The most popular question I get asked these days is, “What are your thoughts on investing in crypto currencies?”
Therefore in this week’s newsletter I wanted to give some context to my personal views on the subject.
I’ll focus less on whether investing in crypto is right or wrong, and more about on how I approach this type of investment sensibly.
Whenever someone tells me that they invest in crypto or are thinking about it, I always ask them one follow up question.
“Why do you like the idea of investing in crypto?”
The typical response usually starts out with an explanation of how the blockchain technology is going to revolutionise the future of decentralised finance (or something very similar).
After about 1-2 more probing questions, I usually get to the truth.
95% of people have FOMO (fear of missing out) and they want to make a quick buck.
FOMO is very common in the world of investing. It’s totally okay to explore new investment opportunities, but I encourage you to take caution and approach it sensibly.
Below are some personal approaches I am taking before diving head first into one of the currently most risky and volatile investment products out there.
You earn the right to invest in crypto
If my 10 year old kid came up to me and said that they wanted to be a Formula 1 driver, the last thing I would do as a parent is shove my kid straight into an F1 car travelling at over 200 miles per hour.
That would be extremely risky, stupid, irresponsible, [fill in your favourite adjective].
An F1 car is the fastest, riskiest and most dangerous professional car you can drive.
Most likely I would start by enrolling my 10 year old kid into a go karting circuit, where the typical horsepower of a car is 36.
Start small. Here they can learn their craft.
Once they conquer karting, the next step might be F4 where cars have a maximum of 160 horsepower versus 1000 horsepower in F1. If my kid is good enough and showing they are capable of handling this kind of speed, the next step would be F3 and then F2 (380 and 620 horsepower respectively).
Finally after years of training and practice, they graduate to the holy grail of F1. At this level they are ready to drive a 1000 horsepower car at speeds over 200 miles per hour.
They earned the right to drive an F1 car. They didn’t start out there.
To me crypto currency is the F1 of investing. It’s one of the riskiest and most volatile investment products you can buy, at the moment. If you are a beginner investor, it seems rather silly and irresponsible to jump head first into the highly speculative world of crypto as a starting point.
Take a look at how volatile Bitcoin has been in the past 1.5 years:
Jan - Mar 2021 - Bitcoin nearly doubled from $40,000 to $76,000 in just 3 months
Mar - June 2021 - Bitcoin plummets by 50%, down to $39,000
June - Nov 2021 - Bitcoin doubles in value again to £80,000
Nov - May 2022 - Bitcoin finally crashing back down in half to $42,000
All in less than 2 years. Madness!
Crypto trading is only 13 years old, giving it a limited trading history. It’s totally unregulated, making it even harder to predict.
Just like starting your F1 career in karting, it feels far more prudent to build a strong foundation to your investments before you explore crypto.
I recommend laying a good base to your financial future by investing in diversified index funds or retirement date funds. Once that is done, you can progress towards crypto as you become a more experienced investor.
In my personal view, you earn the right to invest in crypto.
Don’t bet the farm
When I coach individuals and see that 100% of their investment portfolio (and their financial future) is tied to the price of bitcoin, it makes my stomach turn.
Good investing is not gambling. However, to me, crypto absolutely feels like more like gambling at the moment. It’s unproven, untested and unregulated.
If my entire financial future rested on the performance of crypto I would personally have a lot of trouble sleeping at night.
I am no Warren Buffet and have never claimed to be. However, I do know that putting all your eggs in one basket is a terrible investment decision. Let alone that basket holding nothing but speculative assets!
Most of the time I simply copy what brilliant investors already practice and preach. One lesson that the best investors always preach is that it’s crucial to manage your risk.
Therefore the way I view crypto is how can I get involved where I can share in some of the upside but limit my downside risk.
One way you could do that is by investing 1%-10% of your net worth in crypto. That way, if you “bet” right and it skyrockets to the moon, fabulous! You can share in some of those delightful profits and pop some champagne while you’re at it.
However, if all crypto currencies plummet down to 0, you will not jeopardise your entire financial future.
Betting 100% of your investments on a crypto lottery ticket could end in disaster.
I have pieced together my own crypto currency narrative after following the best investors I admire:
- This is an area of investing that is clearly gaining momentum and no longer feels like a fad
- Investing in crypto is now accessible to a mainstream audience versus a small niche of financial nerds on the web
- We can see many ways that blockchain and crypto can be used in other markets outside finance and could have long term benefits to society
It’s a simplified narrative but one that makes sense to me. I am a money coach, however, the world of crypto is still new to me, but something I am keenly watching.
Over the next 6-12 months I plan to do a lot of research on crypto. Look into the various coins, the usage across the globe, as well as look at crypto index options.
Crypto is still in its infancy. Therefore if you are worried that you have missed out on the crypto gravy train, you must not think it’s here to stay.
Personally I have no money invested in crypto at the moment. It’s not something I was keen to explore as we were busy building our solid financial foundation via index funds first.
Now that that is done, a small investment in crypto might be in our future. My wife and I have agreed that we would be okay to invest 5% of our net worth into crypto, if our research over the next few months indicates we should. I’ll keep you posted on our journey.
Before I jump into any investments, I have a set of guidelines I follow. For cypto investing, my guidelines look as follows:
- I need to understand the crypto market and know why I am investing (beyond get rich quick)
- It must be an investment that I would happily hold for the long term (+10 years)
- It will never be more than 5% of my net worth (to begin with)
- Ideally I would invest in a crypto index fund (all significant coins not just one)
I would like to spend the next 6 months educating myself more on the subject. Listen and learn from the top financial minds and how they view this brave new world of decentralised finance.
I am going to do my best to ignore all the hype such as companies starting to accept crypto as payment, or a B list celebrity launching the next must have “coin”.
I am going to take my time, learn the fundamentals, and proceed with caution.
At least that is my approach.
The crypto coin millionaires out there might disagree...
❤️ Patrick & TOMII Tribe
What We're Listening to 🎧
To continue my education on crypto, my brother recommended a podcast recently which I will be listening to this week. I always love how Tim Ferriss asks questions and what better way to learn about crypto than from the guy who created Ethereum!
What We're Pondering 🤔
3 very different views on crypto from 3 influential people. They can’t all be right!
“I do think Bitcoin is the first [encrypted money] that has the potential to do something like change the world.” – Peter Thiel
“Stay away from it. It’s a mirage, basically. In terms of cryptocurrencies, generally, I can say almost with certainty that they will come to a bad ending.” – Warren Buffett
“Cryptocurrency is promising, but please invest with caution!” - Elon Musk
What We're Doing 🤩
Last week we packed up our London life and set out for a 4 month remote working trip to Canada 🇨🇦. Why? It’s the first time in 10 years we have spent meaningful time with our families (not a rushed Xmas visit). Viva The Remote Work Revolution!