You’ve done your research, waded through various articles about cryptocurrencies, and you’ve decided to dip your feet into the crypto market (yes, it’s okay to call it crypto — in English we refer to this as a semantic change). Whether you’re looking to invest ten dollars, ten thousand, or a million, I have some good advice for you, based on years of research in financial markets. I’d like to help you help yourself, so you can invest intelligently and make Benjamin Graham proud.
But first, a warning: you really need to do your own research and confirm (or refute) the claims I make in this post. There are a lot of charlatans, scammers, purveyors of bullshit, people who don’t understand computers, and just plain imbeciles in the crypto world, and they may send you astray.
Why should you trust me? You shouldn’t. Do your own research. But if you decide to trust me anyway, here’s why you might:
With that in mind, let’s continue.
Perhaps you heard about Bitcoin for the first time from the first post on Hacker News, or Slashdot, or Reddit, or wherever. Or perhaps you learned about it last week. In either case, it doesn’t matter. My advice is the same regardless of your personal situation.
From my experience, many people are initially intrigued, but also skeptical when they hear about Bitcoin. What it promises is noble, altruistic, and for the much greater good: financial independence and liberty for all, free from censorship, tyranny, and central control. How can it be? How does one know it’s not just another Ponzi scheme or another type of scam?
Bitcoin cannot be a scam because it’s not centrally controlled, it’s not a business, there is no marketing budget, and nobody owns Bitcoin in its entirety. Some individuals own more, and some own less, but it’s the only truly global and completely decentralized currency that exists today (excluding all the Bitcoin clones, or ‘altcoins’).
Welcome to crypto. Those entering the cryptocurrency market usually go through a sequence of learning stages, which look something like this:
Discovery: you learn about crypto, but you’re skeptical. Maybe even so skeptical that you’re still a hater and you say things like “well it’s only useful for buying drugs on the Internet or pure FOMO and speculation”. Of course, all investments are forms of speculation where you’re hoping the value will go up in the future, so that’s just semantics and ad hominem. And while you can probably buy drugs with Bitcoin, I imagine most drug dealers still prefer US dollars and don’t understand what Bitcoin is. Now you’re moving on to…
Education: you keep hearing about this Bitcoin thing, and decide to do your own research. After reading some articles, or watching some Andreas Antonopoulos videos on YouTube. Time passes, thoughts simmer, and you maybe start to change your thinking. Maybe it’s not a scam? Perhaps that guy at work who keeps talking about it isn’t so off base? I guess it’s time to try…
Entrance: you decide to throw caution to the wind and buy a small amount of Bitcoin (or some altcoin). It’s exciting. A few days after you buy some, the price jumps 15%, and you’re hooked. Now you’re on to…
HODLing: you’re holding on for dear life, enjoying the ride. Things are good. You’ve been consuming a lot of memes on /r/Bitcoin and you like the way they taste. You tried submitted one or two memes but nobody upvoted them. But, then you start to think, maybe you’ll try…
Trading: you have a revelation that maybe you can beat the market if you just make a couple of smart trades. You could double your holdings if you buy the right alt on its way up. Maybe you try to write your own trading bot, or try to engage in arbitrage. Alas, it doesn’t work, and you get rekt. You put everything into some alt that was pumping and then it crashed back down to half of what you bought it for. Now it’s back to…
HODLing: you haven’t lost complete faith, but you’ve realized that trading is for fools. You’re back to HODLing, and this time you’re going to keep it this way.
My goal is to help you, perhaps marginally, to get from Discovery through to HODLing, with the least amount of pain and suffering.
You should learn from the mistakes of others, and stick to what’s good and right in the world. Don’t bother trying to day trade or make money through arbitrage or some other scheme. You’ll probably get rekt.
Now on to the good stuff: how do you go about investing rationally in crypto when everything seems irrational? Well, it’s actually a lot like investing in the stock market. Unless you’re an insider, you’re better off buying and holding assets passively, like an index fund. Crypto differs from the stock market in one major way, however: it’s unregulated and the ratio of scams to legitimate coins is (probably 🤷♀️) much higher than with the stock market.
It’s very unlikely that you will ever be able to beat the market, and if you do, it’s probably sheer luck. — Me
Index funds provide an opportunity to invest in the broad stock market. Companies like Vanguard have been providing high quality low cost index funds for a number of years now, but nothing like this exists in crypto (yet, and that’s an opportunity). Thus, you’re going to have to build your own index fund (or pay high fees for someone to manage it for you). You’re better off taking the time to understand everything and do it yourself.
Index funds are funds composed of a number of different assets which track an index. An example of a popular index is the S&P 500, which is composed of stocks of the 500 largest US companies weighted by market cap. The S&P 500 gives great exposure to large companies, but it misses out on a lot of the smaller ones.
Other funds, like the Vanguard Total Stock Market Index track an index that’s representative of the entire market, more than 3,500 stocks, weighted by market cap. This fund tracks the CRSP US Total Market Index, and you can even go to the index website and download a copy of the index’s components, and read about their methodology. You could try to build your own fund based on this index, but given the affordability of Vanguard funds, it’s probably not worth the effort. It’s unlikely you will be able to operate more efficiently than Vanguard.
Why passive investing? If you haven’t read it yet, I suggest you read a book called “A Random Walk Down Wall Street”. There’s a theory known as the efficient-market hypothesis which suggests that market prices already reflect all available information. In other words, unless you’re an insider, everything is already ‘priced in’ to the market. If a market is completely efficient, it’s close to impossible to actually make money by trying to time the market or by any other quasi-sophisticated trading technique. Arbitrage doesn’t work. The costs of trading (broker fees, transaction fees) will exceed any gains you might make.
Crypto markets aren’t very efficient yet, but they’re getting more and more efficient every day as new market makers, quantitative trading firms, and arbitrage bots come online. You can run your own arbitrage bot if you want (don’t bother, you’re welcome). Furthermore, once an inefficiency is found and exploited, it becomes unprofitable very quickly. It’s just not worth the time, energy, effort, and stress.
Another problem with crypto markets is that they’re extremely volatile, and there are a large number of other emotional traders who don’t know what they’re doing. Order books are thin, and volumes are relatively low (compared to other assets). If you trade actively, you’re going to get caught up in the inevitable volatility and emotional reactions, and thus, you’ll probably get rekt.
To sum it up: the best way for someone who isn’t an insider to invest in crypto, is to invest passively like an index fund.
I did one of the hardest parts for you by creating a spreadsheet that will help you rebalance and buy assets regularly, in the most efficient way possible. You’re going to have to do the work of registering on exchanges, getting a hardware wallet (see rule 4: keep your coins off exchanges), and understanding how to use all these things. If you want to skip the rest of this post, here’s the spreadsheet for you, and godspeed. Follow me on Twitter for updates and pictures of my dog.
Hint: If you don’t see any data when you open the sheet, remove and re-add the CRYPTOFINANCE addon.
The spreadsheet is designed to help you rebalance between major asset classes (stocks, bonds, and crypto), and determine how much to contribute to each asset class when you have new cash available to invest. If you’ve never done any investing before, you have a lot of catching up to do and I suggest you start over at the Bogleheads wiki. Cryptocurrencies have made investing fun and cool again, which is great, but you should also try to not get rekt, and you can do so by diversifying to help reduce risk and the emotional sting of losses.
Buying different crypto assets is not diversification. Buying different asset classes is diversification. — Me
The spreadsheet is designed around the concept of market cap weighted indices. Simply put, a market cap weighted index is one where each component of the index is weighted by its share of the overall market cap. You can try to get fancier, but it’s probably not worth the trouble, and I doubt it will improve your returns, except by pure luck.
In the screenshot above, you can see a few coins, sorted by market cap. The data is pulled directly from coinmarketcap.com, and it updates automatically when you open the spreadsheet. Since we’re trusting a third party data source, you may want to double check the data to ensure accuracy.
On the far right in column I above, you see ‘Target alloc’, which is the target allocation for that coin, according to its market cap weight. In column E, you have the quantity of that coin which you own. Everything’s set to 0 by default. You should adjust column A, the ‘Ticker’ column, to reflect all the coins you own or plan to own. You will then adjust column E, the quantity column, with the number of coins you currently own. The spreadsheet will update and tell you how the numbers fare as far as your deviation from the market cap weighted allocations.
If you want to contribute some new funds, fill in the ‘Cash available’ field at cell B20 (by default) with the amount you want to contribute. It’s pre-filled with $5000 just to show an example.
There’s a script built into the sheet which runs and crunches the numbers to determine the ideal amount to contribute to each asset to reach your target allocation. This is a very important concept, which I’ll discuss in more detail below.
There’s a column on this sheet called ‘Multiplier’ (column G). This is a special knob you can adjust which will change the weighting of individual assets (by adjusting the ‘Adj. market cap’). I don’t recommend you change this, except maybe if you want to buy more of one asset, such as Bitcoin. For example, you may want to enter 1.2 into that cell to hold an extra 20% worth of Bitcoin. If this makes you feel queasy, don’t do it.
Sidebar: weighting Bitcoin slightly higher may be a wise strategy. I suspect (my opinion) that people who buy altcoins are mostly doing so to accumulate Bitcoin. This claim is supported by extremely biased unscientific Twitter polls, which should be taken with a large salty grain of salt, especially since Twitter is mostly shilling bots anyway. This might be what Roger Ver and his sock puppets are trying to do by pumping their Bcash altcoin.
Switch to the “Portfolio by Asset Class” sheet to see a breakdown of your assets by class. Here you can see each major asset type, with some amounts pre-filled (again, just to see how it works), and the sheet will show you guidance on what to rebalance to maintain your desired target allocations. It also has the same “Cash available” feature where you can optionally add new funds to your investments in the most optimal way possible, computed by the built-in script, the source code of which you can inspect yourself.
Now you’ve got a spreadsheet that does the basics: it tells you how much of what to buy. If you don’t know how to use a spreadsheet, it’s time to learn a new skill. I leave that as an exercise for the reader.
Which coins are the ones that will undoubtedly go to the moon? Nobody knows. Anyone who claims to know is either a charlatan or a time traveller. Hopefully the latter. Be wary of any person (or bot) making claims that this coin or that coin is The One True Coin.
I have my own model for thinking about this, and I’ll share it with you. You really need to do your own research, however, and make sure you fully understand before you buy. And keep in mind, the answer to “which coins to buy” is strictly a matter of opinion and not fact.
Generally speaking, I look for a few things in a coin. In order for it to qualify as interesting to me, it should satisfy all of the following:
Next part of my model, there are a few tiers of coins:
With that out of the way, there are 3 of what I call Tier One coins:
If you want to build a very basic portfolio, you can stop reading at this point and just stick with these three. I even wrote a tool you can use to buy these automatically and maintain a cap-weighted allocation.
Beyond Tier One, we reach Tier Two. Tier Two is a place of great uncertainty, and again, nobody knows exactly which coins belong here. Since you’ve asked, I’ve included a list of some coins I consider Tier Two coins in the spreadsheet. I’m not going to say much else beyond that.
Lastly, let’s talk about Tier Three coins, or as I prefer to call them: shitcoins. It’s entirely subjective which coins you consider shitcoins, but here are a few of the top ones that stand out:
An indexing purist may tell you that the best thing to do is to ignore all the FUD and simply buy all the coins according to their market cap rankings. In crypto, however, it’s not that simple, because there is no regulatory entity filtering out the obvious scams. Ripple, for example, hardly even qualifies as a cryptocurrency, has ~60% of its supply held by the owners, and yet it remains in the top 5 and people keep buying it, presumably because of the fake news they continue pumping out. The reality is, there’s no evidence of anyone using Ripple’s products. I have a feeling the price of shitcoins like these may continue to climb anyway due to market mania and ignorance.
Nothing in the world is more dangerous than sincere ignorance and conscientious stupidity. — Martin Luther King Jr.
Some coins rank high in market cap rankings for various reasons unrelated to their usefulness, such as very thin order books, exchange withdrawal issues, or some other strangeness. Many of them have very little utility, and are being held strictly as a speculative investment.
My opinion is that the most useful application of cryptocurrencies has already been built (payments & store of value), and Bitcoin is already the best for both, assuming it can overcome the scaling challenges. There’s a lot of hype around other coins, but aside from a few science projects here and there, nothing has gained the level of adoption that Bitcoin has, or has achieved the same level of brand awareness.
Simply by being in the consciousness of the general public, Bitcoin has a huge head start. Every single cryptocurrency is a clone of Bitcoin to varying degrees, and Bitcoin is the only coin that has survived as #1 since the beginning of cryptocurrencies.
An important concept in investing is rebalancing. Rebalancing is the business of buying and selling between assets to maintain your target allocation, in order to minimize risk, rather than maximize returns. There’s a good detailed explanation of this here.
Good practice is to try and maintain a specific allocation, and rebalance periodically when your assets drift outside your desired allocation. There are 2 main strategies for doing this (or you can use a combination of both):
Vanguard has published a detailed report on these strategies and their impact. A reasonable strategy is to rebalance between major asset classes annually, and rebalance your crypto portfolio when allocation begins to deviate significantly from your target allocation (on the order of 20% or more).
A few things to consider when rebalancing are the costs associated with doing so. You will have to pay transaction fees and broker (or exchange) fees for buying and selling assets. Furthermore, every time you sell you will owe taxes on any gains you have realized.
You can significantly reduce the amount of rebalancing you have to do if you follow the philosophy of HODL. Rather than selling assets to rebalance, try to buy underweighted assets on a continuous basis, such as after payday (assuming you have other income). I call this optimal rebalancing, because it’s the most efficient way to get back to your target allocation when you drift. It also ensures you buy more of assets when they’re cheap, and buy less when they’re overpriced.
Plus you should never be selling your crypto assets anyway. Rule #1.
Do create yourself a tracking spreadsheet to monitor your progress. It’s not hard to do, so I leave it as an exercise for the reader. You shouldn’t need to update it more frequently than once a month. I like to use Blockfolio, although lately I’ve been getting into the habit of not checking prices. I’m a long term HODLer, and I don’t gain much from checking the price aside from a psychological boost or spike in cortisol, depending on the circumstances. I try to focus on more interesting things in my life than daily price fluctuations.
You might think it’s smart to weight your asset holdings differently than by market cap, but more likely that’s a good way to increase risk and not increase returns. In other words, you might get rekt. There is one alternative weighting strategy worth mentioning, which is equal weighted indexes.
Equal weighting is pretty simple: just buy the same dollar amount of each asset, and rebalance periodically back to equal values. Historically, equal weighted indexes have beat market cap weighted indexes by a significant margin.
Past performance does not predict future returns —SEC
However, in spite of this ray of hope for your future moon launch, I don’t think you should use this methodology. I think (my opinion) that Bitcoin will continue to crush the rest of the crypto space, especially when scam coins have their day of reckoning. These ideas about alternate weighting are a red herring, so don’t bother with it. You’ll regret doing so (but, that’s just my opinion, and I could be wrong).
This is a good question, and a difficult one to answer. One problem with cryptocurrencies is that the supply may change over time, or even arbitrarily at the whim of the creators of some shitcoins. While this isn’t very different from stocks (which can also be diluted to infinity), in crypto it’s a little harder to know what’s going on at times.
To illustrate, here are 2 different rankings from coinmarketcap.com:
Can you see the difference between the two images? On the left, we have the default view on coinmarketcap.com, which shows coins ranked by their circulating supply. On the right, we have coins ranked by market cap using total supply, which results in an entirely different picture.
To keep things simple, you can think of circulating supply as the coins that are currently available, and total supply as all the coins that will become available in the future. This is nuanced and differs on a coin-by-coin basis. For example, Stellar Lumens (a shitcoin brought to you by the same guy who created Mt. Gox and Ripple) has no supply limit, and it inflates forever at a fixed percentage for some reason. Literally anyone can make their own cryptocurrency and decide to change the supply formula any way they’d like.
Wtf is SolarCoin? ATMCoin? Bitcoin Atom? No one knows. No one probably cares, except for whoever is pumping it so they can accumulate more Bitcoin.
Another issue with market cap is that it’s calculated based on circulating supply, which changes over time. In other words, If you own 100,000 BTC today, that amounts to a share of about 0.59% of the entire Bitcoin market cap right now. By the year 2140 or so, that 0.59% will have diluted to around 0.48% (a difference of nearly 20%). These numbers aren’t astronomical, but it’s worth being aware of, especially if you end up buying some coin which changes its supply drastically over time.
Another strategy used (which differs from the method of using circulating supply) to calculate index weights is based on future supply. For example, the HOLD 10 index fund does this (and they charge a whopping 2.5% for it, which you can save by using a spreadsheet and doing it yourself). They describe this as “circulating supply + additional supply publicly scheduled for next 5 years”. I’m sure they spent hours in a room arguing about this, but I’m not convinced there’s any value added. Especially not for that 2.5% management fee. You’ll also notice they include multiple shitcoins in their fund (Ripple, Bcash, Zcash, and Ethereum Classic —the latter of which is used by nobody). Plus, if you want to use that formula, you could probably do it yourself with a couple hours of work on the weekend.
This is a tricky subject and it really comes down to your tolerance for risk. Some might suggest allocating as little as 1 or 5% of your assets in crypto, others might suggest as high as 50%. If you’re new to crypto, I’d start small and work your way up as you get your sea legs. Begin at 5%, get your feet wet, and go from there.
If you’re feeling more bullish, try 25%. The important thing is to stick to your asset allocation, and to stay the course. I personally have a relatively high percentage in crypto, but that’s because I invested relatively early and it grew very quickly. There’s no guarantee the growth will continue at the historic pace.
I’ll put together a list of things you should read before making any rash decisions. If you choose to ignore this advice, then I wish you the best of luck and that you reach your moon.
I also implore you to follow crypto news, and subscribe to relevant crypto subreddits (/r/Bitcoin, /r/CryptoCurrency, /r/ethereum). If you like Twitter, have a look at my list of influencers, which you can use as a starting point. Things change fast, but not so fast that Bitcoin will lose its throne in your sleep. You need to know who’s who and what’s what in order to make sense of everything.
I hope you get some value out of this advice. As a reminder, please do your own research to confirm (or refute) my claims.
If you enjoyed this, follow me on Twitter for more of my thoughts, uncomfortable truths, and an occasional laugh.
Here again are some links for your convenience:
And PLEASE, as a final note, don’t contact me directly asking me for any investment advice with your personal situation. I’m not in that business. I write code.
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