Bitcoin & Cryptocurrency: It Will Change The World But Not My Portfolio

by Corey Philip
December 4, 2017

Bitcoin is all the rage these days. It’s up over 1000% this year. Everyone and their uncle, with no other assets, is hopping on the band wagon hoping to strike it rich (bubble much?).

I’m an investor and rather knowledgeable, so i get asked about it on a daily basis.  My response generally is not what most people want to hear.

bitcoin index

Crypto Currency / Blockchain Will Probably Change Many Things.

It could revolutionize the world.  It probably will.  It might cut the credit card premium out of transactions.  It could bring credit to the developing world.  Who knows exactly, but we could all agree the potential is endless.  The head of the IMF, Christine Lagarde, recently said “Instead, citizens may one day prefer virtual currencies (full remarks here).”  Fidelity is even mining Ethereum and many banks are looking at ways implementing / launching cryptos.

But will it be bitcoin?  Will it be Litecoin?  Will it be Ethereum?  Who knows.

Many folks compare it to the growth of the internet as that’s the most visible revolution to happen in the world in our lifetime.  Recall the internet in its infancy as it just started to catch on with the public in 1996.  Compuserve and AOL were the 2 biggest internet service providers.  For help you would Ask Jeeves or search on Lycos.  And if you wanted to make a shitty website you would go to Angelfire or Geocities.

None of those promising and thriving companies are around today.  Thousands of other internet startups disappeared and investors in them lost everything in the early 2000’s when the nasdaq lost 78% of its value between March 11 2000 and October 9 2002.

My point is the future of bitcoin or any particular crypto is uncertain and long term success is unlikely.  Yes the technology, ecosystem and concept my grow, but a single bet of any of the cryptos today is just plain crazy.  Go play roulette instead.

It’s A Gold Rush. A Bubble.

Everyone is afraid of missing out.  No one wants to tell their grand kids they could’ve put $100 in and been billionaires — but they did not.

And everyone is pouring their money in.  Kind of like the internet bubble.  Also like oil in the mid 2000s when there was talk about oil wells running dry (what ever happened to that?) and the price of a barrel of crude oil rose 389% between Jan 2001 and Jun 2008 only to then crash 70% in the nex 6 months… and never really recover.  Statistically speaking these growth trends exponential growth trends don’t last.

Yet, I can count more than 10 people I know personally, who have no invested assets other than cryptocurrency.  All the while the total 300 billion market cap of crypto’s  (that’s an older link when crypto market cap was lower but the visualization is cool) is about 0.1% of the total global market cap.

“But Corey, you don’t understand, the world is going to change.  The fiat currencies are going to crumble.  It will all be worthless”
.  Lol.  People have been saying that since fiat money was created hundreds of years ago.  Maybe one day, far far far in the future it will happen, but for now our currencies are backed up by serious military force and jail time that our society complies with.  When people stop paying their taxes without fear of repercussion, then I’ll consider that argument, but for now ‘compliance with the system’ is strong than ever, and changes from that happen over a long period of time.

Personally I believe crpyto currency will be worked into our daily life, and will just be another currency, and other currencies may devalue themselves against it.  Consider this, 1oz of gold, which has been an alternative store of wealth against the inflation of fiat currency, 2000 years ago would buy you a nice suit.  Today, it would also buy you a nice suit.  Its kept up with inflation, outpaced it at times, but never really beat it.

Some People Could Make A Ton Of Money On The Rise

Many more will also lose, but you won’t hear about them.

If you’re going to play the bitcoin game, don’t just play with Bitcoin.  Please.  Considering how the internet bubble went and the other introductions of revolutionary concepts/investments/products, the first ones don’t necessarily last.  So don’t bank on a Bitcoin windfall.  If you must, hold a handful of cryptocurrencies.  Keep it small.  Remember the market cap is a mere 0.1%.  Want to invest 1% of your net worth in crypto?  Be my guest.  But many people are going far beyond that.

If you’re well versed in quant investing, or have time to learn and are well disciplined, consider trend following.  I would do a momentum, and trend following approach with simple moving average crossovers… Invest in the top 3 crypto’s by 3 month return, and then trend follow. At an exit signal look to see if any other cryptos in the top 3 of 3m return.  That would limit your chances of losing everything and catch most of the upside on the markets.

Or hold an equal weighted portfolio of cryptos, and trend follow the entire portfolio.

But I’m not going to play either of those games.  It’s not worth it.  Trading costs and taxes would take a whack out of it.  Liquidity could be a problem.  It can’t be automated (at least not easily), so it would require time and attention, daily.   If I wanted to take on some high risk investments and volatility I would do that strategy using triple leveraged ETF, in which markets are established and beta is positive (aka statiscally it goes up over the long term).

That’s Not To Say I’ll Never Invest In Crypto / blockchain.

There’s a few scenarios In which I would:

  1. Market beta.  I guess I already am invested in crypto.  As entrepreneurs and business leaders launch startups and ventures in the crypto / block chain space, the premium will flow through to equities.
  2. A Multi Crypto ETF hits the market.  If an ETF which holds a a few cryptos is launched, I’ll probably invest and trend follow.  Just a little bit of money.  As it would be tradeable by anyone with a brokerage account, it would open the flood gates to a tsunami of retail investors, so likely a huge inflow of capital and surge in price.
  3. If a crypto ETF is launched and the crypto market cap as a % of global market cap meets the lowest of the 13 assets classes I trade (currently gold at 2.7%), and the volatility of such is comparable to the most volatile (currently emerging markets), I will add it to my global momentum strategy which means it could become ⅓ of my portfolio… but we are faaaar from that point.

About the author

Corey Philip

Corey Philip is a small business owner / investor with a focus on home service businesses.

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