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So you’ve heard about the explosion of bitcoin, ether, ripple, and other cryptocurrencies? You talked with someone who “got in early” and is making a killing? Is it too late now? How can you participate in the upside of this new blockchain crypto-economy?
We currently have about $100 billion in assets on blockchains. I believe that within five years, we’ll hit $1 trillion. My thesis is that we’ll continue to see very volatile growth of most of these assets, so that if you’re exposed to many of them, your portfolio should do quite well.
In this article, I’ll explain how to get started with crypto-investing and how to build a smart portfolio for the future. This is for people who want to invest, not trade.
Step 1: Review your portfolio
Most people don’t spend much time studying portfolio theory. They more or less choose investments that seem like good ideas at the time. Some people get their advice from popular magazines or even investment advisors. All of these are bad places to get advice.
It’s not easy to design a portfolio. I can’t give you any rules here. I will be giving a webinar on postmodern portfolio theory at BrightTalk on July 12th (and recorded thereafter) which I hope you’ll join.
Step 2: Allocate to crypto
I believe everyone should allocate around ten percent of her portfolio to a broadly diversified portfolio of crypto investments. You don’t need to start with ten percent, but I think that’s a good goal. In general, the goal here is to allocate about ten percent of your investible assets into three categories:
1/3 into the two large coins, bitcoin and ether
1/3 into a diversified large and mid-cap portfolio
1/3 into a larger number of long shots
If there’s another financial correction in the big markets, crypto investments should do well, so they are both a hedge and a great opportunity. It’s not too late at all - there will be plenty of gains in the crypto markets in the coming years. You can start with 3-5 percent and allocate more as you learn.
My goal is to go for Sharpe ratio and not performance. A diversified portfolio may not give you cocktail-party bragging rights, but you won’t be wiped out in a black-swan event either.
Step 3: Get set up
I learn everything by watching YouTube videos. Everything you need to know is on YouTube. First, you choose a reputable exchange that is licensed to accept money in your country. Good examples might be lykke.com, coinbase.com, kraken.com, gemini.com, and others. Make sure your exchange can accept wire transfers in and out. Don’t forget to back up your login details safely. Then wire money to your new exchange account.
Step 2: Play around
Once you have some money in your exchange account, buy some cryptocurrencies! Don’t buy much. You can take $10 and buy small amounts of several. This gives you a feel for the process. Ask friends for their bitcoin or other addresses and send them some small amount, and ask them to send you some. Please don’t skip this step - you don’t want to make mistakes with larger amounts.
Step 3: Buy some bitcoin and ether
If you believe, as I do, that bitcoin will be well over $5,000 in a few years and ether will be over $500, then buy some now. I would allocate about one sixth of my target to bitcoin and another sixth to ether. Your goal is to accumulate these coins and not sell them, so you can wait for what you think is a decent buying opportunity or just buy now. I’m not sure there will be much difference in a few years. There will be plenty of volatility, but it will wash out in the long run.
Step 4: Put those coins into cold storage
You don’t want to hold your coins or tokens on an exchange. Bad idea. You want to move your coins to cold storage. I recommend watching YouTube videos on cold storage to learn how.
Step 5: Buy some other coins
The next third of your portfolio should be other cryptocurrencies and perhaps a few major tokens. You can buy them individually, or you can buy an index. The best index I know is one I designed personally, but that won’t be available to the public until around the end of the year. Dedicate the next third of your portfolio to buying at least ten cryptocurrencies. This takes plenty of study and hard work.
Step 6: Take some long shots
For the final third, ideally you would buy about 40 long shots, most of which will be worthless but a small number of which will probably turn out really well. This takes even more work. I hope to provide a token for this at some point, but for now you’ll have to do it yourself. The main thing here is to avoid correlation - try to pick projects and vehicles that are dissimilar and relatively risky. You can go with the herd on a few popular deals, but you should also invest in some obscure, unknown projects as well.
Step 7: Rebalance rarely
It’s fine to allocate around 5 percent of your money in this way and leave 5 percent for follow-on investment. This way you can look for some big dips and buy when others are panicking. There will be opportunities. There will be volatility. I wouldn’t sell any coins - it’s most likely that the time you want to sell will be exactly the worst time to do so. Resist getting caught up in the latest fads and trends.
You may want to go above ten percent, but be careful. It’s entirely possible - as many of us have seen - that your crypto holdings will bloom to become a larger portion of your portfolio. I would say twenty percent should be the maximum. In that case, it’s probably a good idea to lighten up on the winners and not be overexposed.