I have been reading GMGH’s recent posts about Cryptocurrency. The latest one being Don’t Crybaby To Me About Bitcoins & Cryptos. His posts piqued my interest in Cryptocurrency, which is a financial topic that I have no knowledge of. Not even a cursory understanding of it. I know it is a digital currency that used encryption/cryptography to generate money and verify transactions. Examples of Cryptocurrency are Bitcoin, Ethereum and Litecoin. There’s a Cryptocurrency Wallet that is a secure digital wallet used to store, send and receive digital currency. This technological development is expected to revolutionise and change the world.
GMGH talks about Cryptocurrency exchange in Singapore and mentions Coinbase. I went to have a look and it seems like a simple and well-designed platform to buy and sell digital currency. I check the 1 month price history of Bitcoin, Ethereum and Litecoin on the Coinbase website and this is what I found.
Bitcoin
Ethereum
Litecoin
Is it considered an Alternative Asset?
The rate of returns in the past month are much higher than any other asset class. Which brings me to my next question. Would you consider Cryptocurrency an Alternative Asset? It refers to assets that have not been traditionally considered part of an investment portfolio. Examples of traditional asset classes being stocks and bonds. But I am confused. I thought Cryptocurrency is a transfer or payment mechanism. How can it be a store of wealth as an alternative asset class? Then again, cash can be used to make payments and transfer wealth, hence it is considered an asset class. Plus Cryptocurrency does have asset-like characteristics. It has a limited supply and is traded on exchanges in multiple currencies around the world.
Do I have sufficient cash funds to take a position in Cryptocurrency?
Knowing nothing about Cryptocurrency and investing in it is the fastest way to get burnt. Before I decide to pursue this any further, I want to know whether I have enough cash to take a position. Our investment portfolio has been overweight on cash for a while, which suggests I have room to allocate a portion of it to Cryptocurrency. I have always wanted to start building up an alternative asset component of our asset holdings. Perhaps now is the time to start exploring this further. But I really should read up on Cryptocurrency first and I will need to convince my wife about this. Wish me luck!
Ok at this stage, personally I wouldn’t put more than $100 or $200 to “kick the tyres” and test the waters. It’s in a vertical parabolic phase (esp BTC) & reversals can be swift and brutal. Need to be prepared to lose 90++%. It’s pure gambling at this point in time.
Unless you’re adopting a shoot-and-run style e.g. taking out the profits whenever you get 30% or 50% gains. Otherwise…
I would rather wait for the inevitable wipe-out before picking the bones. It may be next month or 2 years later. But in the meantime plenty of other assets to focus on.
Haha, yeah, I did more research and it really is pure gambling. There’s little logic behind the demand & supply driving the price movements and the volatility is so high! But it would be interesting to put some money in it and see what happens. Might wait for a better time to do so and use short to mid term trades. Doubt long term buy and hold strategy is going to work for cryptocurrency. Unless you truly believe in its future as a force of revolution and change!
Hi Mr Finance Smith, I do appreciate your frank and insightful writings about personal finance. Agree with erring on the side of caution, one major bugbear I’d like to add about cryptocurrency is that its pretty much a speculation game, no one knows what causes a boom/bust, unless you’re part of the crew generating the algorithmic puzzles for the rest of the world to solve. High risk, but also, high reward, assuming you can cash out your crypto into actual currencies proper
Thanks and I hope you find the blogposts useful! Yup, investing in cryptocurrency at this point will be purely speculative. I wouldn’t mind taking a small position in it but nothing significant because I have so little understanding of it. Good point about the assumption I can cash out crypto into actual currencies. Didn’t realise that can actually be a major issue/problem until I read more into it.
As Sinkie mentions above, there’s no harm in giving it a go with a few hundred dollars. What’s the worst that could happen? You might lose a few hundred quid. You must be willing to lose it all. This really is pure speculation. The price of cryptocurrencies totally depends on the demand of the market. And…the demand of the market depends on….speculation ie how high they think that the price might get. There is nothing of substance or tangible behind the price. Handle with care
Agreed and I will probably give it a go and take a small position. Limited downside but the upside seems to be entirely speculative and could be a lot higher than imagined. As you said, there’s no way of knowing and understanding what’s behind the cryptocurrency market forces. But will try to be careful. Thanks!
Crytocurrency is a mathematical puzzle that requires dedicated computers to mine. When you mine gold, you dig for it. When you mine cryptocurrency, you use computers to solve mathematical puzzles. The only value it has is the value people assign to it.
You keep your cryptocurrency in an eWallet , which can be hacked unless you keep it in a thumbdrive and remove it. The quantity and movement of cryptocurrency is maintained in a Blockchain. No names, No addresses, just a string of numbers.
It is particularly useful for money laundering, since cryptocurrency cannot be traced. It cannot be taxed. When this gets serious enough, governments will begin to either shut down cryptocurrency or heavily regulate it. Then the bubble pops.
But who knows, maybe Bitcoin will hit $40,000 soon. It is currently $4000.
That part about keeping my cryptocurrency in an eWallet and the potential of it being hacked is what worries me. I don’t have to worry as much about something like this happening with more traditional assets such as stocks and bonds. I suspect there will be increased efforts to regulate it as the market size grows. It’s too late to shut it down but I hope the prices will stabilise more when that happens. Haha, really anything can happen with the crypto prices at this stage.
Hi Finance Smiths!
Wow, thanks for the mention, I only just realized that it was you that’s been driving traffic over to that post, haha!
It took me a long time to grasp cryptos and it’s impact on the future and the opportunities of it as an investment. I think its good to know that those 2 things are somehwat independent from each other. Bad ideas and bad technology can still make money for investors if they can flip it in time, and good technology does not mean that the developers and creators will be financially rewarded.
Before you decide to plunge into buying cryptos as an investment, I would like to suggest to first buy a small token amount and play around with it – install a wallet in your phone / computer and see for yourself how the payment/remit function of cryptocurrencies work. I think you will find it very enjoyable and a good learning experience into the tech. (I would recommend LTC or DOGE as good starter cryptos with cheap transaction fees and strong communities for support)
I strongly advise against people putting in hundreds or thousands into cryptos without first understanding why it could be a good investment. As your other readers pointed out, the volatility can be very very rough, and it during down downside volatility (no one complains about upside volatility, hah!) only having a good reason of entering in the first place will keep you from selling out at losses.
I look forward to see how it goes for you guys!
Hi GMGH,
No worries and your cryptos posts have been really useful!
Yeah, I might buy a small amount and play around with it first. Still need to work out how to install a wallet, which goes to show little of an understanding I have in relation to cryptos.
Haha, I probably wouldn’t put so much money into cryptos. Yup, it’s the downside volatility that I’m worried about. Anyway, all the best to your cryptos investments and I will continue to learn from you and do my own research. Thanks for the advice!