Speculating in Crypto
I bought three coins in June 2022. I don’t have hot or cold custody (just like the new spot ETFs). Initially, they were about 1% of my investable assets. Now, they are about 4%.
Should you speculate in Crypto?
Crypto is Confusing
Crypto is confusing. Let’s be honest. There has been mass confusion from the start. So, let’s start with what a coin is.
A coin is the way a cryptocurrency is traded. There is Bitcoin, and there are thousands of other coins that you can buy and sell.
If you buy one, you (or someone else) must hold it in a wallet. This can be hot (on the internet somewhere protected by your key) or cold (off the internet not accessible to anyone without the key).
Spot Bitcoin ETFs mean you can buy coins easily. They are liquid and tax-efficient. Inflows into Bitcoin ETFs are breaking records, and spot Ether ETFs are next. A third-party custodian holds these coins. Regulation risk is huge.
Given these risks and since Bitcoin is easy to buy, is it time to buy Bitcoin?
Investing in Crypto
Investing in Crypto is a speculation. Bitcoin has no yield, so only the greater fool will buy it from you in the future. Since the greater fool also buys gold, collectibles, alternatives, non-correlated assets, wine, and the dollar, you might consider 1% of your portfolio ripe to invest in crypto.
On one hand, don’t invest in what you don’t understand. On the other hand, railroads had a massive bubble before transforming the world. So did the internet. So will AI. Crypto has survived massive volatility but is not a currency or useful in any product you use daily. Yet it has survived, and Bitcoin is the best-performing asset in the last 20 years.
I’m all about diversification. I bought three different coins. If you are going to speculate, don’t try and pick the winner.
Why Did I Buy Three Different Coins
Since this is still a speculative investment, I suggest diversifying into three different coins.
Buy 1/3 or 50% Bitcoin. Bitcoin has the first mover effect and the largest moat.
Next, bet on Ether and Solana. Either may win the battle of the programmable blockchain.
Summary recommendation: Put 1% of your after-tax assets into 1) a BTC ETF, 2) ETH, and 3) SOL.
Since BTC has a spot ETF, it should probably be in a tax-protected account—Roth if you are bullish about crypto and pre-tax if not.
ETH and SOL still need spot ETFs before becoming easily investible in tax-protected accounts. However, it is easy to set up an account with multiple custodians and buy your own coins.
Please remember that this is not specific investment advice. Do not buy anything based on what you read here. You need to read another 40 hours of stuff before you are competent to speculate in crypto.
Why Did I Buy Crypto?
Instead of buying more VTI, I bought crypto. Once you have a high savings rate and are on your way to FI, it might be time to buy crypto. If you put 1% of your investible assets into crypto, your asset allocation is unchanged.
This is speculation, but the bet is that the returns on the US economy in the next 10-40 years will underperform a basket of coins. If you are willing to hold that bet forever, put down 1%.
How Long Should You Hold Crypto For?
Plan the money is gone when you buy crypto or plan on giving it to your kids when you die. Or it can be rebalanced as part of your asset allocation as an equity alternative.
I am going to hold for 5-10 years. Who knows what the world will be like then? Do you remember what you were investing in 10 years ago?
Ten years ago, I was plugging away at the mortgage and fully funding the 401k year after year for two decades in a row. I was unaware of simple and intelligent investing principles, but luckily, I invested in low-cost equity index funds and forgot about the accounts.
That’s why I have so much VTI and can divert a percent of it. I have invested every two weeks for 20 years, which is a lot of dollar-cost average.
What did I think When I Bought Crypto?
So, what was I thinking when I bought crypto?
Why not divert some money that would go into that pile and be, oh, I don’t know, the children’s inheritance or given away to charity, and try to make in 100x what it is now? Wouldn’t that be a nice gift? Not for the kids. If it goes up 100x, it is going to charity.
Why not take some money I’m willing to lose and diversify it into a possible solution to the future I cannot imagine 5 or 10 years from now?