Bitcoin investing and crypto portfolios
For some time now, I have been following news on various “crypto-coins” including Bitcoin, Ethereum, Dash, XPR and others. I have watched in awe at the booming world of Initial Coin Offerings (ICO) and the millions willingly thrown at dubious new ideas (just look at MatchPool a “dating” service that raised $6 million in 2 days) as well as the ease that new market indexes are built and get to dominate the crypto markets in days not years (see Iconomi buying 9% of Byteball without spending a dime).
As I am building a new portfolio based on these new assets, I wanted to put down some of my thoughts and processes as I try to apply traditional investing principles to the brave new world of blockchain-based investing.
I am by no means an expert in Bitcoin or the blockchain. There are some very interesting aspects that are pulling me into this exciting world:
The world is changing – There is a need for an alternative store of value.
There is a growing distrust of governments, fiat money and banking institutions. This has been true since the 2008 crisis but it has developed into a political mistrust of powers-to-be. Just look at recent elections in the U.K, the U.S. , France, Italy, to name a few. In less developed countries where capital markets are restricted this mistrust is a given as people are threatened by devaluations, seizure of property and political risk. There is a growing war on cash as well as privacy as governments have agreed on increased exchange of financial information (list of countries). Even traditional safe heavens like Gold, require a third party (a bank/ a vault) to either store it or verify it’s value. Bitcoin, on the other hand, is border-less, portable, cannot (easily) be confiscated and can be easily set up for family wealth and inheritance purposes.
Institutional money may be coming in.
A portfolio manager’s main problem when constructing a portfolio is to find a negatively correlated asset to the equity market that has a positive bias. In other words an asset that goes up when the SP500 goes down and that gains in value as time passes. In the past, two such assets existed: Treasuries and Gold. Now there is a third: Bitcoin. No wonder, recent deveopments point to the fact that institutional as well as retail money may be slowly coming in. Regulation and KYC rules are becoming mandatory. Once they are in place, the path for mainstream funds to enter the cryptomarkets will open. There are U.S. based exchanges (Gemini, itBit) that seem to be set up mainly for institutional level trading. If and when a ‘trusted’ ETF is set up, the sheer volume of new funds could further raise prices.
Bitcoin may not survive but one of the alternative coins will.
There are many problems in Bitcoin land: Disagreements between developers, so-called hard forks, miner’s oligopolies, large Chinese influence to quote a few. One that strikes me as important, is the electricity consumption needed to keep the Bitcoin blockchain safe. This does not mean that the underlying technology, the blockchain, will cease to be of use. The technology behind is useful and increasingly relevant in a changing de-centralized world.
We are moving into a ‘virtual’ economy where workers are spread across the world living in different countries, their paychecks and expenses traveling across currencies and tax regimes. This will be a challenging environment for the governments to collect taxes. They may eventually be forced into embracing the technology as a means to retain their status quo and ability to collect taxes. If that happens then crypto world will go mainstream and some of these companies (and coins) will gain dramatically in value. Diversifying across coins and companies may be a good way to participate in a growing economy even if Bitcoin is not its main product.
Setting Up for Bitcoin Trading
Unlike regular investments, setting up for crypto-currency trading/investing is a fairly tedious process with a lot of unknowns. I will try to document some of these in the next articles.
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