I strongly believe that putting money in crypto is a very sensible thing to do as of 2020.
The crypto space has had the time to mature over the past ten years, but it’s still in its infancy and as such huge returns are in store for those who enter the space now.
Bitcoin and Ethereum, in my view, are sure bets. At this stage, I would rather keep my money reserves in Bitcoin rather than fiat currencies such as USD and EUR. That is how much I believe in this cryptocurrency.
Ethereum, on the other hand, will probably be more volatile and has a more uncertain future with the move to Ethereum 2.0, however from an investment standpoint I think it will offer even better returns than Bitcoin. If we take an optimist view of Ethereum’s future (think DeFi and other possible applications), then it is easy to understand how undervalued Ethereum currently is.
In the rest of this article, I’ll talk about various facets of a crypto strategy that I think can provide good returns and minimum downside.
As with any other investment, before you start off, you need to be aware of the risks and also be very clear about your objectives.
For this strategy, I am going to assume that the investor is young and therefore has a long time horizon for investing, and has a decent-sized amount saved up. He also has a good monthly income that covers living expenses, such that any temporary or permanent impairment of his investments will not disrupt his daily life.
Here’s how I would structure things.
I would hold one year of living expenses as a cash reserve in my home currency, provided that it is one of the top currencies and not subject to rapid devaluation. So I would be OK keeping EUR, USD or GBP but not OK with keeping Argentine pesos, for example.
Read more: The best crypto-friendly banks in Europe
With the money printing that is going on at the moment, it is quite possible that there will be a degree of currency debasement, but until we can readily pay for our daily expenses by other means, it is prudent to hold 6 months to a year of fiat currency cash reserves.
Crypto wealth – Commodity money
This is where you would hold the majority of your net worth. Specifically ETH and BTC.
Commodity money is a money whose value comes in part from its use as a commodity and in part from its use as a money. This is in contrast to representative money which has no intrinsic value or fiat money which is established by government decree.
- Commodity money: gold, silver, copper, cigarettes, shells
- Representative money: bank notes, checks, USD (when USD was gold-backed)
- Fiat money: dollars, pounds, euros, yen, yuan
Among the above types of money, commodity money is unique in the sense that it is the only form of money that has an underlying value. Even though we no longer use commodities such as gold as a form of money; it still has value as jewelry or gilding.
Now the major question here is whether you should use DCA investing or put in a lump sum. If it were me and I had a lump sum I would invest it right away, and the reasoning is that we are in a unique moment in history – at the beginning of possibly the most important innovation of our generation, and we know from history that investing early gives the best returns. The nice thing is that Bitcoin has 10 years of history and is no longer a highly speculative moonshot anymore. It’s utility has been proven and adoption is increasing day by day. However, if you don’t have a lump sum or just want to invest on a monthly basis in a hands-off manner, you can use a service like Swan Bitcoin (if you’re in the U.S.) or even BlockFi (worldwide). Both permit you to set a monthly or weekly amount to invest into your crypto currency of choice.
Crypto speculation – The moon shot
Every so often, there are extremely good opportunities to hit it big with certain asset classes. Think of real estate in an area that is on the cusp of an explosion in tourism, or Apple just before the release of the first iPhone. Check out my post about my favourite crypto bets for 2021 for some ideas.
And there you have it. If you want to keep it nice and simple, you can stick to the above strategy. For those who seek the thrill of gambling, there’s always the opportunity to trade crypto, but in my opinion in the long-run it’s going to be a losing game when you factor the time needed as well as fees paid.
An important part of this strategy is the idea of never selling. Instead of selling your crypto and possibly become liable for capital gains tax, as well as losing out on more appreciation, you would take out a loan using a service like BlockFi.
What are your thoughts on this strategy?