Is It Time To Pay Attention To Crypto?

Time for crypto?

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.

Digital Allergies

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?

ReEvolution

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!

Perhaps.

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.

Smart Money

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.

Visa and Mastercard are working on initiatives to enable Bitcoin transactions on their networks.

All the big banks (including the one I work for) now have a crypto / blockchain task force of sorts.

Some 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?

Question Marks

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!

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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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44 Comments

  1. If you’re interested in crypto education, my suggestion would be that you invest in yourself and dabble with the Tezos network. It’s a smart contract platform, like Ethereum, and has an evolving DeFi space, a proof of stake mechanism (which Ethereum 2.0 is looking to adopt) and I believe the biggest NFT market.

    Most importantly, a Tezos token currently costs about £2. You could conceivably teach yourself about DeFi for under £50. It won’t make you a millionaire overnight, but think of it as an investment in yourself. A learning opportunity.

    This isn’t a plug for Tezos as an investment, but it’s the cheapest way to access DeFi tools that work the same way as those on Ethereum if you want to upskill yourself quickly.

    • Thanks for the tip. That’s exactly the point – experiment with a few platforms and trivial amounts of money just get a better feel for the underlying technology.

      I haven’t heard of Tezos, but it looks interesting and agree that PoS may be the way forward. Curious to see how it works out for Ethereum.

      As a broader point, smart contract functionality is exactly why I think Ethereum has more potential than the Bitcoin blockchain. The latter is now trying to enable DeFi but is coming from very far behind.

  2. For me I am looking to allocate 1-3% of my portfolio to crypto and see how it goes from there. Hopefully this dip in the price of most crypto will prove to be a good entry point into the market. What worries me the most is if central banks start to get involved……well who knows what could happen then!

    • I actually think it might not be unhelpful.

      Like it or not, we live in a 21st century, digital-first society. If anything, broader based adoption of “digital money” is a given, and central banks will have a role to play there.

      The big question is which currency (or currencies) will become the de-facto standard!

  3. How about investing in the areas that support the crypto ecosystem rather than the currencies themselves (of which there are hundreds out there to choose from). Using an analogy from the gold rush, plenty of miners went broke prospecting for gold but a lot of people got rich selling them pick axes and other equipment.

    I think that although we can identify long term trends to execute a strategy effectively over the long term is another matter. There is a blockchain etf out there though which could be a good starting starting point.

    • Yes, that’s one of the key questions I am trying to answer.

      So far, Ether seems to be a good play on the underlying Ethereum blockchain (as you need Ether to transact on the underlying platform and they plan to start “burning” Ether which will make it less inflationary).

      I know there are a few blockchain ETFs but the challenge as ever is whether they have access to the most promising investments. I suspect that a promising blockchain startup would much rather sell shares to a more “permanent” vehicle like VC or PE as opposed to a traded ETF.

      You could also play the space by investing in the likes of Coinbase. To me, there will always be a need for businesses that “straddle” the crypto-traditional divide. Question is which ones will win longer term!

  4. I have heard of CRYPTO20, which is the first crypto index fund. It provides exposure to crypto returns with broad, diversified risk, rebalancing the top 20 each week. The C20 tokens are tied to the underlying assets with a unique liquidation option in the smart contract.
    I think there is a 0.5% management fee. I am curious, but haven’t used this fund, so no idea about performance.

    I have bought a very small amount of Bitcoin, Ether(eum) and Cardano using Revolut.

    The underlying blockchain technology seems to have wide uses. The luxury brand industry is looking at using it to prevent counterfeiting.

    • So I debated something similar with a colleague.

      Presumably when you buy a market-weighted “basket” of currencies, you inevitably end up with 80-90% Bitcoin / Ether, given those have the biggest market caps.

      I guess rebalancing does help load up on emerging winners but I really wonder how expensive it is (for the fund) to trade in and out of crypto like that.

  5. I understand the hesitancy around crypto. I used to be the same way. I’m still wary of it’s real world applications, but I’ve changed my investing strategy around it.

    A small amount is all you need. If crypto goes nowhere, you only lose a little. If it completely takes over, you’re going to be damn glad you have some.

    • How much are you allocating to crypto if you don’t mind me asking? (in terms of % of net worth)

      Challenge I have is that putting $1k to work won’t really make a difference to me, even if it’s a ten-bagger.

      Putting $100k-$200k would, but I’m not yet in a place where I’m willing to allocate a chunk of money that big to crypto.

  6. I’ve got 1% invested in Crypto. Underlying blockchain technology will prove to be very useful. It is a competitive as heck sector right now, which is good because that should drive further innovations in the space. I can see blockchain tech being used for smart contracts in real estate, art, resumes, and more. I don’t know what will end up winning out, and it certainly could all go bust. This is why 1% feels right to me. If I was not living off of my investments, I would probably push that bound upwards, especially right now during the pull back.

    • I think somewhere between 1% and 5% is the right zip code.

      Problem I have is that when I think about the absolute number that represents, I struggle convincing myself to put that much money into crypto! (over and above the other question marks above)

      Are you just in Bitcoin / Ether or do you have other investments in the space as well?

  7. Oh dear…
    So you are investing because VCs and PEs have invested? They invest in thousands of businesses every year. And most fail. Do you invest in those too?
    Think why banks are interested. They are all looking to get a slice of trading margins, profiting off gullible investors.
    If the underlying tech was that good, GS would’ve bought a crypto company or currency. Not try to make money off sellers and buyers.
    What have the smart contracts really accomplished? What has blockchain achieved in 13 years? Has it made something better? Something efficient? In real life, I mean.
    All I can see from friends and even those who commented here is FOMO. Not one can explain why cryptocurrency is beneficial other than helping to evade taxes.

    • I disagree on a number of fronts here.

      First of all, crypto does have a ton of use cases right now. There are about 1.5bn unbanked individuals out there who have a mobile phone. For them, crypto is a massive step up when it comes to being able to transact and also mitigate the volatility of their own domestic currencies.

      In the US / UK we complain about inflation of 2-5% a year. Think about living in a country where your currency fluctuates by 10% – 20% a day. Bitcoin / Ether, for all their shortcomings, look far more attractive in that context, even if only used as store of value.

      As far as banks go, I can assure you the technological threat is real and profiting off crypto trading is just one of the ways banks are involved.

      Underlying technology has a ton of use cases already, even though adoption isn’t very broad right now.

      Think of the internet back in early 90s – nothing other than a curiosity, used by a few geeks / academics to communicate with each other. Fast forward 30 years and it has redefined EVERYTHING we do, kind of like electricity.

      And as far as FOMO goes, that usually works on the way up, not when prices are down 50%+ off all time highs 🙂

      Still, love having the debate – this is how we all collectively get smarter!

      • Crypto makes no sense as an investment – it does not have a proven track record like equities and property, it is pure speculation. Imagine a historical time when some smart people have come up with cash and there are hundreds of different currencies all round your country. Which ones succeeded? Which one do you invest in, what happened when the government created their own currency, I bet the others very quickly went to zero value. So which is Bitcoin etc, which one succeeds, Who knows!

        That said it is potentially a new paradigm and the fear of missing out is very real. But if you just stop and think about this for a second. If Bitcoin is going to be a new currency ands it’s stable price is going to be say 150,000 USD in 5 years time, how is it going to be the one if 75% of the population can’t afford it. So it can only be a successful investment now if Bitcoin will becomes a new Gold type thing where so many people believe it has value, but I don’t invest in gold!

        Hind sight will be the winner.

        • Graham, FYI – Bitcoin is fungible, it can be broken into a a fraction of itself and, therefore, one does not have to own a whole single Bitcoin.

        • So this is my conceptual problem with crypto, which I mention above.

          I struggle to see a currency accrete in value given it’s a non-productive asset. It can hold its value, like gold, but I struggle to see it continuously compounding in value beyond the initial “growth spurt” if it does indeed become the digital gold.

          However, it’s quite different with Ether, which may well become the default currency underpinning Etnereum’s smart contract functionality. If there’s a framework by which the value of the Ethereum network accrues to Ether holders, then the story could be quite different.

          And yes, agree it will be fun to compare notes in 10 years’ time to see how things shook out.

  8. BOF
    I started out as a value investor 5 years ago but became dismayed by the craziness of the stock market valuations of unprofitable businesses. I started listening to people way smarter than me questioning the quantitative easing that’s happening globally and questioning the stability of ‘fiat currency’. I’ve read a lot about it and listened to hours of podcast episodes. I’m still no expert but you don’t have to qualify as an electrician to turn the light on. I mean, sometimes you know something makes sense even if you don’t totally understand all the technical workings. I see Bitcoin as the new store of value…period. I made my first investment in Bitcoin last August when it was priced around €10k per BTC. At the time i put €35k in (16% of my cash savings). I’ve since invested more and more and am now at 94% (yes, €210k invested in Bitcoin). I believe it will be at €100k per BTC by the end of this year (2021). I will then take some cash back off the table but I will be a BTC maximalist for years to come. As you say above, if you got the chance to buy a part of the internet back in the 90s you wouldn’t pass it up. I believe Bitcoin is this century’s equivalent opportunity. I would not invest in any other cryptocurrency.
    Sheila

    • That’s a very bold move – sounds like you’ve got a ton of conviction on this one!

      As mentioned, my thinking is still evolving on this one, though I do own some BTC and ETH.

      Do you mind sharing why you think BTC will be the long-term crypto “winner”? Is it the finite number of Bitcoins, first-mover advantage, or something else?

      • BTC is the only decentralised crytocurrency and so it stands head and shoulders above anything else. Ethereum, and all of the other coins, are not decentralised and therefore open to manipulation. BTC demands proof of work (about 20 days of complex coding) for 1 x BTC coin to be issued – there are no gatekeepers or middlemen who might be tempted to move the goalposts in the future.

        My mind was made up to buy BTC when I read a U.S. hedge fund manager had purchased vast amounts of BTC back in May 2020. Since then in November 2020, a listed company, MicroStrategy, has invested their entire company treasury fund completely in BTC. Nobody saw that coming – the adoption rate is jumping so quickly. MicroStrategy then made a bold move and announced they were selling a BTC $1.6bn Bitcoin convertible bond which was oversubscribed by fund managers (who probably aren’t allowed buy it except for this is ‘bond’ manner). They have now, just this month, launched a second $400mn Bitcoin convertible bond which will no doubt sell out in the same manner.

        El Salvador became the first country in the world to adopt bitcoin as legal tender 2 weeks ago. The commercial ecosystem that is being formed around Bitcoin is also persuasive…start up businesses, security wallets, the Lightening network etc. I think this is a case of the little guy (i.e. you and me) having first mover advantage over all the big guns as their boards are too slow/scared/confused to buy BTC as they watch what’s happening.

        I will finish by recommending you listen to Preston Pysh on the “We Study Billionaires” podcast. He has a BTC episode every Wednesday and has interviewed anyone who is anyone on Bitcoin. He has about 30 x episodes so far and starts at the ground floor i.e. what is bitcoin. Best of luck BOF.
        Sheila

        • Thanks Sheila, very helpful.

          I was aware of Microstrategy buying bitcoin but hadn’t realized they issued a convert as well. Will dig up the disclosures now as keen to see how they played it – seems like a crafty move indeed.

          Best of luck with your strategy!

  9. Still waiting on the sidelines on this ones. Think there is a lot of literature out there but definitely makes sense to consider a percentage of the portfolio in crypto or industries / services surrounding crypto…

    • The good news is that it’s still very early days. Plenty of time to make (and lose) a ton of money in the space 🙂

  10. Sorry for the late reply.
    Unbanked masses – do we really think old or uneducated people who aren’t comfortable opening regular bank accounts will be happy to trade cryptocurrency?
    If some countries have huge inflationary pressures, the easier step would be to adopt usd or any other stable currency as their currency, which already happens.

    More importantly, if you think some celebrity VCs investing in crypto implies they are the next holy grail, look at the people who sat on the board of Theranos:

    the “all-star board”, which included William Perry (former U.S. Secretary of Defense), Henry Kissinger (former U.S. Secretary of State), Sam Nunn (former U.S. Senator), Bill Frist (former U.S. Senator, senate majority leader and heart-transplant surgeon), Gary Roughead (Admiral, USN, retired), James Mattis (General, USMC), Richard Kovacevich (former Wells Fargo Chairman and CEO) and Riley Bechtel (chairman of the board and former CEO at Bechtel Group).

    The medical advisory board included past presidents or board members of the American Association for Clinical Chemistry such as Susan A. Evans, William Foege, former director U.S. Centers for Disease Control and Prevention (CDC), David Helfet, director of the Orthopedic Trauma Service at the Hospital for Special Surgery and professors, Ann M. Gronowski, Larry J. Kricka, Jack Ladenson, Andy O. Miller and Steven Spitalnik.

    And we all know what happened to Theranos.

    • Like the Theranos analogy. Bad Blood is one of my favourite books, absolutely riveting.

      However, you and I are kind of making the same point. A stablecoin is still cryptocurrency, albeit with a slightly different twist.

      And yes, I do see folks who can’t open or use a bank account for whatever reason using crypto instead.

      Think of migrant worker remittances to emerging countries. I’m pretty sure they would rather bear the volatility of crypto (or use a stablecoin) then pay their bank 10% in fees AND have to suffer from unfavourable exchange rates and domestic currency volatility.

      It’s just not a use case many folks in the West understand.

  11. Hi BOF thanks for an interesting article, when you say net worth do you mean everything including cash and property equity or just invested assets? I ask because 5% of my total net worth is over 20% of my pre-pension investment pot, which feels like an uncomfortable amount to put into crypto (most of my net worth is in my pension and my provider doesn’t have access to crypto investments). I agree the whole crypto thing is worth researching. Especially like the idea of owning the underlying technology somehow.

    Cheers,

    Calum

    • The way I look at it is to invest an amount that will make a meaningful difference if the investment goes 10x (and also to justify all the research around it)

      If you put 1% in and crypto goes 10x, you will have increased your net worth by 10%. Good but not life-changing.

      But juice it up to 2/3/4% and you are now talking a material uplift.

      That being said, whatever you do, don’t bet the farm. It has an equivalent (if not a greater!) chance of going to zero as well.

      • An uplift of 10% of my net worth in a pre-pension account would make a significant difference to my FI age. Also around 1% of my net worth is around 5% of my pre-pension investment pot so I’m thinking that will be a good starter for 10, if my research says “yes”.

  12. I have been involved in investing and crypto for a similar amount of time, so I can give you my two cents o this topic.

    ***** and ***** are two very interesting crypto projects in the sense that they encourage long-term investing and discourage trading (which causes most people to lose money).

    Stef talks about the new features coming soon to ***** here: *****

    • Thanks for the links.

      That being said, I will edit them out from your comment above.

      Even if you eliminate 100% of the banking costs, you will never get to a 10%+ (or a 40% like Hex advertises) interest rate without risking a loss of principal.

      Which is totally fine, but it’s not the way it’s being presented to the public.

  13. You are absolutely correct. The crypto space, in general, is high risk, high reward. The interest rate is paid in Hex and if the Hex price drops you can of course lose your principle. As it stands though, the price of Hex has done exceptionally well (I think it might even be the best appreciating asset of all time – check out the chart), due to its high desirability in the current low interest environment. So you not only get a very high interest rate, but (so far) you also get the insane returns offered by successful crypto currencies.

  14. P.S. There are plenty of other crypto I like (Ethereum, Cardano, Chainlink, Solano, to name a few), but none of them excite me quite like Hex.

    • I quite like Solana as well.

      There was a very good piece on notboring recently describing the latest on Solana and it looks very impressive! I may just add a bit to my existing ETH / BTC holdings.

  15. The growth of crypto is insanely fast. 5% of your portfolio is a risk that may pay off handsomely as more countries assimilate crypto use.

    • The problem is the absolute quantum of money to be deployed – plenty of folks for whom 5% represents $100k – $200k+

      Tough to chuck all of that into crypto in one go

      • I have a different problem – the 10% I initially invested in crypto has grown to over 80% of my portfolio.

        My plan is to slowly cash out and rebalance into safer assets, such as index funds, or possibly one of the life-strategy funds.

        • It’s a high-quality problem to have!

          Agree with you regarding diversifying back out of crypto. Take some of the gains off the table and let the rest of it ride.

    • Thank you.

      I use Coinbase but I’m not very happy with their egregious fees.

      A reader suggested Coinbase Pro which apparently has lower fees, and I’ve also been guided towards Kraken.

      Have also heard good things about Metamask, but that’s more of a wallet solution.

      • It seems UK banks are blocking payments to crypto exchanges such as Binance, Kraken and Coinbase (for example my bank would not allow a payment to Binance) So do any UK crypto investors on here have any recommendations? eToro maybe?

          • The only bad thing here (other than the Coinbase fees) is that you and I are still using HSBC for our day to day banking!

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