January 25, 2018 admin

High risk investing & cryptocurrency

Whenever anyone asks me for advice about investing, I always give the same response:

Invest in indexes. Contribute regularly, hold for the long term and rarely check.

Then I point them towards two bits of reading — JL Collins Stock Series and Warren Buffett’s $1 million bet. These do a great job of outlining the above approach, with some proof that it actually works.

I’m now convinced it’s worth having a small percentage at a higher risk. And as usual, Barry Avraam is the person responsible for getting me to take more risk. Fred Wilson’s writing on AVC also helped. Crypto Asset Allocation and Diversification (aka How To Survive A Crash) are two posts that have been particularly helpful.

I went the cryptocurrency route. But, in true ‘me’ style, I went the boring, straight forward way of taking risk. I signed up with one platform (Coinbase). I then invested equally in the only three cryptocurrencies they allow (Bitcoin, Ethereum and Litecoin).

The thing I had to get my head around is — I have to be OK if I lose this money tomorrow. That’s the price you pay, for the potential of very high returns.

So, why is it risky?

  • Whilst Coinbase is probably the most established and easy to use trading platform, it’s still flakey. It’s obviously in the early days of building out it’s infrastructure, whilst dealing with unprecedented demand — and it shows. Also, it’s customer support is about as bad as it gets. There are lots of horror stories of people not getting a response, despite waiting for weeks.
  • Cryptocurrency valuations are super volatile, with sometimes daily swings of over 20%.
  • I’m not convinced on how reliable the liquidity is (being able to sell it back into £ and then get it into bank). I tried a small amount, and it worked fine. But, I suspect if dealing with larger amounts, there will be some issues.
  • Cryptocurrency is about as close to the definition of a bubble as you get. And the smart people are saying exactly that:
    • Ray Dalio says, ‘Bitcoin today you can’t make much transactions in it. You can’t spend it very easily … It’s not an effective storehold of wealth because it has volatility to it, unlike gold,’
    • Warren Buffett says ‘In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending … When it happens or how or anything else I don’t know.”
  • There are constant rumours that governments are going to act and put a stop to them

Yeah, so super risky.

I moved about 5% of my investments into cryptocurrency over the last few months. And, it represents under 2% of my total net worth. So, whilst it IS super risky — if it all ends in tears, I’ll be ready for that. It won’t hurt me.

As of today, my cryptocurrency investment is up 22%. That includes putting in funds over a period of three months (which has been bringing my % profit down).

Not bad, but I’m not letting myself get attached to it. Until cryptocurrency is a valid currency, or I have converted it all back to £, in my mind, the money is lost. And that’s probably the best way to think about it.

So, now when I’m asked for advice about investing, I give a slightly different response:

Invest in indexes. Contribute regularly, hold for the long term and rarely check. Once you have a lump, invest 5-10% at higher risk.