared to an index.
Buying a crypto index is performance chasing by definition. You could also say that about an index with stocks. So why is the index working for stocks? Where is the difference?
For once BTC is different because of its cycles and its influence on the whole crypto space. If Apple crashes due to a scandal all of its competitors will not fall with it, they could be even rise in value.
And there are a lot of professionals missing in the crypto space and most of the information is available for the retail investor too, so you have a way better chance to pick a single crypto and beat the index than you would have with stocks. Cryptos for now do have another risk-reward profile than stocks. For that reason I don’t see the point in having an index in crypto. That could change in the years to come. Right now it is pretty obvious to me that there is no good reason for buying a crypto index.
The moral question
So why is Nathan Sloan recommending C20? Would it be okay to sell something and lie about it even though you know it is a lie?
The company who is selling the token is not acting unethical. They show their numbers and they offer a service which is underperforming (for the moment), but selling a product which is suboptimal is not morally wrong. Almost all stocks have underperformed ETH in 2021, but it was not unethical to sell stocks. You still would have had better returns on the C20 token than on most stocks.
Youtubers who recommend the Token to people and telling them it is a smart investing strategy are not that easy to judge. I am absolutely convinced that Nathan Sloan is not aware of the fact that the index is such a suboptimal strategy when it comes to crypto. I don’t think he would risk his huge following for such a small sponsorship deal and he invested a great amount of his own money in C20. I think he is just mistaking here. If someone is lying just so he can schill the token and make easy short term profits with it, it would also be clearly wrong to do so. But what if he is doing it to promote the overall crypto space?
Therefore, here is again the ethical question: Is it ok to lie for the greater good?
In my last article I answered the question with the utilitarian moral theory. Today I want to give an answer from Immanuel Kant a German philosopher who has another moral theory in mind.
For him the answer is clearly: Under no circumstances is it ok to lie. But what makes him so sure about that? And are there really no circumstances at all where it would be morally permissible to lie? Let?s take a closer look:
His moral theory is based on the “Kategorischer Imperativ” (categorical imperative) which is a more sophisticated version of the golden rule:
Act only according to that maxim whereby you can at the same time will that it should become a universal law."
“Act in such a way that you treat humanity, whether in your own person or in the person of any other, never merely as a means to an end, but always at the same time as an end.”
These two versions of the categorical imperative show why lying is morally wrong under all circumstances. If I lie to a person, I am treating him merely as a means to my end. He would not be ok with it if he would knew about it. And I also would not want it to become a universal law that it is ok to lie, because nobody would know what is true anymore.
Therefore, the answer is pretty straight forward: You are not allowed to lie about index investing in the crypto space, no matter what. If you didn?t know better and did not intend to lie you wouldn?t be blamed. But if you knew better and still lied about it you are to blame, even if you do it for a greater cause.
But there are still cases where lying seems obviously the right thing to do. If the Nazis knock on your door searching for Jews in order to kill them, would you say the truth if you were hiding Jews in your house? Wouldn’t it be the right thing to lie in this case?
What do you think about that? Let me know in the comments.
