Crypto is a new asset class but the old rules of investing still apply. Past returns are no guarantee of future results. Diversification applies to crypto along with the need to understand the underlying value proposition. Recognize potential risks, and when competition has eroded the potential for future growth. Cryptocurrency advocates have convinced much of the world that cryptocurrencies are in fact a new asset class, but they often treat them like lottery tickets. The result will be similar. A few will make out very well, but most will lose their shirt.
Bitcoin advocates have the hardest time doing this. They are the original “Hodlers” and it has worked out very well for them…so far. Investing solely in Bitcoin was, in hindsight, the smart move. Many simply got lucky. Some recognized its near monopoly in a technology that is shaping the future. Congratulations!
Now comes the hard part.
We know how hard it is to stay smart when investing in crypto. We made our first investment in Ether on March 5th. Investing has never been so much fun. We were hooked. We did all the things one is not supposed to do with their investments:
- Watching the price soar
- Attributing the rise to our genius
- Believing we could predict when the next jump would happen
- Telling everyone who would listed
- Ignoring everyone that said we should sell
In short, we became addicted to our own success and became blind to the changing reality. Success led to Euphoria and Ether surpassed $400 on June 13th. Then the price started falling. Slow at first, and then they came crashing down. We lost 30% in a single day.
But that wasn’t our only loss. We were so fixated on Ether that we failed to see the market reaction to the Bitcoin Cash fork. Bitcoin price growth stalled in the month leading up to the fork. Investors were uncertain about the fork (the concept of “dividend” came after) and so they sat on the sidelines. After the fork there were clear signs that investors were responding positively to the event and jumping back into Bitcoin.
But we were too busy licking our wounds to notice. We wanted to sell Ether at $400 and buy the dip. We wanted to relive the glory days (previous month) and make a killing by simply watching the price rise and congratulating each other. That is what every investor wants…but it’s particularly pervasive in the crypto space this year because so many people have had experiences like ours.
We believe that Bitcoin is at an important juncture. We don’t claim to know the future, but we have gotton better at forecasting the present, and often times that seems to be enough.
As soon as news got out that the Segwit2X fork was called off a significant number of investors that were fearful of the fork bought the news. Minutes later several other groups sold the high (over $7,800). Based on the articles we have read and notable twitter accounts this group comprised of the following:
- Segwit2X supporters that see scalability as a severe challenge
- Traders looking for their dividend
- Alt-coins are cheap compared to Bitcoin
The Segwit2X fork coincided with a sudden rise in the total market capitalization of Alt-coins. For over two months Alt-coins traded in a tight range (by crypto standards) until yesterday. Alt-coins are surging while Bitcoin has languashed between $7,000 and $7,400.
No one can accurately time tops and bottoms. We still hold some Bitcoin, but have made a strategic switch in our holdings in response to this possible regime change. Namely, we diversified into other cryptocurrencies that we believe have greater prospects in today’s environment which is characterized by the following:
- Crypto related businesses looking for alternatives to Bitcoin with cheap transaction costs.
- Households looking for safe and anonymous ways to hide their wealth
Note that this is an entirely different environment than the one Bitcoin grew up in. For years the challenge of Bitcoin was to convince the world that it represented a legitimate currency. With CME group starting up futures contracts we think it’s safe to say that it’s only a matter of time before folks like Jamie Dimon admit their ignorance. But that is not the challenge today. The challenge today is to make cryptocurrency useful for businesses and those that put a premium on “Censorship Resistance” when it comes to their money.
Bitcoin hodlers will disagree and there is very little we can do to convince them otherwise. It took a lot of pain before we wised up to the dangers of hodling. But to those of you on the fence, ask yourself one simple question.
How long can Bitcoin claim to be the future of money when it costs over $5 to use?
Bitcoin is no longer a monopoly. It is now in an extremely competitive environment with alternatives that can spring up from anywhere in the world. Again, we are not claiming that Bitcoin is doomed. We hold some, but we also hold Ether (Ethereum) $ETH, Monero $XMR, Bitcoin Cash or BCash $BCH and Litecoin $LTC. We have discussed Ether at length in earlier posts. In short, Ethereum is the largest smart contract network. The rise of decentralized applications (#DAPS) has only just begun, and there is a good chance that Ether could overtake Bitcoin at some point in 2018. Monero is a unique cryptocurrency that is truly anonymous. As such it is not surprising to see Russia, China, South Korea, Eastern Europe, and Argentina having the most interest. BCash and Litecoin provide functional forms of payment via very fast and very cheap transactions. Moreover, the market is clearly speaking. Prices of all three have risen over 10% since the Segwit2X fork was called off.
We are not suggesting that you buy our portfolio. Every investor should do their own independent analysis. What we are saying is that the lessons of diversification, risk analysis, competition, and asking sensable questions about the investments value proposition apply to cryptocurrencies just as much as any other asset class.
Our new portfolio is holding up well despite the fall in Bitcoin, illustrating the usefullness of diversification as we explained yesterday. Bitcoin is down -7.53%. Meanwhile our Alt-coin portfolio; which crucialy includes #BCash is up 3.8%. By being diversified we are also doing a better job of mainting our composure as we look for opportunities.
The Alt-coin regime change still appears to be holding up. We would need to see the blue line fall significantly above the top red line for a full day before re-assessing yesterday’s call. We expect that many Bitcoin hodlers that relented and sold will likely enter the market in more diversified positions. Whether we picked the right coins to benefit from this rebalancing remains to be seen. We lost a lot on Monero and Litecoin, both down more than 10% today. What matters is how investors that sold re-enter the market. Our best guess is that Bitcoin will still remain dominant for some time to come, but that investors will slowly recognize obvious advantages to alternatives like BCash, Litecoin (low fees) and Monero (greater anonymity).
Alt-coin regime continues unabated by falls in Bitcoin.
Bitcoin fall is steady this morning. This suggests that sellers are not panicking, but simply waking up to the fact that Bitcoin cannot go up forever.
We made a tactical bet this morning that all those extra funds on GDAX will eventually find their way into Litecoin. As mentioned, we added Litecoin to the portfolio because of its low transaction fees. This makes Litecoin a competitor to BCash which we also own. Notice that Litecoin prices have been rising in BTC terms.
If you liked this article feel free to check out our other articles on cryptocurrencies:
We wrote this article in part because of a tweet today by Patrick O,Shaughnessy @patrick_oshag. Some high profile investors in crypto like Patrick seem to think that just because Crypto is a new asset class that investors can use a new set of rules. There are no easy ways to passively invest in this market. There are no crypto market weighted index funds. Investors that “Hodl” are typically buying one coin and hoping the price explodes. Most crypto investors know nothing about what they are buying. There is no difference between hodling a crypto coin and buying a single tech stock during the rise of the Dot Com bubble.
There are over 1,000 cryptocurrencies and most experts agree that 98% of them are going to be worthless within 10 years. The pace of technological change in breathtaking. No one can say with certainty which cryptocurrencies will be on top in the years ahead. This actually makes trading crypto a bit like extremely risk tech stocks. A very small percentage will explode, but most will fail. (Note: We really like Patrick and you should check out his podcasts on crypto…we just disagree strongly with the suggestion that “Hodl” is a good strategy going forward.)
Feel free to share your own thoughts on how to invest wisely in cryptocurrencies. There is no better compliment you can give us than your thoughtful criticism. You can reach us at firstname.lastname@example.org, or follow us on Twitter @intuitecon
Disclaimer: We are long Bitcoin $BTC, Monero $XMR, Bitcoin Cash or BCash $BCH and Litecoin $LTC. This article is not, and should not be regarded as investment advice or as a recommendation regarding any particular security or course of action. Our hope is that these observations will merely help you to more critically examine your own beliefs about finance and stimulate dialogue.