Is Crypto a Good Investment?

by Cody on 2021-02-12 filed under Crypto for Beginners

Is cryptocurrency a good investment in 2021? A lot of people are wondering this, given the major rise in the price of coins like Bitcoin, Ethereum, Polkadot, and Chainlink. In this post, we look at the pro's and con's of crypto investing in 2021 and make a reasoned recommendation for investors.

Pro's for Crypto Investing

Bull Market - There's no doubt that crypto investing has been a bull market in early 2021. As of mid-February, Bitcoin is up 60+% and Ethereum is up a whopping 150%. These strong returns attract the eye of investors looking for return on capital, drawing in new investors to crypto. With interest rates low and the stock market high, crypto is one investment that has room to run.

Inflation - Governments around the world have tried to mitigate the impact of COVID-19 through governmental stimulus. How have they paid for this? By printing money. (Editor's note: we think this is the right thing to do for a global catastrophe.) However, as the US government prints more dollars, the value of each dollar goes down. Since those dollars are worth less, it takes more money to buy cryptocurrency, so crypto prices go up. Each crypto coin has its own supply managed via its own blockchain, completely unrelated to the dollar.

Asset Allocation - Effective asset allocation means spreading your money around multiple classes of assets to spread your risk around while still getting some upside. (Editor's note: to see why this is important, ask people who were 100% invested in GME.) Typical assets include stocks, bonds, and real estate. We believe that crypto is another asset for allocation within a smart investor's portfolio. Given it is decentralized, the swings of the crypto market are largely unrelated to our asset classes like stocks and bonds. The exact % of assets you put into crypto are up to you, but we feel it should be somewhere between 0 and 100%. For us, we try to keep it at 10%.

Innovation - Crypto has seen an explosion of innovation and investment since its last boom in 2017. In Q3 2020 alone, venture capitalists invested nearly $900M in crypto and blockchain startups. At the same time, the community itself is thriving, as can be seen via the progress with DeFi, Ethereum 2, and Algorand. This innovation makes each crypro investment more valuable over time.

Institutional Interest - Major institutional investment is now flowing into crypto. Investors can now dip their does into crypto via the Grayscale Bitcoin Trust and Grayscale Ethereum Trust. Tesla just bought 1.5 billion in Bitcoin. In aggregate, this will dwarf the amount that small timers like you and me can invest. However, if we can get there before they do, the returns go to us.

Con's for Crypto Investing

Deregulated - In the US stock market, we have the SEC to protect investors and the national banking system against market manipulation. The crypto markets are decentralized and deregulated, so there is no such protections. That means coins like Bitcoin and Ethereum can go up / down quickly. They can be manipulated and disrupted by 51% attacks. Caveat emptor.

Technical Risk - Given that all cryptocurrency is based on computer code written by puny humans, it's definitely possible for bugs and technical glitches to impact the value of crypto investments. For example, in 2016, a bug in an Ethereum smart contract led to hackers taking 1/3 of the Ethereum DAO's funds. This is not the first or last instance of a crypto bug putting millions of dollars at risk.

Fraud and Theft - Your crypto is investment is only as safe as your wallet or provider. If your wallet is hacked, your crypto is gone. For example, top crypto wallet provider Ledger was hacked in 2020. While funds were safe, users were subject to many phishing schemes to try to pry their credentials loose. You must think very carefully about how you store your funds, as there's no equivalent of Charles Schwab or Vanguard in the crypto world.

Recommendation for Crypto Investing

Is crypto investing riskier than the stock market? Yes. Is it also potentially more rewarding than the stock market? Yes, we think so. This is why we advise investing up a targeted percentage of your portfolio in cryptocurrency.

The actual percentage is up to you and your risk profile. Here are our recommendations:

Risk Tolerance Recommendation Scenario
High 10% of assets, following our latest crypto to invest in 2021 guide. High income earners who don't need liquidity anytime soon.
Medium 5% of assets, following our latest crypto to invest in 2021 guide. Medium income or new investors wanting to try out the world of crypto.
Low 0% of assets. Stay on the sideline and live vicariously. Low income or high need for liquidity.

Disclosure: I/we have a long position on Bitcoin and Ethereum. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Big Time Crypto).

Additional disclosure: Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of cryptocurrency. Investors are advised to review all documents and press releases to see if the cryptocurrency fits their own investment qualifications.