Investing: How to get involved and #getoffzero
Had a few requests asking about how to get involved in crypto. What’s the best way to invest? How do I get started?
Volatility, in Pictures...
Before we begin, you need to see a chart. This is the Bitcoin price over the past month...
At first glance, it might not look too crazy, but check out the scale and the % swings I've highlighted in yellow. The last month alone has seen an 85% price increase followed by a 30% drop. These are dramatic numbers when you compare to other assets such as stocks.
Here’s the S&P 500, a gauge of the US stock market, over the same period...
The 8.5% gain looks dull in comparison to the first chart. But trust me, it's much easier to sleep at night whilst you own it. The price swings (aka volatility) in crypto can (and will be) gut wrenching. The key is therefore to not be overexposed. However some exposure could be very rewarding if you believe in its future.
Correlation and Pension Funds
Lets take this to the next level, i.e. beyond me and you investing for ourselves today. There’s a lot to be said about the correlation of crypto with other assets such as stocks and bonds. Let’s take pension funds as an example. Their goal is to create a portfolio of assets that are diversified, meaning that they don’t all move in the same direction at the same time. The ‘holy grail’ is to find assets with zero correlation, i.e. that move completely independently of each other.
Guess what? The correlation of Bitcoin with the S&P 500 over the last 6 months is Zero. The charts I included above which show the past month are not correlated. If they were then both would have fallen alongside each other over the past week. They didn't. Bitcoin also has an asymmetric return profile, meaning the upside potential (see my previous blog here) is much larger that the potential downside loss if it goes to zero.
I’m not going to call Bitcoin the holy grail because this isn’t a sales pitch and that would be a tad overenthusiastic. However, there’s certainly an argument to made that it adds value to to a diversified portfolio, increasing returns and reducing risk according to modern portfolio theory. Some (but not many) pension funds are already involved. They won’t be over exposing themselves and throwing half their money into Bitcoin but 1-2% of assets is a realistic number. There’s a looming pension crisis and crypto assets could potentially help. More on that in a separate blog.
Anyway, I digress. How do YOU invest today?
If you have got this far and I haven’t put put you off, the best place to start in my opinion is a company called Coinbase. They are US based, with appropriate regulatory status and insurance, which adds a layer of trust. They also have a user friendly interface and are the highest ranked on mobile app stores.
Here’s a link to their site. It’s a referral link, so we both get $10 if you do you decide to use it. I'd also recommend Kraken for similar reasons, though the interface is a little less intuitive. But check out both and do some research on the web as would always be recommended before investing your money.
I’ll flag that there are numerous coins available to buy on these sites and I’ll be talking about some of those in the next post. The best starting point however is plain and simple Bitcoin, BTC. Start with vanilla and you can move on to the more complex flavors later down the line, should you choose. Once you buy it, just hold it (or 'hodl' as they say in the crypto world). Trying to actively trade the price swings is extremely difficult and I would not recommend that unless you know what you're doing.
Remember the pension fund example above. Crypto is a great asset to own in conjunction with others, however owning it on its own is a different experience. I can not stress enough, do not invest more than you can afford to lose. In the long term it may be hugely rewarding, but you’re guaranteed to see a lot of volatility on the way.
Just want to make sure you’re able to sleep at night. That said, I think the world should and will eventually #getoffzero.