Investing in Bitcoin without buying Bitcoin

For what seems like the millionth time, the SEC last month once again rejected another attempt at forming a Bitcoin ETF. But for those people who want to invest in Bitcoin through a traditional brokerage like Charles Schwab or Fidelity, there is still the option of the Bitcoin Investment Trust which trades under the ticker GBTC. As of 2018, this is the only method to invest directly in bitcoin without actually buying bitcoin.

GBTC is operated by a company called Grayscale which owns 175,000 bitcoin. Each share of GBTC represents about 0.001 bitcoin. Grayscale runs a number of these investment vehicles also for Ethereum, Bitcoin Cash, XRP, Litecoin, Ethereum Classic, ZCash, and most recently ZEN. Of those, only Ethereum Classic is available for regular investors. The others are only available for “accredited investors”, aka rich people, aka not me. They also have what they call a Digital Large Cap Fund, which is looks like a mutual fund, or a basket of crypto currencies.

The weightings look like they are based off each coins market cap. This may be the closest to a crypto ETF that exists right now. I’d be curious to see if those weights are constant, or if they rebalance regularly. And if so, what kind of fees are involved when they rebalance.

So why would someone invest any of these?

Pros

With crypto exchanges getting hacked on a regular basis, investors may feel uneasy using exchanges to trade. On the other hand, you can protect yourself if you move your crypto off of an exchange on to a wallet. Some people may want to stick with their familiar online brokerage. I can certainly see the advantage of being able to track all your investments in one place.

Because you can purchase GBTC through your regular brokerage, you can buy them in your tax-savings account, like an IRA and Roth IRA. This could mean huge tax savings if bitcoin goes to the moon (assuming that people report gains on their crypto in the first place).

Cons

These investments are not approved by the SEC. Instead of being exchange traded, they are OTC traded, which stands for Over the Counter. This means less regulation and less standards. This means some possibly shady business. Although, considering how bitcoin was founded on the principle of less regulation and decentralization, it is ironic that people now want increased regulation.

Fees and premium. There is a 2% fee that Grayscale charges. Crypto exchanges have fees too, but nowhere near that high.

The price of GBTC doesn’t always correspond with Bitcoin’s price. In fact, it can be even more volatile. Maybe this point is a positive for some folks who don’t get enough of a thrill of watching bitcoin rise and drop 30% each week.

I pulled this from Yahoo Finance. You can see how GBTC has performed about 8% worse than bitcoin so far this year, but there were some instances where GBTC had outperformed bitcoin.

Overall, it doesn’t seem like a great product for more people, unless you want to own bitcoin in your IRA, which I think is a terrible idea. However, the crypto fund looks intriguing because it could allow folks to buy a diversified basket of crypto easily.

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What makes a good investor

Last year, those of us in the crypto-sphere were on top of the world. Crypto investors literally couldn’t lose. Throw a dart at the top 100 coin list, buy some of that coin, watch it rise 10x, rinse, repeat. We were geniuses and you made sure that all your friends and family knew that you were smart enough to buy into crypto. Fast forward to 2018, people ask, “weren’t you in to crypto?”. You reply, “Um, yeah, just a bit, it’s nothing really, haven’t checked it in a while.”

So reality has set in. I like reading personal finance blogs and learning about how the average person can manage their money effectively and reach financial goals. In particular, there are the FIRE blogger. FIRE stands for Financial Independence, Retire Early. By early retirement, this isn’t just retiring at 55 or 60. This is retiring by 40 or even 30. They can reach their goals because of disciplined savings and investing strategies. Their strategies are not rocket science. It simply involves savings large percentages of their incomes, upwards of 70% or more, and investing their savings into index funds. Index funds are just low-cost mutual funds which follow the overall market. Kind of the slow and steady approach.

However when these FIRE bloggers discuss the topic of bitcoin, they all discourage people from investing in bitcoin. They share the same old arguments that bitcoin is too volatile, too speculative, that it doesn’t have any inherent value, yada yada.

So, is it possible to be a good investor and still buy bitcoin? And as I alluded to in my last post, I would say yes. Now that bitcoin has come down, I think now’s the time to separate the gamblers from the investors. It’s important to remember that just because you lose money on an investment does not mean that you’re a bad investor or even that you’re decision to invest was bad. Is bitcoin speculative and volatile? Yes. Does anyone know if bitcoin is going to reach its all-time high again or tank to zero? No. But one could also say this about a lot of investments, particularly riskier investments like futures, alternatives, options, marijuana stocks. I think the qualities of a good investor include:

  1. Diversification. I’ve talked about diversifying your crypto portfolio. But this also applies to all your assets as a whole. Cryptocurrency can’t be the only thing you invest in, and it shouldn’t even be where most of your money lies. Stocks, mutual funds, bonds, CD’s, real estate, heck, even baseball cards are all other places that you should consider diversifying your money. Unfortunately, there are a lot of people whose put a majority of their money into bitcoin.
  2. Patience. Why is patience difficult? Because humans are emotional people. When we see bitcoin soaring, we want to buy. When it sinks, we want to sell. That is a surefire way to lose money, not just in bitcoin but in any investment. Investing is about the long-term. Sure, some people made a boatload of money in 2017 from the crypto surge. But for most people that was more lucky than good investing. Although you can argue that it’s better to be lucky than good.
  3. Knowledge – If whatever you invested in drops in price, think about the reasons that you bought it in the first place. If those things still hold true, then there’s no rational reason to sell. If those things don’t hold true any more, then go ahead and sell. That’s why it’s important to research and learn about coins. What’s the problem it’s trying to solve? What’s the background of the founders? Who are its competitors? What’s the technology behind it?

I have a lot to learn about investing. As I’ve read about both personal finance and bitcoin, I believe there’s an overlapping space where both circles can intersect, and where the principles of disciplined personal financial management are applied to crypto investing.

 

What goes up must come down … down… down

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I’m back on the blog after a 4 month hiatus. I had some not-so-minor damage to my home, which perhaps I’ll detail in a future post. So that served as a distraction from the implosion of bitcoin this year. I remember back when I would receive monthly investment statements during the 2008 financial crisis and each statement would be covered with negative numbers and red marks. It wasn’t long where I just stopped opening the statements. Nevertheless, I still continued to invest money knowing intellectually that that was what I was supposed to do.

And so it goes with crypto. Since the beginning of the year, this is how the top 10 currencies have faired:

# Name Symbol Week 1 Week 22 % Change
1 Bitcoin BTC $17,131.27 $6,400.32 -62.64%
2 Ripple XRP $3.19 $0.33 -89.66%
3 Ethereum ETH $1,097.65 $295.90 -73.04%
4 Bitcoin Cash BCH $2,881.03 $553.01 -80.81%
5 Cardano ADA $1.01 $0.0997 -90.12%
6 Litecoin LTC $300.10 $57.08 -80.98%
7 NEM XEM $1.67 $0.1064 -93.63%
8  Stellar XLM $0.71 $0.2242 -68.36%
9 TRON TRX $0.17 $0.0215 -87.37%
10 IOTA MIOTA $4.01 $0.4960 -87.63%

And this doesn’t even fully capture the highs at the end of 2017 when Bitcoin was at $20,000. Bitcoin has been the “best” performer with only a 62% loss. This makes the 2008 financial crisis sound like a bad day at the office.

What are lessons to be learned here? When people talk about investing in bitcoin 101, they always say “don’t invest what you can’t afford to lose”. That’s easier said than done when returns are going to the moon. The NY Times had a sad article about folks losing their life savings. So how much have I lost? Based on CoinTracking, I’m down about 70% of my initial investment. There’s no way to sugarcoat it, it’s a pretty bad investment. But taking a step back, my original investment was less than 1% of my net worth. I wouldn’t recommend putting more than 5% of one’s net worth into something as speculative as bitcoin, and probably closer to 1%. Fortunately, the other 99% of my investments has increased about 6% so far this year, so overall my year has been doing fine. So my crypto investment will serve as a good reminder to myself of the volatility that is bitcoin.

Does that mean I’m going to sell what’s left of my crypto? Maybe I should. But at this point, I’m just going to let it ride. I still have a small chunk of change so I could call it quits, but this the technology is still fascinating and having some money invested into crypto will help me continue following the news. And I still believe that the crypto markets will come back up. Maybe not to their all-time highs of Dec 2017-Jan 2018, but there is still money to be made.

 

The Disciplined Investor

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Crypto has been crashing all around. Oddly enough, the safest altcoin to be in was the one that is being subpoenaed by US Trading Commission, Tether (USDT).

For the past several days, a general pattern emerged where coins would drop 20% then recover slightly up 5%, then drop another 20-ish% and so on.

Anyone can invest when the markets are surging, but only the disciplined investor can make it through the downturns. A few thoughts from the past week.

With the huge drops come huge discounts. Coins are essentially at 60 to 80% off from their all-time highs making it a good time to buy in, especially if you think that the prices will eventually go back up. But the question is when to buy in? If I buy now, maybe the prices will keep going down. People ideally want to buy at the absolute bottom, But since no one knows, the best way is to dollar cost average. If you have $500 that you want to invest, split it up into 2 or 3 buys spread over the course of several days or weeks.

Dollar cost averaging takes discipline. Inevitably, there are some spikes. When you see the prices spike, there is an urge to have to get all your money in because of FOMO. Don’t do it. There is usually a slight pull back after a large spike, so you end up buying high. This is basically just chasing trends and is the reason why day trading fails for a majority of people. Stick to your game plan. If you plan to put in $250 today and $250 next week, just wait until next week. It does feel like every time, I try to perfectly time a buy, the price immediately drops when I buy, to the point where I feel like I can actually make the market crash by just buying in.

Take the news with a grain of salt. It seems that every other article has a theory as to why the crypto markets are crashing. Facebook ad bans, India expressing concerns, stock market correction, the SEC hearing (which actually went well for crypto), Tether scams, North Korea, and of course, there’s always China. It’s probably a bit of all of the above, in addition to a possible regular market correction. Given the huge run up throughout 2017, this could all just be much ado about nothing. But it does seem like the media is just jumping on every little reason to cast doubt on crypto.

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Have an exit strategy. I still believe that buy and hold is the best way to go. But that doesn’t mean you never sell. When a coin is dropping, ask yourself, has anything changed about the fundamentals of the coin? Do I think the coin will rebound? Is there a better place to put this money? Or sometimes it’s ok to just think “No matter how great this coin is, I’m not going to lose more than 50%”. On the other side of the coin (pun intended), don’t be afraid to take profits. If you’ve doubled your initial investment, take sell a portion of your holdings that you can even use to buy back in when the market decides to dip.

Of course, this is all easier said than done. Will I buy when prices spike? Yes. Will I panic sell when prices have bottomed out? Undoubtedly. Will I hold on to coins too long? Yes Yes and Yes. But I think it all comes down to being a disciplined investor and taking the emotion out of the picture.

The 3 Don’ts for new crypto-investors

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According to surveys, while 6 in 10 Americans have heard of Bitcoin only 5% of Americans actually own bitcoin. However, 20% are looking to get into bitcoin soon. If you’re in this 20%, here are some pointers to get into the right mindset:

Don’t invest more than you can lose. Everyone says this, but then you hear people of putting their life savings into bitcoin or maxing out credit cards. Hopefully you’re not in that extreme, but how much is too much to put in? If you’ve never invested in anything before before, I wouldn’t recommend getting into cryptocurrency. It’s way too volatile. I also think that investing in crypto bears a lot of similarity to investing in the stock market, so the stock market is a good place to learn. I would recommend to not put more than 5% of your net worth and probably closer to 1%. So if all you have is $1000 of savings, then I wouldn’t put more than $10-$20 into bitcoin. The other 99% you should be for emergency savings. If you have $100k, then put a thousand in bitcoin and put the rest in an index mutual fund.

You may think that bitcoin is easy money. But according to Cointracking.info’s user statistics, over 20% of cryptoinvestors have lost money, some over $3,000.

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Red is BAD

Don’t quit your day job. Even if you don’t lose money on crypto, you’re not going to become rich over night. Don’t get me wrong, I think there are still plenty of gains to be made. But if you’re just buying bitcoin, you might get a good return, but you’re probably not going to get insanely rich. With bitcoin hovering around 10k to 14k, even if it goes to 100k, that’s at most a 10x on your return. Unless you’re investing 100k, you’re not going to get to $1 million on bitcoin alone. So if you want to get a high return, you’re going to have to look into altcoins, and that involves research and investing time to sift through the thousands of cryptocoins.

Don’t chase the hottest crypto. At any given moment, there’s likely going to be some coin that’s going up 20% in an hour and you’re going to want to throw your money into some trendy coin. I looked at the data of the top 50 largest coins of each the last 10 weeks. Of those coins, I looked at the #1 performing coin of the week and looked at how they performed the week after. So from the below chart, the #1 performing coin on Nov 19 became the 45th performing coin the following week.

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n/a means that the coin dropped out of the top 50 performing coins the following week. Only once did the #1 coin repeat the following week as a top performing coin (Jan 7). People inevitably sell off pretty quickly once their coin makes a huge jump, especially if said coin is an obscure coin.

That said, some people think it’s too late to get into bitcoin, but we’ve barely scratched the surface in terms of what blockchain can do. Not only are profits to be made, but also the chance to get in early on a potentially societal-altering technology. Check out my post on how to get started. Invest wisely!

 

 

How to diversify your crypto-investments

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I’m a big fan of mutual fund investing. It provides instant diversification so that I don’t have to analyze and research individual stocks. And it allows me to allow in broad sectors. So I can buy a technology mutual fund, so that I don’t have to choose amongst Facebook, Amazon and Netflix and worry about choosing wrong and have FOMO.

Coinmarketcap lists nearly 1,500 different cryptocoins. It can be difficult to sort through all these coins to figure out which ones you want to invest in. So similar to stocks, I find it helpful to divide them into categories, like the ones I list below. This is by no means comprehensive.

Currency – This is where the original bitcoin falls and perhaps the easiest to understand. All coins can technically be used as currency, i.e. holders of monetary value and a method of payment, but these coins are designed for this purpose alone. This is not only bitcoin but also it’s forks, Bitcoin Cash and Bitcoin Gold, as well as Litecoin. I’ll also include cross-border payments here too. This is for Ripple and Stellar Lumens which were designed to easily and quickly do currency exchange.

Platform – Ethereum, Neo, EOS, Cardano. These coins are used as a platform to design applications. The cost for building and running the applications is paid in these currencies. If you want to build a decentralized app or create smart contracts, developers will turn to these coins. Personally, I see this as the biggest opportunity for growth.

Privacy – Bitcoin is not anonymous. For more and more people, privacy is of utmost importance and coins like Monero, ZCash, Dash, Verge are all meant to be completely untraceable.

Decentralized exchanges – So the irony of trading altcoins is that many of us rely on centralized crypto exchanges to make trades and even hold our cryptocoin. It feels almost inevitable that crypto moves toward decentralized exchanges. Decentralized exchanges use coins like 0x, Kyber Networks and AirSwap.

Cloud Storage – You may already have used Dropbox, Google Drive or Microsoft OneDrive. Coins like SiaCoin, Storj, and Maidsafe are looking to create decentralize cloud storage. Some call these the Airbnb of your hard drive where you can get paid for others to use your empty hard drive space. It’s an interesting concept, but it may take a while for people to feel comfortable having their private files scattered across random other people’s computers.

Sector specific – There are also some very sector specific coins. Like Dentacoin for the dental industry and Funfair for casino gambling. I’m not surprised to see casinos pushing blockchain given the popularity of online gambling. Dentists on the other hand… My dentist’s office plays oldies songs and has a wall of paper file folders to track patient records.

 

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I promise, this won’t hurt…

So when you are deciding on whether or not to buy a certain cryptocoin, check how it compares with other coins in the same sector. Look into how this coin differentiates itself from others in the same sector. Or maybe you think the sector is so hot that you just want to buy up a slew of coins in that sector, or avoid one sector altogether.

Let me know if there are any other broad categories for cryptocoins!

 

 

How I track my crypto using CoinTracking.info

So now that you’ve bought your bitcoin, what’s the best way to track how it’s doing? I started out using Excel but once you start trading bitcoins for altcoins, it becomes a nightmare. There are a number of software and websites available, but I’ve only used cointracking.info. There is a lot of functionality which can make it a bit steeper learning curve, so I put together a simple cheat sheet below. There also is also an iOS and Android app. It’s free for up to 200 transactions uploaded. I haven’t hit the limit yet, so I might look at other tracking tools as I get near the limit.

Upload your transactions

Under the Enter Coins tab, click on Exchange Imports. Most exchanges have a way to download your transactions in csv format. Select your exchange and upload this file and you’re all set. You can manually input your transactions, but it’s a time-sucking activity.

3 Useful views

These are the 3 main views that I use:

Dashboard View

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1 – This is the value of all your coins

2 – This is how much cash, in my case US dollars, I’ve put in. So -680 means that I’ve invested $680 into my coins. If say, I cash out $100, then this will become -$580.

3 – This is simply circle 1 + circle 2, or your net profit (or loss). In the above picture, I’d be up $113.

Realized & Unrealized Gains

This is found under the Reporting tab

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Circles 4 and 5 give you the Unrealized and Realized gains/losses. Unrealized represent the change in value of the coins. Realized gains/losses is the amount you profit/loss after you’ve sold a coin. If you start trading your bitcoin for altcoins, these can be difficult to calculate on your own. Much easier to let cointracking crunch the numbers.

 Current Balance

This is also under the Reporting tab.

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This tells you the balance of your coins, as well as the most recent performance on the right hand side (similar to coinmarketcap.com).

There are a load of other functions, but you can get started using the above.

Hope that is helpful. If you have any other tracking tools to recommend, let me know in the comments.