For the longest time, you couldn’t pay me to talk about crypto on this blog (and trust me, people have tried).
Thus, I think there’s more than a little cosmic irony in the fact that this post goes up on the back of the biggest crypto crash in recent history.
I mean, the proverbial (digital) streets are covered in blood.
Bitcoin Price – Last 3 Months:
However, I did make a promise to cover off my (emerging) thoughts on the crypto space, and I would quite like to keep it, irrespective of the latest price movements.
In addition, today’s post is not a recommendation for or against investing in crypto. Only you can make that decision.
What it is, however, is a strong recommendation to at least try and wrap your head around crypto and blockchain.
As someone who considers himself a very rational investor, I’ve ignored the topic for a very long time.
If I am to be completely frank (and not that I would ever admit it), I wouldn’t know blockchain if it hit me between the eyes.
I am reasonably confident that many of you are probably in the same boat.
That being said, I have now come to a point where I am convinced that a change of strategy is in order.
Today’s post is intended to formalize my own thoughts on the subject – and solicit a healthy debate amongst the readers, many of whom are probably in the same boat as me.
But let’s take things in turn.
The list of reasons that made me avoid crypto in the past would probably occupy a blog post in itself.
One of my key concerns (which remains valid to this day) is the fact that cryptocurrency is not a productive asset.
I mean, the hint is in the name.
To draw a parallel, consider buying and holding USD or GBP a hundred years ago.
Would that make you rich? Absolutely not. But putting your money in the stock market sure would.
The same applies to crypto. It may or may not be a good store of value.
Some (but not all) cryptocurrencies may even be non-inflationary.
However, there’s a difference between an asset that’s holding its value and the one that accretes in value.
And so, buying crypto is simply not the same as buying a share in a listed company or a piece of real estate.
Of course, that doesn’t mean that you can’t get rich off crypto – because you sure can.
In fact, many people did just that over the past decade – especially the ones who got in early and got out in time!
That being said, there’s a big difference between speculation and investing. And if you’ve been reading this blog for a while, you know that I much prefer the latter.
The other aspects where I really struggled with crypto were longevity, security, use cases, energy consumption, market manipulation, and regulatory risks.
But the biggest reason by far was lack of time.
The Real Investment
There are a couple of principles that guide my investing philosophy.
The first one is that I only invest in things I understand.
In other words, I don’t put my money to work without a solid grasp of what will drive my long-term returns.
The second principle is scale.
I like to focus on investments that can become very meaningful components of my net worth over time – both in absolute and relative terms.
Say hello to equities and real estate. Just as importantly, I continue to invest in myself – given that it is my day job that provides the cash to invest in equities and real estate!
The final guiding principle is time. Just like most readers of this blog, I don’t have a lot of it.
Thus, I am not about to spend hours a day reading up on some fringe investment unless I intend to put a meaningful (i.e., 5%+) component of my net worth behind it.
The opportunity cost is just too big.
So to put it bluntly, I didn’t understand crypto, I didn’t see it as a big component of my investment portfolio, and I sure wasn’t going to take the time to go down the crypto rabbit hole.
Thankfully, many others did – such as Banker on Wheels who recently did a great post on making 10x your money with crypto tokens.
So what has changed?
The most important factor is that I am now firmly convinced that crypto is here to stay.
There’s a phenomenon called the Lindy Effect, which essentially states that the longer something exists, the longer it will exist.
It applies to physical structures, systems (i.e., capitalism vs communism), as well as technologies.
And so, when Bitcoin was founded back in 2009, it was very easy to dismiss it as a temporary phenomenon.
But it persisted. And along the way, it survived multiple price crashes.
Consider that in December 2017, Bitcoin traded at about $17k. It then crashed violently, and the price remained in the doldrums for years, until it finally recovered in late 2020.
Now, not all asset bubbles are the same.
However, the ability to survive multiple severe price declines is a vote in favour of any asset’s longevity, in particular when that asset exists as a collection of bits and bytes.
Even more importantly, there’s the fact that over the past decade Bitcoin has spawned multiple other cryptocurrencies and technologies.
The most important one is Ethereum, which provides smart contract functionality and has quickly become the most actively used blockchain.
In turn, Ethereum gave a massive boost to a concept called DeFi (decentralized finance). And if I am completely honest, it is DeFi that fascinates – and worries me – the most.
Risking The Day Job
Wikipedia characterizes DeFi as follows:
“Decentralized finance is a blockchain-based form of finance that does not rely on central financial intermediaries such as brokerages, exchanges, or banks to offer traditional financial instruments, and instead utilizes smart contracts on blockchains, the most common being Ethereum.”
Now, you may be tempted to dismiss it as the kind of wishful thinking that will never materialize.
Those pesky bankers are never going away!
But if there is a technology that has even a 0.1% chance of decimating the industry from which I draw a livelihood, I better know about it, understand it, and find a way to get ahead of it.
And given that blockchain has applications far beyond finance, you probably want to take notice, too.
It won’t be instant, but sectors like automotive, healthcare, retail, media, entertainment, alongside many others, all have potential to be transformed by blockchain technology.
As ever, there will be those who ride the disruptive wave – and those who will get left behind.
Kind of like those publishing executives who never really understood – or embraced – the internet.
To state the blindingly obvious, I am not the only one paying attention.
However, there is a big difference between bored teenagers crypto experts who still live in their parents’ basements and some of the sharpest participants across the financial ecosystem.
All the big banks (including the one I work for) now have a crypto / blockchain task force of sorts.
do God’s work facilitate crypto trading for their clients. Others try to figure out how to re-engineer their businesses with blockchain before they get blown out of the water by DeFi start-ups.
Private equity and venture capitalists are also putting their money where their mouth is.
Andreessen Horowitz, one of the world’s pre-eminent VC investors, is raising a $1bn fund to invest in crypto.
The likes of Bain Capital, Tiger Global, Coatue, Lightspeed Venture Partners, GIC, and Sequoia have all either led or participated in large-scale investments in the sector.
If you know your way around the institutional private capital ecosystem, you know how credible the names above are.
There are other significant developments in the crypto / blockchain space that prove this is more than a transitory phenomenon.
To me, China cracking down on Bitcoin indicates that they see its transformative potential (just like with the internet).
So does El Salvador’s initiative to make Bitcoin legal tender.
Even the Bank of England is trying to get in on the action. Anyone fancy a little Britcoin?
So where does that leave us?
Crypto and blockchain is a massive, complex, and rapidly evolving space.
Even for someone who is digitally native, it takes a significant amount of time to get up to speed and subsequently stay on top of everything that’s going on.
Still, I think it’s an investment (primarily of time) that’s very much worth making.
The big questions I am trying to think through are as follows:
Crypto vs. Blockchain: How does one get exposure to the underlying technology without necessarily taking the risk on cryptocurrency itself?
Risk Management: How does one dabble in crypto while mitigating both platform and counterparty risk?
Capital Allocation: What’s the optimal % of one’s portfolio that belongs in crypto / blockchain?
Security: Remember the guy who has hundreds of millions in his Bitcoin wallet – but doesn’t have the password?
Diversification: What’s the right way to spread your bets – without betting the farm?
Tax efficiency: Is there a way to mitigate the tax liability on what we hope are winning bets? I believe the US now allows some crypto investing in an IRA, but I haven’t heard of other countries following suit.
Clearly, there are far more open questions than answers at this stage. The good news is that we are still in very early innings.
For all we know, another multi-year “crypto” winter might be in the making as we speak, which would give folks like me plenty of time to get up to speed – and possibly pick up some BTC or ETH on the cheap.
In the meantime, I look forward to hearing your views – and learning from you – in the comments below.
Thank you for reading – and happy (careful) investing!
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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