An Alternative Way to Investing: Crypto (Part 2)

“I am not a Crypto-guy”

Ignorant me in 2017

Yes, I felt into the “I know, I don’t know” trap in 2017. A number of my friends shared with me as early as 2014 about Bitcoin and other cryptocurrencies but I was ignorant enough to call it “a tech scheme” back then. In retrospect, I had little to no idea about blockchain, the history of money and how this technology and its applications will transform the way how we both store & trade value.

Since then, I have embarked on a discovery journey which helped me to realise that a number of ‘forces’ are converging that will enable the crypto industry to continue to grow in the long run. Before jumping into my portfolio approach to investing in Crypto, I would like to spend a handful of paragraphs on my rational why I started to invest both more time and money in Crypto.

3 Converging Forces that drive Cryptos Value in the Long Run

  1. Characteristics of Money and what makes “good money”
  2. Technological adoption rate in emerging/frontier markets
  3. Money printing/devaluing of currencies in emerging/frontier (and global) markets

These 3 forces together convinced me that Crypto is an essential part of anybody’s investment portfolio. In an simple equation it is:

Good money + Smartphone Adoptions Rate + Bad governments/central banks =
Superior Returns in Crypto

Characteristics of Money and what makes “good money”
It all started with the philosophical question of “what is money” – one of the best interviews that I have recently listened to is by my friend Manuel Stotz of Kingsway Capital (a public and private equity firm investing in emerging and frontier markets). I am summarising his key points but I do recommend to listen to his podcast below (in German only).
Money is essentially used for 3 things:

  • Store of Value: essentially the time we invest in something to generate value being protected for use in the future
  • Medium of exchange: not time but space (from barter over fiat to crypto)
  • Unit of account: price (split) and thinking in pricing

Historically, there have been 5 criteria for “good money”

  • Scarcity
    • Common example is gold, it’s the rarest/scarcest commodity and only +/- 2% has been digged up every year
    • Fiat money is pretty bad in terms of Scarcity nowadays. E.g. US/Europe are currently printing up to 2% new fiat money every month. This means that 25% (!) of new fiat money was created in the last 12 months only. That’s …pretty… insane.
  • Durability
    • Good for Gold (again), it has existed for thousand of years
  • Portability
    • (Fiat) money or your electronic money are good examples for easy portability
  • Visibility
    • Silver worked better than Gold in that regard
  • Verifiability
    • Electronic money shows one of the best verifiability of money, especially an encrypted currency that keeps the records of its transactions (’thus blockchain’)

If you follow this logic and assess any money on these criteria then TODAY Bitcoin (and other cryptocurrencies) are superior to any other form of fiat money. In fact, you could argue that it is 100x better than Gold and up to +10,000x better than fiat money based on these 5 criteria for “good money”.

Next, I have been looking at the total addressable market for Crypto. Although most of the western media is writing (or complaining) about Crypto, the highest adoption rates are in emerging and frontier markets (with exception of the US): 

2021 Global Crypto Adoption Index

If you continue this logic and dig deeper into the emerging and frontier markets you will realise that a staggering 3 billion (!) people don’t have access to banks. In addition, they have some of the worst fiat currencies (I will get to this in a bit). 

Technological adoption rate in emerging/frontier markets
BUT, these markets experience a much higher growth in terms of smartphone adoptions: the growth rate in smartphones is equal to 10% in the developing vs. 4% in developed countries (1). And in many emerging economies, younger – especially technological-savy – people lead the way in smartphone ownership.

This in turn translates into new digital ecosystems. E.g. have a look on the Internet economy growth vs GDP penetration in Southeast Asia:

Money printing/devaluing of currencies in emerging/frontier (and global) markets

Adding to this, you have global and local governments and central banks who have a ‘free-ride’ in printing money or devaluing its currencies. Let’s have a look on the money printing machine by the US Fed:

Fed M1 Money Stock since 1975 to 2021

If you think that this is crazy then let’s have a look at one of the frontier markets (which has one of the world’s highest adoption rate of Crypto): Nigeria.

Point in case: Nigeria

The national currency (Naira) used to be Naira per USD of 2.02 in 1986.
Today in 2021 – 35 years later – the exchange rate is Naira per USD of 411.50. The dollar value of your purchasing power decreased by 99,5% over 35 years if you lived, worked and saved in Nigeria.

Naira’s exchange rate development against the US$

This is only 1 example of many frontier or emerging markets. So you could argue that people are not poor because they don’t have the necessary knowledge, but they live and operate in a market/system that makes them poor. They might have daily work but have had limited access to (global) capital markets and thus little to no assets that appreciate over time. In the worst case, they don’t even have a bank account – so no storage of value. And even if they have a local bank account (as the Nigerian Naira powerfully shows) the value of their stored money gets them less and less purchasing power. So – up until recently – they did not have something to invest in to keep value. Definitely not by keeping their fiat money at home or at a deposit account in their local bank.

Adding these three forces together made me convinced that Crypto is not only here to stay but that I have to invest at least 1% (and eventually up to 5%) of my wealth in Cryptocurrencies. As these forces will most likely generate superior returns in the long run.

How I personally invest in Crypto?
Disclaimer: This is NOT considered any investment recommendation nor do I suggest you to invest in the same manner. Please do your own research and decide for yourself 🙂 

Bet on a contrarian truth

Peter Thiel

After 3 years of actively following the Crypto-Space (and experiencing first hand 2 bull markets and 1 Crypto “Winter” bear market) I have developed an approach similar to Angel investing in tech/private companies.

In general, Angel investing in Tech/Private companies is a high-risk/high-reward (or loss) type of investing. I have allocated approximately 40% of my wealth in Private Equity which includes 3 different sub-categories with different risk profiles: Private Equity (medium), Venture Capital (rel. high), Angel Investing (very high) risk. In comparison, my (total) crypto holdings represent approx. 1% of my assets. And this 1% is in my category of “highest risk/highest return (or loss)” of my portfolio. I am sharing this with you as I have read stories of people who invest up to 50% (and sometimes even more) of their total asset portfolio in Crypto. That’s not only highly risky but against the definition of diversification of assets. But…it’s everyone’s own choice to do what he/she thinks is best for him/her.

I took the ‘guide book’ from Angel Investing as I started to see more and more similarities in terms of return patterns. A typical Angel investing assumption is that you invest in min. 10 companies with the following (+/- result):

  • 5 companies are total losses (50%)
  • 3 companies average out to 1-3x return (30%)
  • 1 company produces a 5x return (10%)
  • And hopefully 1 company is the real winner (north 15x) (10%)

And over a 5 year period, you will (hopefully) generate a min. 3x return on your invested capital.
I have the same approach and similar expectations for my crypto investments. 

Following this logic (and assumptions), I created a diversified portfolio in terms of investing more capital in more mature coins (Bitcoin + AltCoins) that represent 50% of the investable amount and the other 50% based on my research, interest or recommendations by people who are operating relatively deep in the Crypto industry.
Below the Crypto Portfolio Mix I applied in terms of invested capital:

Crypto Allocation based on Invested Capital

Similarly to my original post (Diversification is Key: An Alternative Way to Investing), I apply the following principles:

  • Dollar cost averaging: investing regularly at a fixed interval with a fixed $ amount across the portfolio
  • Check/adapt regularly: as crypto is still a nascent and relatively early industry, I check the portfolio mix min. 1x a month and max 1x a week. This helps me to stay ‘on top of things’ and identify new and relevant opportunities to (re)invest.

Below is my to-date crypto value mix:

Crypto Value based on current market prices

If you look at the relative return rates of the last 6 months (since I started to methodically invest into Crypto with this framework), there is a similar (but still early) pattern to angel investing:

My current portfolio performance looks currently like this: 

24% are “under water” (and I do expect this figure to get up to 50%), 68% have generated a return of 1 – 3x as of today (and I do expect that some of them slip to the 0-1x and 3-5x respectively) one single coin class (“NFT”) generated a 21x return. I do expect to have at least 1 more outlier in my Crypto portfolio mix.
In the short time, these figures will be (very) volatile. And I won’t get in/out because of short-term market movements. In case there is a major correction (e.g. because of the new infrastructure bill in the US), I will double down on these coins. In case there is a new bullish sentiment, then I stay on track with my cost-averaging approach. In the long term though (and in Crypto 5 years is a very long time frame), I do expect to generate min. a 3x return. And in case I lose everything? It won’t hurt my overall portfolio mix as Crypto represents less than 1% of my (current) asset allocation.

How did I start to get into Crypto?

  1. I started to acknowledge that I had no idea about Crypto (instead of dismissing it)
  2. I then asked a lot of questions to people who were actively operating in the crypto scene. e.g. I learned the basics from my former roommates brother who was going to do an ICO in 2017/2018
  3. I started to read some basic literature such as the work by Julian: Cryptocurrencies simply explained: Bitcoin, Ethereum, Blockchain, ICOs, Decentralization, Mining & Co
  4. I started with dollar cost-averaging on a quarterly basis (and since April ’21 switched to Monthly)
  5. I am reading & listening to topics around Cryptos, Bitcoins and new coin launches
  6. I am keep an eye on new token launches that cover the intersection of art + business + technology

And I keep learning from my mistakes. I guess this is one of my most important capture tool(s) so I can start to identify patterns of when I got something wrong (from my thesis, behaviour or greediness) and to keep me in check for future investments.

Fast forward – and especially with the acceleration of digital technologies in emerging/frontier markets and the seemingly never-ending money printing of central banks – I foresee the pace of adoption to increase.

But as with any prediction of the future, I have to be reminded by this wonderful quote: “Predictions are difficult. Especially about the future.” Cheers!

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