Crypto-Investing 101 — The Crypto Couch Potato Portfolio
A lot of folks asked me how I invest in Crypto-currencies. This post outlines my approach to Crypto-Investing, the theory behind it, and the basics that anyone who wants to invest in Crypto should understand.
I’m also introducing my portfolio which I’m coining the Crypto Couch Potato Portfolio. In a nutshell the portfolio takes the concept of the passive Index investing that Warren Buffet recommended his successors follow, and extrapolates that to Crypto therefore assuming the long term growth and prosperity of the Crypto market.
It is true that the Crypto-space is crazy, volatile, risky, and has some scammers, but the space has also some of the most honest, smartest, most talented, ambitious and driven Entrepreneurs, and Investors out there.
It is also true that we are in a crypto-bubble and the bubble must burst, but bubbles are just a normal part of the cycle of the economy, and hopefully this portfolio will weather such a storm.
I would also like to remind everyone that Crypto and BitCoin is 5 years old, and it has weathered a number of storms and craziness including the latest China Crypto Ban.
Before we begin let’s get a few things out of the way:
I’m not a crypto-guru and I’m not a certified investment or financial advisor. I would like to say consult with a professional crypto-advisor but none exist yet. The ideas and guidelines below are ones that I follow personally for better or worse. I have been watching the crypto-space since 2012, and actively participating in it since 2014. I have had amazing returns through the ups and downs of the crazy market and I haven’t had disasters as of yet.
The seven commandments:
1- Thou shall not invest in Crypto-currency, Tokens, ICOs, or any other crypto-assets before you familiarize yourself with the basics
I’m a big fan of investing in things that you understand. Because if you don’t understand the basics and see the long term potential then you will be scared out of your mind when sh*t hits the fan and you will become emotional and do crazy things. Emotions are the enemy of every investor.
The basics you should understand are: what is Blockchain, what is Bitcoin, what is Ethereum, and what is an ICO. I’m not going to cover this information in this post and will be happy to write a follow up if I see requests.
If you are Technical then I highly recommend you read the mother of all whitepapers in the Blockchain space; Satoshi’s Bitcoin Whitepaper. Also familiarize yourself with Ethereum. There are many more currencies and tokens that I will reference and I advise you familiarize yourself with them as well.
The big idea here is that Blockchain technology (the Technology behind all crypto-assets) has changed the world of finance, currencies, investing, and economies forever from a model that is centralized and controlled by a single entity such as a Bank or Government to one that is decentralized, private/anonymous, peer-to-peer, and one that is backed by Computing Power.
2- Thou shall act as if your investment will either go to zero or infinity. Invest accordingly.
Crypto-assets are very risky perhaps even experimental investments. Do NOT invest what you cannot afford to lose. Do Not invest more than 5% of your net-worth no matter what!
Invest as if every dollar you will put in will go to zero, vanish, get stolen or go to infinity.
There are lots of risks associated with Crypto-assets; take the typical risks associated with stocks (financial, companies going bankrupt, scandals, scams, etc…) and add the risks associated with Technology projects on top of that (security issues, scalability issues, delays in delivery, timelines, bugs, hacks) and add Regulatory risks (governments deciding to regulate / shutdown exchanges, tax you differently, etc…)
Some of the risks can be reduced by following the best practices outlined below and familiarizing yourself with the current regulations in your country (I’ll cover Canada and U.S. in a later post)
Keep in mind that due to the decentralized and anonymous nature of Crypto governments cannot really shut it down. Crypto-currency is essentially CPU and GPU power converted into currency. Nobody can stop this. Government can only regulate the points of exchange where Crypto-money needs to jump from blockchain to become fiat currency. Therefore you can practically hold your crypto forever regardless what governments say/do, also given this nature you can always find another way/country to convert your Crypto back to Fiat* (*I don’t recommend you do anything stupid or illegal)
The flip side to all of the risk is the REWARDS that can be HUGE! Bigger than any other returns you will ever see in the stock market or in any other investment on earth to date. Bitcoin was 6 cents in 2010, at the time of writing (2017) a Bitcoin is worth 3605.37 dollars and this is when the market is down!
3- Thou shall NOT speculate what crypto-asset prices will do short term. Thou shall NOT trade or day trade. It’s the long term we are after
Repeat after me: Our Basic strategy is BUY and HOLD (aka HODL) forever and ever (for a long period of time)
Ok let me make you a crypto-insider now: this is where the word HODL came from… from a typo in a title of a post on Bitcoin Talk forum in 2013.
Repeat after me now … our basic strategy is BUY AND HODL
This cartoonish chart illustrates why we BUY and HODL and NOT day-trade or short term trade
When you buy and HODL you bet on the overall direction and growth of the market in the long term.
If you day-trade or short term trade you will be speculating most of the time. You will be buying and selling across all the peaks and valleys and the crazy day to day volatility. I don’t recommend you do that unless you are really really good at day-trading stocks, and/or have insider information in which case you should go for it!
4- Thou shall diversify
Whatever applies to stocks, other assets, and investing in general also applies to Crypto-assets. You should diversify your crypto-assets to reduce your risks and increase your gains.
There is no denying that there are some correlations between some crypto-assets, and that there are events that will impact the overall market, however some currencies and assets are more recent than others, and different ecosystems will have different growth rates and will perform differently as time goes by.
5- Thou shall Dollar Cost Average
Whatever applies to stocks applies to crypto-assets in this case as well. Instead of using all your fiat currency to buy crypto-assets at a certain date/time in one shot, it is best to buy at different points along the way. See Dollar Cost Averaging on Investopedia.
Consider the chart below for ETH vs USD. If you bought $1000 worth of ETH on July 11 2017 (red arrow) you would have bought ETH for 343 hence you would have 2.9ETH and on today’s price you would are in the red. However if you spread your $1000 on the 7 dates indicated by the green arrows, you would be in the green today (still making profit). Long term you would be doing much better as well.
6- Thou shall rebalance your portfolio every quarter (or year)
Rebalancing ensures that you maintain your portfolio asset allocation in sync, and that you actually lock-in some of the gains that you have made. There are various ways to rebalance and we will discuss this more in depth in a later post.
7- Thou shall secure your portfolio from theft, hacks, and your own stupidity
Once you buy Crypto-assets on an Exchange NEVER EVER leave your Crypto on the exchange. You need to transfer the assets into a Crypto-wallet ASAP. If you don’t you might as well kiss your assets goodbye.
Crypto-assets sitting in the Crypto-exchanges are sitting ducks. Exchanges are under attack by hackers 24x7 and thanks to the decentralized and anonymous nature of Crypto it’s easier to steal crypto and get away with it. Every day millions of dollars worth of crypto are lost and/or stolen.
Moving your portfolio to a mobile wallet also protects you from your own stupidity where you might panic and sell if the crypto market isn’t doing great. So not having the crypto on-hand in an exchange helps!
Speaking of stupid things never share your Wallet private keys with anyone. You only share your wallet’s address with whichever party you need to transact with (such as transferring crypto to the wallet from an exchange) Always store a copy of your backup passphrase in physical form (paper). If you lose your keys/or passphrase this means your Crypto-assets are GONE.
Mobile/Software wallets are great if your porfolio has less than 50,000 to 100,000 dollars worth. If you have more than that it is wise to invest in either a trezor, ledger, or use a paper wallet.
Now for the moment we have all been waiting for:
Crypto Couch Potato Portfolio Version 1.0
The table below summarizes my Crypto Couch Potato Portfolio recommendations. The name of the Crypto-Asset, Its’ Symbol, its’ Market Capitalization and the Dollar Allocation are shown in each column.
Pay special attention to the symbols and make sure you are using the correct symbol when buying, as there are symbols that are close. For example make sure you are buying BitCoin (BTC), NOT BitCoin Cash (BCH) which is a recent bitcoin fork. Also make sure you are buying Ethereum (ETH), NOT Ethereum classic (ETC).
Dollar Allocation explained:
The above will be your dollar allocation. So if you want to invest $100 dollars, 57.79 dollars will be used to buy BTC (bitcoin), 22.55 dollars will be used to buy ETH (Ether), 6.62 dollars will be used to buy XRP (Ripple), etc…
The good news is, unlike stocks you can buy fractions of BTC, ETH, etc. so such an allocation will not be an issue.
Portfolio design explained:
The portfolio above has been designed on Sep 16th 2017 based on data assembled from CoinMarketCap for Market Capitalization, in addition to my knowledge and research on various blockchain projects and teams and the likelihood that they will continue to exist in the future.
From CoinMarketCap we shortlisted the top 20 Cryptos by Market Capitalization, then eliminated a few of the cryptos based on my understanding and projections. We limited it to 20 for practical reasons. Anything more than 20 and the dollars will be spread too thin, the gains will be reduced, in addition the quality will go down and risk will increase significantly as we go down. At the time of writing there are more than 1100 currencies and a more than 2000 crypto-assets total. There are new ICOs coming almost every day, so this space is exploding!
The Cryptos that have been intentionally excluded are the following:
- ETC as it is an older version (pre-fork) of ETH here is some background on ETC vs. ETH. ETH is already taking over the word, while ETC will eventually decline.
- BCH is also a recent fork of BTC and I excluded it because it’s still fairly new and its future unknown.
- OMG is a promising project, however it is built on Ethereum so if successful its success will also be reflected on ETH pricing.
- BCC: there is something about BitConnect that doesn’t feel quite right so I have excluded it from my list. Some of it feels like Multi-level marketing (MLM) and Payday loans!
Another thing worth noting is that 80% of the portfolio is invested in the top 2 currencies namely BTC and ETH; This allocation happens to reflect their market cap, which also happens to reflect liquidity and stability. Today most of the ICOs and tokens issued rely on BTC and ETH for raising funds. Additionally ETH and BTC are becoming the base currencies that other currencies and tokens are trading against on the exchanges.
That’s the Crypto Couch Potato Portfolio!
Feel free to leave any comments or questions about this portfolio and I will do my best to answer as soon as I can.
Stay tuned for part 2 (A practical Step by Step guide to creating your Crypto Couch Potato Portfolio)
