If you have ever asked yourself, “should I invest in cryptocurrency,” or “is cryptocurrency a good investment?” then keep reading.
To answer these questions, you must consider the opportunity, opportunity cost, risk, your investment objectives, and how they relate to cryptocurrency investments.
If you cannot answer these questions confidently, you stand to miss out on the most significant wealth creation events of your lifetime.
By the end of this article, you will know:
- If it’s a good idea for you to invest in cryptocurrency or not.
- The state of the cryptocurrency market and its future, so you know if it’s a bubble or not.
- How much to invest in cryptocurrencies to achieve your goals without speculation.
- Which cryptocurrencies to invest in so you don’t spend thousands of hours researching.
- How to avoid expensive mistakes investing in cryptocurrencies to avoid getting ripped off.
- The safest way to invest without learning to trade or opening a wallet.
Disclaimer: This is not financial advice.
The Cryptocurrency Opportunity
“Should I Invest In Bitcoin?”
To answer this question, first, you need to understand the state of the market because to grow your portfolio, you must invest in growth assets.
The good news is the boom in digital assets has only just begun. Even if you think you have missed the boat because Bitcoin prices have risen, you haven’t.
State Of The Crypto Market
In broad terms, the world’s population is grabbing onto crypto because it is part of the global transition from an analogue to a digital economy.
Nigeria, and similar corrupt countries, has the highest adoption rate because of the high cost of money transfers.
If you see the adoption curve, you’ll notice the stages of adoption of new technology. Bitcoin is only at the beginning stages, which is exciting.
Cryptocurrency Market Growth
The size of the entire cryptocurrency market has already sprinted past the $1.5 trillion economy of Australia.
Many people have said, “Bitcoin is a bubble”, but this is not true.
When you look at the price of Bitcoin on the log chart below, you can see the steady increase in value since its debut. A log chart plots the price in percentage change rather than absolute dollar change. The chart is crammed full of the ‘booms and busts’ you’ve heard all about. Bitcoin is volatile, but so is the stock market.
Choosing What Cryptocurrency To Invest In
The optimal portfolio to produce the most returns for the least risk is to hold 70% Bitcoin and 30% Ethereum and rebalance every year. My team proved this by using a Monte Carlo testing analysis on thousands of iterations across a diverse portfolio. The goal was to use the 'efficient market hypothesis' taught in universities to find the highest return on risk as seen in the image below.
I don’t recommend investing in any cryptocurrencies outside of Bitcoin and Ethereum right now unless you’re getting help with your portfolio or are a professional. Bitcoin is a currency replacement, and Ethereum is a proven infrastructure other cryptocurrencies need to survive. They are the two blue chips of the cryptocurrency space.
Is Bitcoin Overvalued?
Valuing Bitcoin is problematic because it’s a new currency.
As a result, experts use various models to value it. Each has its pros and cons. You can learn more by watching interviews on Real Vision.
To know if cryptocurrency is a good investment, I first recommend the Stock to Flow model as a simple place to start because it measures the price of Bitcoin compared to the release of coins. You can see how it looks in the chart below. (You can see a live version of this chart here.)
What Is The Value Of The Blockchain Ecosystem?
Cryptocurrency and the blockchain will lead a bull charge into your life through payments, digital ownership, privacy and an entire ecosystem of services.
Banking and finance are long overdue for innovation. Hopefully, governments will innovate next.
Just imagine a world where banks distribute their profits back to the people, and there is no central control of the money… Blockchain makes this future possible.
As Raoul Pal of Real Vision says, "cryptocurrencies are the most biggest trade of our lifetime."
The Future Of Cryptocurrency and Blockchain
Imagine buying a house without a lawyer or getting a mortgage without a bank.
How about buying a fraction of an investment property from your phone, avoiding the need to save for a deposit?
These examples will be as everyday as bread and butter soon.
Blockchain allows industries to increase efficiency and productivity. We don’t know the whole industry’s exact value, but we know the growth is unprecedented, and the trajectory isn’t stopping.
If you want to read a more in-depth guide, make sure you read the article Is Cryptocurrency The Future?
The Opportunity Cost Of Crypto
When you invest, one of your first questions should be, “is my money better off here or somewhere else?”. Time is the only element you can’t get back. Opportunity cost lets you focus on producing the best results using the resources you have.
Let’s look at the most common alternatives you have right now compared to crypto.
Stock Markets Compared To Crypto
Warren Buffett’s partner, Charlie Munger, says stock markets are overvalued, but he doesn’t know when the bubble will burst. As a result, they’re sitting on giant piles of cash, waiting to invest.
Stock market prices rise partly because of the helicopter money governments print, which finds itself invested in stocks.
USA Stock market valuations don’t reflect the companies’ productive output, which means the stock market’s future growth prospects are low compared to cryptocurrencies. Is cryptocurrency a good investment compared to overpriced stock markets? Well, if you're comfortable with the risk of a stock market who's price could crumble at any time, then the answer is yes.
Is Cryptocurrency Better Than Cash?
Ray Dalio, the manager of Bridgewater Associates, the largest hedge fund globally, says, “Cash is Trash”.
The purchasing power of the USD lost over 97% in the last 100 years. Ouch.
Central banks also print so much money, and it devalues your savings compared to inflation. Bitcoin is an emerging store of value, so it is still volatile, but its value is rising over time because they cannot print it like fiat money.
Bank interest is very low. Often it’s less than 1.00%. A smarter alternative is the Digital Savings Account as it offers up to 7.00% on the same cash and can accept deposits in USD, AUD and EUR. At least it covers inflation. Technically this is also cryptocurrency.
Cash is suitable for short-term stability and wealth preservation. You need it for day-to-day living, but there’s little value to investing in cash for growth when compared with the potential growth of cryptocurrencies. If you want to preserve your cash, use crypto to in a stablecoin to earn high interest which has a very similar risk to cash.
Precious Metals Growth
Gold and silver have a bright future. Silver has both industrial use and monetary use as a store of value. Silver and Gold will probably rise in price for another decade due to the lack of supply compared to the demand. Owning precious metals is a sound strategy. However, it doesn’t produce dividends.
An investment in Gold and Silver is smart. You’ll experience growth. However, the prospects of growth are less compared to the potential growth of cryptocurrency.
Is cryptocurrency a good investment compared to gold and silver?
Well, precious metals will have a steady growth and crypto will have explosive growth with more volatility. It comes down to your risk appetite.
We’re at the dawn of a new super cycle in commodities. Their value has been low for a very long time, and this is now changing because the value of productive assets will increase when uncertainty is high.
Think about it. Everyone wants to know they have food on the table, no matter what is happening.
Timing the markets is difficult, but there is a significant upside in studying the macro view of commodities.
Active investing in real estate, where you influence the build or buy cost, produces bigger returns compared to passive investing. As the saying goes, ‘the money is made when you buy’.
Real estate is a highly leveraged investment process; if you’re borrowing from the bank, you must understand your risk. Don’t make the massive mistake of thinking real estate doesn’t go down in price.
Buying a real estate investment trust in your stockbroking account is a simple way to invest passively.
Developing nations usually have the highest returns and yields with an opportunity to get in front of a real estate growth boom. Check out the global house prices to see where to invest.
Real estate is a solid investment but is more hands-on than cryptocurrency.
The Risks Of Investing In Crypto
Investing in cryptocurrencies comes with risks.
Is Cryptocurrency A Good Investment If It Has High Volatility?
Lyn Alden says Bitcoin is an ‘emerging store of value’, and a new asset class is always volatile in the early stages of its launch.
Many investors fear volatility because they think it’s a bad thing. As a result, they miss out on many of the biggest investment return opportunities. Volatility is not the same as risk, as proven by Artemis research.
Volatility creates the opportunity for hyper-growth in your portfolio. It can provide an asymmetric reward to risk. e.g. where you risk 1 to make 10. But it also means you can get overly emotionally if you’re watching prices too close.
If you invest in cryptocurrencies, understand the best strategy is to hold for the long term and to reinvest dividends along the way. This dollar cost averages your position for the maximum compound growth.
The Possibility Of Losing Your Investment
It’s theoretically possible investment in bitcoin will go to zero, just like any other investment. You’ll find it’s more likely that stock in the S&P 500 goes bankrupt because of fraud before Bitcoin goes to zero. Remember Enron?
Bitcoin survives on the network effect where the more people that use it, the more valuable it is. Even fiat money has the risk of hyperinflation and going to zero value.
But it is essential to understand what Bitcoin is, so you are familiar with how your investment works.
Doing It Yourself vs Having It Done For You
The biggest mistake I see investors make is trying to manage their own security. It’s not safe to have a hardware wallet with millions of dollars sitting in a drawer in your house at home. Especially when using dirty tricks, it only takes 15 minutes to hack a hardware wallet.
People lose fortunes by forgetting their passwords, passing away without sharing their private keys with their family, or simply losing their physical wallet.
If your portfolio is worth a lot to you and you manage it yourself, you need to understand the risk involved. Is cryptocurrency a good investment? Not if your administration isn’t bulletproof.
The safer alternative is to open a managed account where the custody, security and execution are all done for you. Not only do you save time, but it’s more secure, and your transaction costs are lower. Check out the Digital Asset Dividend Account, which does all this for you.
Investing Vs Trading Cryptocurrency
You wouldn’t be human if you didn’t get excited about the big moves in cryptocurrency. Many people get excited by the idea of day trading. But trading vs investing are two different activities.
Trading with under $100k or so is easy to do. But psychologically, when the amounts rise, traders are not usually mentally prepared to handle the emotions that come with large profit swings, which is why 99% of traders fail. Many years ago, I worked in a trading education and brokerage house and can confirm this firsthand.
Another key reason trading is so tricky is cash flow. If you’re learning to trade to produce cash flow to live on, then you’ll feel pressure to perform, which ironically makes it more likely you will fail.
Investing means you’re producing cash flow to live on somewhere else, such as a business or a job, so you’re not directly or emotionally tied to the outcome of every trade.
I’ve met many traders who would’ve done better by holding for a couple of years rather than buying and selling many times during the same period.
Not to mention when you trade, you pay hidden tax liabilities. Governments have launched capital gains tax programs. So if you owned your cryptocurrencies before there was a tax, then you better get prepared.
Tax Implications Of A Great Crypto Investment
A wealth tax on crypto is coming. If you haven’t started yet, a smart tax approach is to open an investment holding company in a country with low capital gains tax on cryptocurrencies. You can use this for other assets as well. Internationalising your life has tremendous benefits, but it takes commitment. Obviously, you need to seek advice on your situation.
Broke and incompetent governments will use the power they have to tax wealth in any form rather than learn to be productive. You must be ready when the hammer comes down. Is cryptocurrency a good investment? Well, the government thinks so because they want tax revenue, even if crypto is not regulated yet.
Expensive Mistakes Buying Crypto
To avoid serious mistakes when investing in cryptocurrencies, make sure you read Investing In Cryptocurrency with 100k or More because it details these mistakes when you invest larger sums.
Is Cryptocurrency A Good Investment
For Your Situation?
Your situation determines what your goals are. This is the ultimate test to know if cryptocurrency is a good investment for you or not.
When you learn to invest, there are two ends of the spectrum: growth and preservation. Growth increases your risk and increases your potential for return. Preservation focuses on decreasing risk for a stable return, but it is usually lower.
When you build your portfolio, use this spectrum to make your decisions. Here are three simple fix objectives you can use.
1 High Growth
High growth comes from concentrated portfolios. It creates the most wealth but comes with the highest volatility and risk.
If you dump all your money in crypto, you must handle the yo-yo swings in your portfolio’s value.
Warren Buffett famously said, “Diversification is for the ignorant”. If you don't fully understand what you’re investing in, then it pays to diversify.
A growth portfolio usually has multiple non-correlated investments, with an equal risk in each, all with a high probability of making more than the risk you take. This is a proven approach to long-term growth.
For example: Investing in Crypto, Stocks, Precious Metals and Real estate with a 25% risk of your portfolio in each one.
If you’re focused on wealth preservation, your portfolio will hold low volatility assets like cash or bonds. If you want to earn higher interest than a bank on cash, then check out the digital savings account.
"How Much Should I Invest In Cryptocurrency?"
Another big question to answer. Now you know how to choose an investment between growth and preservation, you can now work out your portfolio goals and risk tolerance.
First, you must choose a goal. Without a goal, you won’t reach it…
So if your goal is to make $5 million, then here are some considerations.
Someone in their 20s with a net worth of under $100k may invest everything through one concentrated bet and keep contributing over time.
If you’re in your 40s and have $300k in a retirement account, then you may choose to work with a diversified growth portfolio for steady growth. By the way you can open a Crypto IRA to invest with your retirement account.
If you’re in your 50s and with a net worth of $5 million, investing all of it in cryptocurrencies is irresponsible as wealth preservation is more important.
Cryptocurrencies are high volatility with high risk, and the rewards are equally high.
Only risk the amount you’re comfortable with losing to achieve your goals. No asset class can guarantee returns. Even money in the bank isn’t as safe as it used to be.
Just think back to when Greek banks limited cash withdrawals to 60 Euros a day to its citizens. This could happen in your country when your bank has a liquidity crisis.
...So Is Cryptocurrency A Good Investment?
To conclude, you should now have a simple answer to this question based on your own goals and personal situation.
Blockchain and cryptocurrencies are driving a global transition from analogue to digital. As a result, Digital Assets were the best performing asset class in the last decade.
This trend is here to stay, and cryptocurrencies are set to blitz the returns of stock markets, cash, precious metals or real estate. The stock to flow model forecast Bitcoin to produce another 10-20x in gains in the next 10 years.
But cryptocurrencies are an excellent investment only if you can handle volatility. Your situation will tell you how much to invest. Invest more for growth and less for preservation.
The optimal portfolio is 70% Bitcoin and 30% Ethereum, rebalanced every year, with dividends reinvested.
The safest way to invest large sums is in a managed account with secure custody and execution done for you, so you avoid expensive mistakes. You can get all of this done for you in a Digital Asset Dividend Account.