The reason why we won’t invest more than 5% in crypto

Editor’s Note: When we wrote the very first draft of this article back in 2019, crypto had yet to rise from the ashes like a phoenix (check out TWS art, circa 2019!).  During the time it has dwelled in our drafts folder, the asset class has become a sort of a mainstream investment, albeit one that is currently still speculative and volatile.

We are well aware of the divisive nature of cryptocurrencies.

Many traditional bloggers hate it, many crypto-believers have almost religious belief in the asset class. One thing is for sure though, it has become clear that we cannot ignore it.

With an increasing number of institutions getting onboard the crypto-train, we’d thought we publish our thoughts on it, and why we still prefer to be somewhat conservative on it.

We still think crypto is an speculative investment

The cryptocurrency ecosystem, is still in many ways like the Wild West.

There are numerous articles written by respected names with differing views – never have so many influential people have been so divided on any asset class. Bloomberg has a nice little summary here, but here are some specific articles we think are worth reading which explains our mixed stance.

Ray Dalio – Our Thoughts on Bitcoin 

Michael Saylor – Why MicroStrategy CEO Michael Saylor Bet Company Cash on Bitcoin—and Wants Other Corporations to Join In

Ravi Menon – Crypto Tokens: The Good, The Bad, and The Ugly (yes, the dude from Singapore’s MAS)

Naval Ravikant – Naval Ravikant’s Blockchain Tweetstorm 

At the risk of sounding uncool, we’d got to say that we still think cryptocurrencies are speculative investments. Yes, despite JP Morgan doing their epic U-turn and more institutions getting onboard, there are many questions that make this asset class uncertain.

Here are just three of many to consider:

• We don’t think blockchain – the technology that allows crypto to be used – is a fad. But will the specific cryptocurrencies that are dominant today be dominant in the future? What if better versions of Bitcoin, Ethereum and Litecoin come along?
• If decentralised currencies are so hard to regulate, what’s stopping governments from banning them outright? Furthermore, who will protect your investments in the event of theft or fraud?
• The mining of cryptocurrency is terribly energy intensive – what does this mean for the future production of crypto, especially in a world where we are trying to reduce our carbon footprint?

So, why would we still want to speculate in crypto?

To the horror of some of my more traditional investor friends, I increased my holdings in both Bitcoin and Ethereum (two of the leading crypto currencies by market cap) up to a low-5-digit position this year using Binance  (ref link). Though in retrospect, Binance.sg would have been a better choice, so if you are reading from Singapore, do that first.

In the future, I might consider also making similar plays in alt coins as well. 

Here’s why I did it.

Diversification

I already invest in the stock market via passively managed local and foreign index funds. This helps me diversify across companies and geographies, but it doesn’t diversify across asset classes (stock market, property, businesses, crypto, fixed income securities etc).

Cryptocurrency might be the riskiest of all these other investments, but it also has a place. It protects me against one specific risk –  if today’s fiat dollar system becomes a thing of the past. 

Hedge against Inflation 

Last year, the US printed trillions of dollars to salvage the economy. While the strategy worked, one side effect you can expect to see is the value of money decreasing.  That means holding on to too much cash might have negative returns. Viewed in this context, cash is indeed trash.

Volatility brings huge potential reward

The 1-year return of the S&P500 is around 50%. In comparison, Bitcoin and Ethereum are both up over 700%. Yes, it’s true that crypto is incredibly volatile, but at the same time, this can work in our favor. With such large potential returns, the rewards are hard to ignore.

That said, in the grand scheme of things, crypto still only comprises 5% of my portfolio. I’m still approaching it with the attitude that I might lose up to 65% of my capital allocated to it.

Why just 5%, then? 

Depending on who you ask, people will either say we’re over-conservative (hfsp, as the believers will say) or risking too much. But here’s our logic why:

We want to sleep at night. Crypto markets are 24/7, and crypto currencies aren’t exactly the most stable stuff around. Minimising the risk you are exposed to also helps us focus on other things, instead of going through emotional rollercoasters all day long. Imagining spending years of your life worrying whether 50% of your net worth is going to be stolen by hackers. Very stressful. 

Our 20s and 30s are really better spent over fussing about other things. We’ve mentioned this many, many times, but our preferred way to earn more money in our 20s, and 30s even is through getting a pay-raise, business and side-hustling.  To us, crypto is a way to protect our finances from technological change, if we grow rich from it, great. If not, meh. 

We just don’t know enough to put more. Look, we get that there are some people out there who are super passionate about cryptocurrencies who’ll say we’re missing out on an opportunity of a lifetime if we don’t sell our house and all our belongings and go all in on crypto. 

But to quote everyone’s favourite and over-cited investing grandpa Warren Buffet, “never invest in what you don’t understand.”

On the flip side, while we have no doubt that Buffet’s wisdom is timeless, the man also didn’t live in the age of blockchain, nor will he have to deal with the full force of the digital revolution when it hits. Plus at 90-years, he has probably earned all the money he’ll ever need in his lifetime.

If we may have the audacity to add on to his words a little, it would be this:

“Never invest in what you don’t understand…

But if you choose to do so, put no more than 5% in it.”

A last word about FOMO and Bitcoin

With the benefit of hindsight, it’s all too easy to be kicking yourself for not investing in crypto sooner. If I had invested my entire $100,000 savings in 2018 when it crashed, I would be at least a millionaire today.

You might be wondering how I feel about missing out on one of the greatest opportunities in history to grow my money.

I’m not going to lie – I do occasionally think about what things would have been like. The FOMO is real, and I am only human.

I’ve learnt to come to terms with my FOMO, simply because there is absolutely no way my 28-year-old self would have dumped $100,000 into BTC when it was at it’s 2018 lows.

Firstly, being able to put $100,000 (or even $20,000) in speculative investments requires a level of privilege (and risk tolerance) I do not possess. The stress would have probably killed me.

Secondly, buying is one thing, holding is another. I know bitcoin investors who suffered 65% losses during the 2018 bubble, materialised their losses and have sat out even since.

My take?

Crypto is hardly the first speculative investment with meteoric returns. And if 2021 is anything to go by with the Gamestop saga, it won’t be the last. Rather than jumping headfirst into every new trend that comes by, build up your wealth conventionally first so you can have the privilege of speculating.

That means creating a position where your speculative investments can’t ruin you financially.

After all, the more money you have, the more risk you can afford. Losing $100,000 when you have $1,000,000, is not a big deal. It’s a disaster if it’s all your money.

Ultimately, common sense applies.

Know the risks. Hope for the best. But prepare for the worst.

When it comes to speculative investments, this is the way.

Stay Woke, Salaryman

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