Adding cryptocurrencies to more a traditional investment portfolio
I talk a lot more about investing than is probably normal, healthy or cool.
Ever since I asked for stocks for my sixteenth birthday, people have known me as the guy who is more than happy to spend a couple of hours talking you through the best places to put your money.
And as you can probably imagine, over the last few years these conversations have invariably turned to Bitcoin and cryptocurrencies.
Like most people, I had known about Bitcoin and cryptocurrencies for a while but it was early 2017 when I started to get really involved. I helped start a couple of crypto-related businesses before going full time with one of them, Intelligent Trading Foundation.
I imagine this is why my friends and family ask me now “so Ben, how can I get into crypto?’
In the past, making your first steps into crypto investing wasn’t easy. You needed to understand the fundamentals of the technology, the way coin ‘ownership’ works and the reasons why these digital assets are different to other investments.
It’s a problem we are solving at Intelligent Trading, by helping regular investors to manage their cryptocurrencies as part of a diversified portfolio.
There’s plenty to read up on if you want to understand how to start trading cryptocurrencies but I’m keen to explain what I say to friends and family when they tell me they want to invest for the first time.
Borrowing from the world of Simon Sinek for a moment, it’s important to start with a clear understanding of why you’re investing in cryptocurrencies in the first place.
There are good and bad reasons to get involved.
Good reasons include diversification of your investments, a desire for riskier assets that might pay off in the long run or taking a contrarian view to what the masses think.
A bad reason (or a risky one at least) is a desire to replicate the massive returns that a friend, colleague or peer achieved in the bullrun of 2017.
So, let’s concentrate on the good reasons. Firstly, diversification.
It’s generally accepted that, over the last five years, Bitcoin and the more established cryptocurrencies have followed price paths that do not correlate with traditional assets such as gold and equities. As a result, they provide a useful diversification opportunity for most traditional portfolios.
Secondly, potential growth.
Cryptocurrencies are in one of the early stages of the S-shaped adoption curve that established technologies, including the internet and smartphones, went through. While nothing is certain, they are potentially able to grow a lot from here.
Finally, there’s the fact that cryptocurrencies provide a contrarian investment opportunity.
Even if Warren Buffet isn’t the biggest fan of cryptocurrencies (understatement, I know), I think his views on contrarian investments are worth projecting onto the crypto market as it exists today. To paraphrase, most people become interested in investment opportunities when everyone else is but the real time to get involved is when no one else is.
While all these factors make me fundamentally bullish about cryptocurrencies, everyone should enter this market carefully.
In doing so, you should hit pause on your crypto enthusiasm for a moment and focus on your personal situation.
Your overriding investment strategy must be the starting point for any new asset allocations.
I’ve written on the importance of investing before but, when it comes to choosing assets, you should always have an eye on how these add up to an overall risk profile. Furthermore, this risk profile should match your personal goals, aspirations and time frames.
Here’s what the CFA Institute says about the importance of background information to investing strategies:
“Without proper knowledge of the investor’s goals, time horizon, liquidity needs, and risk aversion, it is impossible to recommend suitable investments or build efficient long-term investment strategies”.
Context is king
Really it all comes down to the context that surrounds your investments. Your personal circumstances are important whether it’s you or someone else investing your money.
For example, are you earning money, living cheaply and looking to gamble on the next big thing?
Or are you married with a mortgage and young kids, who you want to put through college in 20 years time?
The contextual circumstances of these situations are obviously very different and, while there are always some golden rules to investing, you need to know what your aims and objectives are if you’re going to invest your money wisely.
So, if you haven’t spent time working it out, do so now.
You need to outline a strategy that firstly involves investing more of what you earn and secondly makes those investments work over time.
Unfortunately, most people fall at the first hurdle and aren’t investing nearly enough of their income.
For those that are though, assets are normally split between stocks, bonds and real estate, with stocks considered the most risky and bonds the least.
These are generalizations, of course, but it’s an example that is worth continuing to demonstrate where your first cryptocurrency investments might fit in.
If you hold 60% of your investments in stocks, 30% in real estate and 10% in bonds, it might be worth thinking about transitioning off some of those stock investments into cryptocurrencies.
However, it’s important to remember that these are risky assets and you need to ensure your initial foray is decided by your personal investment portfolio, not your excitement about crypto.
Having said that, I’m fundamentally bullish on it, so perhaps I’m biased.
Jump in with a solid strategy
Once you know where you want cryptocurrencies to fit into your portfolio, there’s a lot of choice on offer.
There are thousands of cryptocurrencies out there but the well-known coins are a good place to start. They are the easiest to purchase, have the most buyers and sellers, and the most information available about them to help increase your knowledge. I always recommend newbies to use Coinbase, it’s well-known and easy-to-use to get started.
For me, one of the best parts of crypto investing is the enormous opportunities for learning that exist. There’s just so much interesting stuff happening.
Everything from the factors affecting price to the wider phenomenon of decentralization and the new economic models that are being built on it.
Not any sort of financial advice, but hey, maybe it makes sense for you. If so, start cautiously but get some skin in the game. There’s no better way to learn!
Originally published at https://www.benlakoff.com on May 9, 2019.