Lessons from a New Cryptocurrency Investor

Bitcoin really is king

Let’s start with my general perception about cryptocurrency: Bitcoin is king. That said, there are people called “bitcoin maximalists” that basically believe Bitcoin is the currency of the future and you’re a dweeb if you think any other coins have real value.

I’m increasingly sold on the former point, less so on the latter.

I’m probably invested in about 15 different cryptocurrencies (a few utility plays and a few “hopefully this makes me fabulously wealthy down the road” plays). But the true, decentralized nature of Bitcoin versus most other coins (collectively called “alt coins”) gives it a big advantage. Most other coins have some kind of for-profit or non-profit “foundation” that manage the technology behind the coins, meaning it is, often, harder for others to contribute to network decentralization in a meaningful way unless you have a lot of said network’s coins.

That is the opposite intent of a “decentralized” currency that no single entity (e.g., the government or a company) can control.

Bitcoin, on the other hand, truly has thousands of independent miners and people (soon to be me) who voluntarily have spun up “nodes” to help validate the blockchain. It would take an unprecedented amount of global regulation and attacks on the concept of Bitcoin to bring it down because of this decentralization. That reality, coupled with its proven security, make it a strong contender for the long-haul. Consequently, about 50% (and soon to be much more) of my portfolio is Bitcoin. And I’m learning now how to leverage some market indicators to buy and sell at or near the tops and bottoms to make the most of it over time. I know I can’t time the market, but this isn’t money essential to my monthly bills, so I have the luxury of doing something close to timing the market and benefiting long-term.

Earn interest on your crypto

My friend Paul is my go-to ally when it comes to talking about cryptocurrency. He’s not so new at this and knows his stuff.

One of the tools he introduced me to last year was BlockFi. BlockFi does a lot of things. You can buy crypto there, trade it, take out loans using crypto as collateral, etc.

The best part about BlockFi, in my humble opinion, is that you can park your crypto there (e.g., Bitcoin, Ethereum and a few other major cryptocurrencies) and earn interest. We are talking real interest, like 4% to9% depending on the currency. Compare that with 0.03% on your typical checking account. Not even close.

The caveat here is that this is a blended interest rate. Once you own more than just a little bit of each coin, your interest rate drops by a lot – closer to something like 0.1% depending on the coin.

But still, I’d rather earn 0.1% on an asset that I have confidence is appreciating in huge strides (~94% mean annual return over the last four years) versus cash in my checking account (0.03%) or even the S&P 500 (call it about 10% over the last 70 years). This is especially true with high inflation rates.

NFTs are a big deal, but most of what is out there seems dumb so far

NFTs are non-fungible tokens, which means they are unique tokens unto themselves. They are like a cousin to cryptocurrency. Unlike a fungible token, such as Bitcoin, where you can trade one BTC for another BTC because they are the same, a true NFT is the only one of its kind.

For example, you could make a piece of digital art and turn it into an NFT. Then when I buy it from you, I have a sort of “certificate of authenticity” that I own it, the actual artwork, and not just a copy. Sure, someone could take a screenshot or whatever, but they have no rights to it. They couldn’t resell it because they can’t access it on the blockchain. But I could because I bought the NFT.

Think about it like the Mona Lisa. There are thousands of copies of that painting, but there is only one Mona Lisa. The copies are worth very little. You couldn’t resell them to other people and expect to make much. But if you have the Mona Lisa, you could probably sell it, move to Bora Bora, and pay a team of people to pull you around everywhere in a golden wagon with square wheels just for fun. The actual Mona Lisa is worth a lot because it is the only one. Make sense?

Now back to the art/NFT that I bought from you. There are ways you can create it so every time your NFT is sold, you get a commission. So if I buy your digital art for $100 and sell it for $1,000, you could get the original $100, plus, say 5% of the $1,000 sale (an additional $50). Then if they sell it for $10,000, you’d get a $500 cut. That is pretty cool for artists, especially if they get popular.

What I am describing is a decent example of how NFTs could be useful, and there are a zillion other use cases – experiences, concert tickets, houses, artwork, music, the list goes on. But for now, a lot of NFTs are stupid computer-generated pictures of monkeys and zombies that are selling for USD-equivalent of $250,000+. If your brain did not just explode, read that last sentence again. It is bonkers. The reason it is happening though is that some of these dumb pictures are relics of the first NFTs – they are collectibles that people think will be worth even more 30 years from now, same as trading cards or Beanie Babies.

Good for the people making money on these as an investment, bad for the people paying obscene amounts of value for a dumb little pixelated image. I hope it is a great collectible worth a lot down the road for them.

Once the collectible craze slows and people start to leverage NFTs for their real utility in more projects, then I think it’s going to take the whole world by storm.

Crypto is good economics

Specifically, Bitcoin is good economics. If you think about it, every currency ever issued by governments in the history of the world has failed. Except those that are around today. But once upon a time, Rome was issuing denarii (had to look up the plural for “denarius”). I bet they didn’t think someday their currency would be a historical artifact, just like we don’t think US dollars will be.

But the problem with government-issued fiat currency is, if you think about it, rather apparent.

Governments can choose to print money at any time. Let’s say there is $1 trillion in circulation. Then let’s say a pandemic hits – we’ll call it “COVID-19,” hypothetically – and the economy tanks. Businesses close because they aren’t allowed to stay open. Restaurants are required to limit capacity to 25%. Kids have to wear useless masks to school. Friends and family are torn apart over how to best handle the situation. I know this is all far-fetched, but just appreciate my hypothetical.

Then let’s say – and this would obviously never happen – elected politicians that want to get re-elected feel pressure to intervene and try saving the world. And what does the world need? MONEY! Or so they believe.

So the Fed prints a few trillion dollars to pay everyone to stay home and not work, and also decide now is a good time to tackle some of the big infrastructure problems since there is no traffic to get in the way of highway crews. Since a lot of people aren’t working and most people aren’t going into the office.

What happens when the government prints a ton of money? Inflation. The dollars you have are worth less than they were before. Because the economy isn’t actually any richer. There are no added goods and services, which is what makes an economy rich. So we have more dollars bidding on the same number of goods and services, making everything comparatively more expensive. Your dollar is becoming less helpful, very quickly. Your 7% return in the stock market is a lot less good when 4% of it is eaten by inflation. It is practically useless when inflation rates are 15%, unless you’ve come up with a clever way to increase your salary or

But with Bitcoin, there will one day be just about 21 million of them. That is all. No more. They can be subdivided into smaller pieces to enable smaller transactions, but there will not be more than 21 million BTC. No pressure from politicians to save the world can change that.

That is valuable on a level that I can’t fully express. That is why I’m on team BTC (but also cryptocurrency in general, because there is a lot of innovation in this space).

I’ve learned a lot in just a few months, which is what happens when you read all the big crypto new sites every morning, listen to crypto podcasts and audiobooks at any free moment, and put some money on the line.

I’m not a financial advisor so I don’t have any advice for you. But let’s say I had a 20- or 30-year-old kid right now. What advice would I give to them (but not you)?

I would advise them to learn this stuff cold. Learn the stock market, too, because there are a lot of parallels and common language and tools in both markets. I’d tell them if they are going to save and invest 20% of their paycheck each month to put ¼ of that (5% total) into mostly Bitcoin and maybe a little Ethereum. Maybe drop a few bucks into some other coins that they learn about and find interesting.

If they get a windfall of cash from somewhere, put it into cryptocurrency. “The percentage of your portfolio in crypto,” I’d tell them, “Only matters if you don’t have enough dollars to be responsible. For example, it might be fine to have 80% of your net worth in Bitcoin if your net worth is $100 million, because $20 million is still plenty of net worth, assuming a lot of it is invested in longer-standing investment vehicles like the stock market.”

I can just see my poor daughter dozing off in the chair next to me as I utter those words. But it is the kind of lesson I believe I’ll need to share in this brave new world. But not a lesson for me to share with you. Because I don’t give financial advice.