Crypto Investing Principles
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Summary: I talk about the mental game of investing, particularly as it applies to crypto markets. Subscribe here and follow me to get weekly updates.
In the five years we’ve been publishing Bitcoin Market Journal, we’ve developed an entirely new way of investing.
The genius of our approach is that it combines old-fashioned financial investing principles with the new-fashioned world of crypto.
This lets everyday investors manage the risk of crypto, while sharing in the reward.
Today it’s hard to find anyone that preaches these principles. Most investors are either all-in on crypto, or shun it altogether – but in the future, we believe this “middle ground” will just be common sense.
What’s rewarding is that this approach has worked. Our results speak for themselves:
Blockchain Believers have far outperformed the non-believers.
Over the long term, we’re making much more money than the “Traditionalists” who stay away from crypto. And we’re blowing away the results of most “Crypto Bros,” who generally don’t report their long-term profits (because they don’t have any).
The strategy itself is simple:
- make monthly investments
- into a well-diversified portfolio of stocks, bonds, and up to 10% quality crypto assets
- hold on to them for 5+ years.
We know that it works. And we’ve had five years to develop the principles that explain why it works. Rather than reading the thousands of articles, research reports, and investor scorecards that we’ve published, here’s a guide to learning the core investing principles.
Call it the crypto investor curriculum.
The Case for Crypto
Investing puts your money to work. Intelligent investors put their money where it can be most useful, by funding great companies (and other investments) that bring real value to the world. Rather than sitting in a low-interest bank account, intelligent investing uses our money for a higher purpose.
Money is going digital. Separately, money itself is changing. Just as we went from paper letters to email, from paper tax returns to e-filing, we’re in the midst of money going from paper to digital. In many ways, it already is (most of us use less cash and more Venmo), and this trend is accelerating.
Money is going global. At the same time, our global economy means that the arbitrary rules we put around “dollars” and “euros” and “yuan” are increasingly irrelevant. All national economies are connected, and what affects one affects all (which we see most clearly during banking crises).
A global digital currency is inevitable. Thus, the dollar will eventually be replaced by digital money that will not be owned by any one nation, but a global central bank (like the IMF). This won’t be bitcoin, which behaves more like a high-flying tech stock than a currency, but bitcoin provides the template.
Investing in this money movement is like investing in the Internet. These twin forces of digitalization and globalization, combined with the invention of crypto, means that we can invest in “future winners” of crypto, which is akin to investing in the early winners of the Internet.
Principles of Value Investing
Find great companies that provide real value. When picking winning stocks (we’ll get to crypto in a moment), intelligent investors look for companies with excellent financials and excellent managers, with room to grow, that are providing some valuable product or service to the world.
Investing in companies is literally buying the company. Before buying a stock, intelligent investors ask themselves, “Would I be willing to buy the entire company?” This helps us say “no” to a great number of companies, and “yes” to a precious few.
Intelligent investing requires both quantitative and qualitative analysis. Quantitative analysis looks at the financials of the business; qualitative analysis uses our judgment about the business. The numbers may look great, but the team is sketchy: pass. Or the business may look great on paper, but the financials are a mess: pass. You need both.
Buy companies when they’re “on sale.” It’s not enough to find a great company; we ideally want to invest in it when the stock is undervalued, not overvalued. Like investing in real estate, we should look at “comps,” or comparable valuations among similar companies, before investing.
Hold for the long term (5+ years). The point is not to “get rich quick,” but to “get rich and make it stick.” We can’t predict what the market will do next year, but the U.S. stock market has grown by 10% a year over the long haul. Good companies should do at least that well, especially if we’ve bought them cheaply.
Cryptos are like companies. Now on to crypto, where the same investing principles apply. Although crypto tokens are in many ways different from traditional companies, it is most helpful to think of them like companies. Then we can apply the principles of value investing, with a few tweaks.
We can analyze crypto like companies. As covered above, we can use qualitative analysis (our judgment about a crypto project) as well as quantitative analysis (the real-time numbers). In fact, crypto is far superior to stocks in this respect, since the numbers are transparent and real-time. (Nowhere to hide.)
We can use tools for both. For qualitative analysis, Bitcoin Market Journal has created the industry-standard tools, including our Blockchain Investor Scorecard, Blockchain Risk Scorecard, and NFT Investor Scorecard. For quantitative tools, see our guide on How to Read Crypto Financial Statements.
User traction is by far the most important metric. Because all blockchains have network effects, the easy question to ask is whether their long-term users are growing, and how quickly. This can help you eliminate the vast majority of crypto tokens right away. Real users = real value.
Tokenomics can build (or destroy) value. There are no rules for creating crypto tokens, so a company that continually creates new tokens dilutes your value (see our analogy of the Magic Pie). Bad tokenomics are inflationary; good tokenomics are deflationary, or at least manage inflation well.
Managing Crypto Risk
Crypto is a rollercoaster. These markets are new and immature; so are most crypto investors. Thus the price of bitcoin, and the entire crypto market, fluctuate between breathless highs and depressive lows, between FOMO and FUD. This volatility is what scares off most traditional investors.
We keep crypto between 2 and 10%. The solution, of course, is to simply invest a small portion of our overall holdings in crypto. Our strategy invests no more than 10%: enough to make a difference, but not so much that a crash will wipe you out.
We steady-drip invest. Because our greatest enemy is our own minds, we need a strategy to deal with the hype cycles of crypto. The solution is steady-drip investing (also called dollar-cost averaging), investing the same amount each month. The goal is to “set it and forget it.”
We invest with monthly withdrawals. Like a 401(K) investment that’s automatically deducted from your paycheck, we can set up automatic withdrawals through services like Coinbase (for monthly crypto investments) and Betterment (for monthly investments in stocks and bonds).
Buying and holding saves on taxes and fees. Although crypto was supposed to free us from fees, the opposite is true: fees are the silent killer of wealth, which is why frequent trading is a bad idea. Because every transaction is taxable, buying and holding also lets your investments grow tax-free.
The Three Most Important Words
Diversify, diversify, diversify. Don’t keep all your eggs in one basket. Putting everything into crypto is a terrible idea; spreading out the risk among many hundreds of stocks, bonds, and a few promising crypto investments is a much better strategy (see our results).
Buy the entire stock market. Rather than picking individual stocks (which even fund managers can’t do well), you can simply buy the entire stock market. An index fund like Vanguard’s VTSMX will give you the average growth of the entire stock market (which has averaged about 10% per year, over the last 100 years).
Buy the entire bond market. When stocks go up, bonds tend to go down, and vice versa. So this will help you diversify further, keeping about a quarter of your holdings in an all-bond index fund (like Vanguard’s VBMFX).
Diversify further using crypto. Keeping up to 10% in quality crypto companies can give us still further diversification, since many investors flood into crypto when traditional markets get wobbly.
Diversify even further if possible. Ideally we want “non-correlated assets,” or investments that each move to their own groove. You can further diversify by investing in assets like real estate, your own business, or your own education (more on this below).
Which Cryptos Do I Buy?
Bitcoin (BTC) is the most established. Bitcoin has the most users, the longest history, the highest market cap, and the biggest brand. While it has not lived up to its promise as a global digital currency (we don’s use it to buy stuff), it can provide a hedge from traditional markets (like “digital gold”).
Ethereum (ETH) is the largest smart contract network. Quite simply, Ethereum is the operating system for crypto. It’s the platform on which most crypto projects are built, which means it has the most users, the most developers, and the most transactions. This is a powerful competitive moat.
Binance (BNB) is the largest exchange. Our thesis is that buying the company’s native token, BNB Chain, is like buying stock in Binance. While there is regulatory uncertainty about all centralized exchanges, Binance has an incredible product, and is has successfully navigated the tricky regulatory waters of crypto for years.
Uniswap (UNI) is the largest decentralized exchange. Exchanging crypto for crypto is one of the proven use cases of crypto. Uniswap has pioneered the decentralized model of crypto exchange, and continues to innovate as the DEX industry standard. (Think of UNI as a hedge against the shutdown of BNB.)
Other category leaders are good long-term bets. Beyond these four, the intelligent investor can identify the categories (or sectors) of crypto that are likely to thrive over the long term, and identify the one or two leading tokens in those sectors now. Our Guide to Sector Investing can help.
Which Cryptos Do I Avoid?
Meme coins are fool’s gold. Even professionals can be tempted to buy meme coins, especially when they seem cute and harmless. Because they add little fundamental value, they’re like gambling, and gambling is harmful to your long-term wealth.
Avoid teams without integrity. The best investments have a combination of strong centralized leadership and a decentralized community of investors and developers. Find projects run by good managers, using our Investor Scorecard. Anonymous teams aren’t accountable; run away from them as fast as you can.
Avoid new token offerings. Investing in a brand-new crypto project is like investing in a startup: the odds of success are long, so it’s better left to people with money to burn. It’s much easier to stick with the investing principles in the section above.
Avoid new market segments. Maybe decentralized file storage will one day be a thing, but today most people are pretty happy with centralized solutions. Likewise with decentralized social, crypto gaming, Layer-2 solutions, cross-chain bridges, and so on. Stick with proven crypto projects that are growing.
Avoid NFTs. Our view is that the technology behind NFTs is important, but today’s NFTs are just collectibles like classic cars or Pokemon cards. If you must invest in NFTs, keep it to no more than 1% of your overall portfolio. Ask yourself what value today’s NFTs are really bringing to the world.
The Long View
Health, wealth, and happiness. Our tagline is our philosophy. Define what happiness is to you, and let money serve that goal – not the other way around. For most people, meaningful work and meaningful relationships are a good starting point for long-term happiness.
Get rid of high-interest debt. If you’re carrying credit card or student loan debt, get rid of that first before you start investing. (Or at least prioritize the payoff, because it’s eating up any profits you make from investing.)
Live within your means. There are two ways to do this. 1) Control your expenses by making a monthly budget, then sticking to it. 2) Increase your income by getting a better job, asking for a raise, or taking on additional work. Ideally you can increase income, decrease expense, and invest the rest.
Knowledge pays the best interest. Ben Franklin said it first, and we put him on the hundred dollar bill. An investment in your own learning — like the kind you’re doing here — is an investment that will stand the test of time.
The best investment is in yourself. Most investments are beyond our control. But investing in yourself – whether through improving your education, starting a business, or taking a leap into a new career – is within our control. This makes you the best investment of all.