If you have a pile of cash which you want to invest in the financial markets, how much should you invest in bitcoin? Should you diversify into other cryptocurrencies as well? Are the opportunities in the cryptocurrency market so juicy that you should just go all in? Or maybe just a humble 1%? Or perhaps somewhere in between those extremes?
Remember: I’m not a financial advisor. Find my riveting disclaimer here.
Cryptocurrency Risk Profile
Without a doubt, cryptocurrency investment is extremely high risk.
Even if you only put money into bitcoin, the most reputable cryptocurrency around, you’re still investing in experimental technology.
And most of those ICOs? In the increasingly hyper-competitive cryptocurrency space, expecting that 9 in 10 projects will fail is probably on the low end.
Sure, that single project that does explode in value could make up for the other 9 failures. However, this assumes that you’d have enough time (and luck) to find that needle in a haystack (or that you’re diversified enough). For most people (including me), that’s a completely unrealistic assumption.
The ‘Perfect’ Balance
So what’s the perfect amount to invest in Bitcoin or other cryptocurrencies?
Let me just cut to the chase: there is not ONE answer to this question which will be appropriate for everyone.
If you’re a Russian oligarch sitting on a couple of billion dollars, then it’d be pretty stupid to bet everything on cryptocurrency. But if you’re a young millennial with just a few thousand pounds? Maybe betting everything you have makes sense.
It’s a decision you have to make for yourself. To help you along with that, I collected the thoughts of a few cryptocurrency enthusiasts.
The crux of his argument is that bitcoin is uncorrelated with traditional assets classes (e.g. stocks), and will, therefore, serve as a hedge against the “autocratic regimes and banking infrastructure that we know is corrosive”.
Tom Lee is the co-founder of Fundstrat and is endlessly bullish about bitcoin. Even in the recent (2018-2020) cryptocurrency winter, Tom Lee remained bullish in the long-term.
In this presentation at the Upfront Summit, Tom Lee highlights that top cryptocurrencies have an “uncorrelated alpha” which is the “holy grail of portfolio allocation”.
Translated? This means that cryptocurrencies are not correlated with other asset classes (e.g. stocks). If you’ve been paying attention, that’s also what Chamath Palihapitiya has said.
At this point in the presentation (on this slide), Tom notes that putting just 2% of your investment portfolio into bitcoin between 2014 – 2017 would have increased your returns by 2% (from 6% to 8%). Interestingly, a 10% allocation split between bitcoin and the top 10 cryptocurrencies would have yielded a 19% return (with a higher Sharpe ratio) over the same period.
Another well-known bitcoin bull, Michael Novogratz (former partner at Goldman Sachs) thinks that “it’s almost essential for every investor to have at least 1% or 2% of their portfolio” in cryptocurrencies.
In 2017, Michael reported that he had about 10% of his net worth in cryptocurrencies.
If you have some time to burn, you might enjoy sitting through one of his 2017 interviews (see here).
Erik Finman is a 21-year-old cryptocurrency millionaire who reckons that young people should invest 10% of their income into bitcoin and other top cryptocurrencies.
If you assume that half your income is lost to rent/mortgage and bills, then this actually equates to 20% of your disposable income.
Not a fan of this piece, but it offers some contrast to Chamath Palihapitiya, Tom Lee, and Michael Novogratz.
Louis Thomas is a millennial cryptocurrency YouTuber who invested his life savings into Bitcoin and Ethereum in 2017. Bold move.
He notes that it wasn’t a huge amount (given he’d just finished university at the time). He also comments that he’d still go all in even if he was investing into cryptocurrency for the first time in 2018.
This decision turned out well for him, but he doesn’t meaningfully weigh in on whether other millennials (who presumably have a low net worth) should follow his example.
“What Should I Do?”
I can’t make that decision for you, especially since I’m not a financial advisor.
From what research I’ve done, there is a strong argument for some exposure to the cryptocurrency market.
But going all-in? That seems quite extreme.
The only caveat to that might be if your total investment capital is low (e.g. <£2500) and you’re young (e.g. an ‘entitled’ millennial or generation Z). That’s only because, in the grand scheme of your lifetime earning potential, losing that much wouldn’t hurt you too much in the long-run if you lost it all.
“What Cryptocurrencies Should I Buy?”
If I was investing anew today, this is what I’d do:
- Put more than 50% into Bitcoin (BTC).
- Spread a small slice (approx. 25%) across the other cryptocurrencies in the top 100 (automatically rebalanced daily). You can easily automate the rebalancing with tools like Shrimpy.
- Setup automatic bitcoin (BTC) purchases so you can dollar cost average into the market. I use Vimba, which is available in New Zealand and the UK. Check out my Vimba Review for an overview.
- Before jumping in, I’d suggest you put together some kind of investment strategy and ask the right questions about anything you’re thinking of throwing your hard-earned cash at.
- You might want to take a gander at the /r/UKPersonalFinance flowchart. They’re pretty anti-crypto though.