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I’m going to break with the traditional FIRE and Boglehead community (and even some of my past statements) to say that I feel there is a place in everyone’s portfolio for a small portion allocated to blockchain technologies. Yes, there has been a lot of mania and hype the last month or two surrounding them, in particular the craze of Ethereum (ETH) that has seen mind blowing gains, but a buy and hold approach (referred to as HODLer in the crypto world) can still apply.
The world of blockchain based technologies is complex and ever changing – as of this writing there are over 1100 individual cryptos (up from 850 just a few weeks ago), including “currencies” (like Bitcoin) and “assets” (like MaidSafeCoin). Some currencies, such as Monero, also provide transaction privacy. In a world where more and more of our individual data is collected and aggregated by firms and governments, true digital privacy is a luxury that will likely yield substantial economic outcomes. Ethereum is a different class of currency in that it is more than just a digital currency, incorporating smart contracts or programmatic legal arrangements into what is really a platform. I could elaborate on more examples but that would quickly get beyond the scope of this article. Suffice it to say, the current applications of blockchain tech are extensive. Think of it like the internet, from which numerous markets have been created.
Bitcoin has reached a point where it is most apt to consider it a store of value and unit of account. For a time, it had a run as a small transaction medium of exchange, but due to transaction costs and other technical nuances, we likely won’t be using it for Starbucks purchases very much longer. Something else will fill the small transaction medium of exchange role. There are a lot of contenders in this space, including Monero, Dash, NEM, and Litecoin.
In my mind, Bitcoin most closely resembles land in a city, though many other finite resource analogies apply as well. The developed area of city expands quickly and then slowly grows outward. That outward growth can only go so far until you reach city limit boundaries. As development reaches the bounds of a city limit it becomes more and more difficult to develop. I don’t know what city Bitcoin most closely mimics today, but it will reach a maximum size of 21 million coins – today there are roughly 16.25 million. As such, it’s a scarce, digital commodity. Then consider those lost by early users of the system, and the supply limitations become quite shocking. Other blockchain technologies have different supply growth and limits so don’t consider this a one-size fits all likeness.
Okay, but what the heck is Bitcoin? If you don’t understand something, don’t buy it right? Absolutely. So, learn more about Bitcoin and blockchain! “Bitcoin is a worldwide cryptocurrency and digital payment system called the first decentralized digital currency, since the system works without a central repository or single administrator.” Brush up on more details at Wikipedia. Don’t be like Katie Couric – What is the Internet?
I personally believe that everyone should have (at least) 1% of their portfolio allocated to digital assets and currencies. If you’re only going to choose one, choose Bitcoin (BTC). It’s like choosing the US market (Bitcoin) versus ROW (altcoins). Footnote – everything except Bitcoin is considered an altcoin. I’ve been taking a market cap approach which puts my crypto holdings at approximately 50% Bitcoin and 50% altcoins. For a long while, I only did Bitcoin and was perfectly happy and satisfied with that approach.
For indexers like myself, I was a bit disappointed to learn that there isn’t a broad market ETF equivalent for digital assets (yet). Bletchley Indexes, in particular, bridges this divide by developing indexes that one can use for constructing their own basket, though they currently have to be manually managed which can be quite cumbersome. The Bletchley 10 Index is essentially a market cap weighted index of the top 10 digital assets (akin to a large cap ETF). And the Bletchley 20 index is also market cap weighted but includes additional digital assets (akin to a large + mid cap ETF). Self-managing a 20 or even 10 holding basket of cryptocurrencies and other digital assets is by no means set and forget, given volatility and the rapidly changing dynamics of the space. Footnote – I would steer away from token based options such as Iconomi and TaaS at this stage in the game as they are securities by another name.
In the 12 months, a 1% Bitcoin allocation to a traditional 60/40 increased returns by roughly 2%. Grayscale Ethereum Classic Investment Investment Thesis
Bitcoin, Ethereum, and Litecoin are the three main players in terms of purchasing directly with USD. Gemini is fantastic and it’s the primary way I purchase Bitcoin with USD – you can purchase BTC or Ethereum (ETH) via Gemini. Coinbase is another very solid option – they also support Litecoin (LTC) and allow instant credit card purchases, but charge higher fees.
Bitcoin is truly the gateway to all crypto as its (in general) the primary way altcoins are quoted and traded. If you’re feeling adventurous and want to expand beyond Bitcoin, Ethereum, and Litecoin, you’ll have to look at a broader exchange such as Bittrex. These exchanges typically only trade relative to other cryptos, with Bitcoin being the standard. For example, on Bittrex all prices are quoted relative to Bitcoin, such as LTC/BTC (Litecoin per Bitcoin). Volatility is very real in this space, so don’t be shocked by a 10-30% move in prices.
- Go to Gemini or Coinbase and buy some Bitcoin. Using the 1% allocation target, I’d buy $1,000 worth of Bitcoin for every $100,000 in my total portfolio.
- Think about how you’re going to store that for the long term. It’s commonly accepted that one should not trust an exchange to hold their cryptocurrencies. There are hardware (Trezor and Ledger) and paper wallets that are the most secure. There are also countless generic wallets such as Exodus, Jaxx, and Coinomi that support multiple coins at once. If you’re brand new to this space, I’d probably start with Jaxx as it gets your assets off of exchanges in an easy to manage fashion.
- Now you have options – stick with 100% Bitcoin or start diversifying. (How to transfer Bitcoin from Coinbase to Bittrex)
The world of cryptocurrencies and other digital assets is quite separate from the rest of the traditional financial system. This is both a pro and a con. There is a bit of a learning curve with respect to terminology, asset transfers, purchases, trading, and storage. However, it’s a great diversifying asset (in my opinion) because of its separation from nationally bound entities.