My thoughts on cryptocurrency investing30 May 2017 | 10 mins reading time
Over the past couple of months, I’ve had a few people reach out to me to ask about my thoughts on the “fill in the blank” Initial Coin Offering (ICO) or “investing in Bitcoin”. The frequency of these requests has gone up, so there are probably a bunch of others interested in the space. I wrote this so that anyone else who cares about what I think has a reference.
First a quick little background on me. I’ve been following cryptocurrencies since 2010. I tried to buy Bitcoin back in 2011 but it was too difficult at the time –and I was broke. I started trading in 2013 and most recently I’ve been doing some contract software engineering work in the space. A friend and I also have built a lightweight algorithmic trading system that is currently in production.
Below are my thoughts and general advice for those interested in getting into cryptocurrencies.
Despite some of the crazy returns, crypto is a long term bet.
Every time I get an email about how to get into this space I check the Bitcoin price in terror. Mostly because I’m reminded of the scene from “The Big Short” when, after talking to an overleveraged stripper, one of the hedge fund managers calls his partner and says “There is a bubble…its time to call bullshit”.
But then I remember something that makes me all of a sudden feel calm; this is a long-term investment.
The CIA fact book has the total amount of money held in time & savings deposits at ~97 trillion dollars. At the time of the post, the entire cryptocurrency market cap was less than $100 billion.
Seems like there is some room for growth, let’s dig deeper.
There are 7 billion people in the world, but currently there are just over 15 million Bitcoin wallets. That means that there could only be wallets for 0.2% people in the world –though most of the wallets are probably held by a smaller group of people.
So cryptocurrency as a category has a lot of room to grow. The question you should be asking yourself is “do I think that this can be a big thing”.
The answer is unequivocal. Yes.
It’s hard for me to believe that 100 years from now people will still be making global online transactions in local currencies. Will the medium of exchange be Bitcoin, Ethereum, Litecoin, or Titcoin? I’m not sure. I just think that it will be very unlikely that in the future we will be paying offline currencies for services rendered online –like software, CPU time, storage, etc.
Assuming that this is true, you want to buy and hold through all of the peaks and troughs because as the other 99.8% of the population starts to demand crypto the price will go up due to limited supply –at least in Bitcoin’s case.
One thing that I’ve done is buy a few thousand dollars worth of Ethereum and Bitcoin for my kids and put it in cold storage. I think of this like a lottery ticket and won’t be pissed off if it goes to zero.
Keep it simple.
I’ve had a few people reach out to me about ICOs that I’ve never heard of. Pretty much every time I respond by saying “keep it simple, open up a Coinbase account and convert 75% of your investment into Bitcoin and the remaining 25% into Ethereum”. This space provides access to asymmetry (I cover this below) so there isn’t really a need to get creative. Plus the risk is already high enough, why do some crazy ICO and increase your probability of loss?
Remember that you have a 47.4% chance at doubling your money on a roulette-table. So if you are really looking for quick money get on a plane and go to Vegas. Don’t put all of your money in on something like Titcoin where the odds of losing are unknown yet you have a similar “roulette-table” style payout.
Don’t invest more than you would be willing to lose.
Cryptocurrencies are still very experimental so much of the current growth is in anticipation of future usage. Right now you can only use Bitcoin in a few places and transactions take 30 minutes. There are just a few of the issues driven by the underlying technology that prevent broader adoption. Fortunately, the technology was built so that these things can be resolved if the people that build the technology and run the network agree. However, the miners (network nodes) and the developers (technology builders) are at each other’s throats right now. If the factions can’t agree and improve the technology it will inhibit the usability of Bitcoin long term –and thus the price.
Also, we don’t know how regulation will affect the market. Decentralized currencies may sound like a good thing for libertarians but it’s a real threat to the current centralized financial system. There is a non-zero chance that governments will come in and make owning, or transacting, cryptocurrency illegal –this happened in Ecuador.
All of this means that any cryptocurrency you buy may be worthless this time next year. So you should think about this space the same way you think about going to Vegas and only put in what you can afford to lose.
Crypto gives “regular” investor access to asymmetry.
The thing that people always tend to forget about investing is that you are compensated for risk. Meaning that really risky investments should have very big returns to make up for the potential of loss.
When an investment has a return that caps the amount that you can lose while maintaining access to a large gain, the investment is considered to be asymmetric. Conversely, if you invest all of your money in a hard money real estate loan that pays out a maximum of 10% in interest, you stand to lose all of your investment for a small return.
Typically asymmetric opportunities are only available to sophisticated investors through things like venture capital or fancy derivatives.
Cryptocurrencies, however, gives more people access to these types of returns.
For example, if you invested $1000 in Ethereum back in 2016 it would be worth $200,000 in May 2017. In this investment, your losses would have been capped at $1000 where the returns were $199,000 –in a single year!
This means that you don’t need to put a lot in to get a good return. A good rule of thumb is to invest a maximum of 5% of your total liquidity. Eg if you have $100k in cash in your bank account, only buy a maximum of $5k worth of crypto. That way if you lose the $5k you can make it back over time, but if the $5k returns 2000% (which has happened in crypto) you will have doubled your $100k.
Getting hacked and losing your money is a thing.
Much like cash, blockchain transitions are permanent. There are no fraud departments to call if someone steals your crypto tokens. This means that you need to start to get serious about internet security if you are going to be in this space.
If you have your Bitcoin or Ethereum in an exchange like Coinbase there is a chance that the exchange will be hacked. This has happened to exchanges before and it’s hard to safeguard against since you don’t have control over what they do. However, without risk there is no compensation for an investor. So risk of an exchange hack is something you will need to live with if you want to be in this space.
The bigger chance is that you will be hacked. This means that a hacker would have access to your login credentials so they can just log into your exchange and drain your account.
Unfortunately being hacked is one of those “it won’t happen to me” types of things but you really want to take it seriously.
Much like in the real world, there is never a way of being 100% secure. If people want to take your stuff they will figure out a way. However, the more difficult you make it, the lower the probability that a criminal will go through the effort.
Here are a few things that you can do to increase your security.
- Setup LastPass and use it to generate/store strong passwords. Don’t be lazy here. If your Coinbase password is the same as the one you use for everything else, you are at risk. Your password should look like complete gibberish. Also when you setup LastPass please don’t use the same password you do for everything else create a new one write it down and keep it somewhere safe.
- Setup 2-Factor Authentication (2fa) All of the exchanges I’ve seen support 2-factor one-time passcodes. This basically means that you download an app on your phone and when you want to log into your Exchange account you enter your username, password and a code that is displayed in the app. This code rotates every 30 seconds so if a hacker has the code they would only be able to log in for 30 seconds. Personally, I use Authy and I also have a Yubikey but Google authenticator is also a good option. When you setup 2fa, the exchange will give you a seed. Don’t save this to a file on your computer! Write it down on a piece of paper and put it in a safe place. If someone has this number 2 factor authentication is useless.
- Go cold storage If you are super paranoid (or investing more than $3000) get a cold storage wallet like the Trezor.io or KeepKey and store your coins on that.
- Change your email passwords or setup a new account most people have a password that is easy to remember. You, however, want your password to be hard to remember because if it’s hard for you, it will be hard for a hacker to figure out. Since you followed my above advice and setup LastPass generate a password with that.
If you’ve got it this far then you understand what I think about investing in cryptocurrency. At the end of the day, it’s all about what you want to risk so just be careful. If you still have any questions drop them in the comments and I’ll be sure to answer them.
Disclaimer: The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.
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