Around four years back, cryptocurrencies, and Bitcoin, in particular, gained mainstream media coverage, and my attention, for the first time. The price of a single Bitcoin surged past $200, highlighting its meteoric rise in a relatively short timespan. As someone interested in all things digital, and particularly those that promise to change our world and disrupt traditional industries, I put a lot of time into trying to understand the phenomenon. As the value plunged down towards $50, after peaking at $200 and change, I contemplated making a speculative bet and buy around $1,000 worth of Bitcoin.
Fast forward to today and a single Bitcoin is trading at around $2,500, having peaked a couple of weeks back at more than $3,000. Those one thousand dollars I considered speculating with, would have a potential worth north of $50,000. While it would be great to bask in your applause and admiration for sitting pretty with a 50X return today, the truth is that I am here to share with you why I didn’t purchase any Bitcoins back in 2013. And more than that, I am going to tell you why I am investing some money in cryptocurrencies today, in 2017.
Don’t Invest In What You Don’t Understand
The chief reason I opted not to obtain Bitcoin back in 2013 was that I wasn’t able to comprehend exactly how the technology had potential be transformative. A new digital, constricted and deflationary currency had some value, sure, but despite people far smarter than myself extolled the virtues of the blockchain technology, I just didn’t “get” it. And, as covered in our introduction to investing in the stock market, you should not invest in what you don’t understand. Even though that today means I have missed out on tens of thousand dollars in returns, given the circumstances, it was the right decision at the time.
Investing is about staying disciplined, and sticking to the rules that govern your decision-making process. With the help of hindsight, we can scrutinise the decision I made at the time. The weak point, if any, in my process back then, was the fact that I didn’t understand the transformative value of the technology. With twenty-twenty hindsight, it is easy to say that I should have spent more time digging, investigating and trying to understand. However, a whole lot of people, many of which are far smarter than me, still don’t believe cryptocurrencies have any value as long-term investment objects.
The Future is Decentralised
Fast forward to today, and the future looks a lot clearer to me. And, despite missing out on some fantastic returns after making the decision not to invest in Bitcoin, I am convinced that we are standing at the very beginning of an age where the technology that enables digital currencies like Bitcoin and Ethereum takes centre stage.
I believe that the future of the internet consists of decentralised applications, where well-crafted “better than free” business models rule. I buy into the idea that we are entering the age of fat protocols, where protocols capture more value, and applications less.
More than that, I think that the emergence of this technology and the abilities it affords us has the potential to change the way good ideas are funded, and democratise early-stage investing through tokens. It was investor Chris Dixon who drew the comparison, in a podcast I was listening to, that we are standing the dawn of a new era, and digital currencies like Bitcoin and Ethereum give everyone the possibility to invest directly into the technology. It would be the equivalent of being able to invest in the internet back in the late 90s. Albeit an imperfect comparison, buying digital currency is not unlike purchasing domains back in the 90s. If we registered a few four or five letter words in the English language as a .com domain back then, you would be pretty well off today.
High Risk, High Reward
It is important to note that purchasing digital currencies at this point is still a very high-risk venture. In fact, I would lean towards branding it speculation more than investing. Even if the technology that powers today’s leading digital currencies such as Bitcoin and Ethereum takes off, there are no guarantees that these assets will retain their value. Other protocols can emerge and take the market, leaving those who got in on what pioneered the technology in the dust.
Even the best case scenario for someone long in Bitcoin and Ethereum will be extreme ups and downs, because of the volatility associated with these assets. Ten percent or larger drop in value in a single day is normal and must be expected by anyone who is thinking about speculating in digital currencies. So, even if I believe the potential payoff is sky high, I would only recommend purchasing digital currencies with money you could comfortably afford to lose. The risks of significant or even complete losses are simply far too high to stake anything else on it.
My Cryptocurrency Investment Strategy
Because I now believe that the currently dominating digital currencies represent a high reward opportunity, I have decided to dip my toes in the water and purchase some digital assets for the first time. As already mentioned, I don’t recommend going in with more than you can comfortably afford to lose, and I will be following my own advice and have decided to cap my investment at $10,000. I made the decision a while back, and initially planned on going all in at once.
But, because I had the feeling that we were in an ICO-driven frenzy, and that a correction was on the horizon, I decided to alter my strategy slightly. Instead of dumping the full $10,000 into Bitcoin and Ethereum at once, I will spread out the purchases. As it stands right now, I have invested a little over half of that with two purchases spread over a few weeks. The plan is to invest the remaining half at some point in the coming months, although I have not set any specific buy-in times yet.
Because I am bullish on both Bitcoin and Ethereum, I am spreading my money between these two currencies. With today’s prices, that means I expect to end up with about two Bitcoins and 20 Ether. Currently, my portfolio consists of 1,05 Bitcoins and 10,99 Ether. And I have, of course, lost a bit of my initial purchase! As soon as I am fully invested according to my plan, I will provide an update, tallying out my total costs and holdings. The plan is, of course, to keep the readers updated with how my investment is doing over time. I will also be exploring the subject of cryptocurrencies further in future articles, so make sure you subscribe to the mailing list if you don’t want to miss out.