Quiet few months for me – its been very hard to find good ideas.

This has led me to look outside the beaten path and I have decided to put a small portfolio weight in bitcoin / related cryptocurrency. I’ve somewhat changed my mind on this.  I did think of them as tulips.  Now I think they might not be, and even if they are – there is opportunity for money to be made.  All one needs to do is double your money and sell half – in crypto world an easy thing to a, and its all free from there.

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Cryptocurrency
BTC Keychain via Flickr (CC BY 2.0)

I’m also investing a small amount in Kryptonite 1 – in effect this is a completely off the radar bitcoin investment trust trading at a discount to NAV.  To avoid confusion this is in a separate post.

I’m not entirely convinced these are the future of money.  I am convinced they might be and if they are there is still potential for substantial gains.  I’m also a bit concerned I am buying at a high – never a good thing to do.  Plan is to ease money in gradually – up to say 5-7% of the portfolio over the next couple of years – buying dips.  I have only been in these for a couple of months – at very low portfolio weight and am already up a crazy 49%.

Whilst it might be thought wise to trade in and out opportunistically I think the best idea is to aim for buy and hold as much as is possible – this is where the really big money will be made.

If you look at some of the performance of these coins doubling / tripling is common, Ethereum is up a few thousand percent in a couple of years.  £1000 investment becomes a million.  Ok, not everyone can pick a winner – but just a bit of this sort of return can transform a portfolio.  A good source of information is http://www.coinmarketcap.com.  Unfortunately I dont have a huge amount of money and whilst my typical 20-30% a year will get me rich slowly if I can stake a little bit and get a much higher return even at higher risk this makes sense.  I have to take chances to escape my situation.

I think there is certainly a degree of a bubble in cryptocurrency.  Lots of coins are launching which are scams / just plain stupid.  Having said that electronic money is a good idea.  There is also demand for money unregulated by government.  You can tell by looking at the number of times this idea has come back – from e-gold in the 2000s to paypal and variants to bitcoin.

Total market Cap of all coins is $156bn.  Apparently, the size of the UK black economy is $258bn  – to say nothing of the rest of the world.  Even if bitcoin are only used by criminals / arms dealers and such – it can go much further.  Generally the criminal fraternity arent that well educated or into technology – they are a conservative bunch.  They are however, innately intelligent and sharp – eventually they will realise that this is a good way of transferring / laundering / parking funds. This alone will allow for a considerable increase in capitalisation of currencies.

There are other uses – hiding money from creditors / spouses / tax, low cost/ low risk  transfers for people fleeing various places.  In lots of the world getting around currency controls is a major reason why this might be attractive.  Holding crypto beats cash in an unstable environment.  In the US crypto is an excellent way of getting around the various prohibitions on gambling.  It also has to be said that after quantitative easing with asset price bubbles and high levels of government / individual debt, inflation is a real possibility.  Through history this has been the most common way of resolving these sorts of issues.  New currency, outside the control of government and not vulnerable to this sort of manipulation is one solution to this problem.

I also think the world is ready for a huge bubble.  There is a lot of liquidity around looking for a home.  Cryptocurrency is very hard to value in any traditional sense.  If you believe it is money it is worth something, if not it is worthless.  This is equally true of gold, paper money, diamonds or lots of other things.  Money is a social concept, not a thing…

There are problems – technically working with these coins is complex.  You can hold these coins in an online wallet such as coinbase or on an exchange.  To use an analogy these are like vaults holding your gold.  A problem exists as legally bitcoins are not gold – they are more tokens like Disney dollars.  They are therefore unregulated – your bank can easily run off with your money.  Worse, if your bank is robbed, your money is gone and you can’t get it back.  You can hold them in your own personal wallet on your PC – this presents technical challenges – you can loose your password, you can get hacked.  There are no easy solutions to any of these problems.  There is a further challenge – if your currency has a severe enough bug in its code – a hacker could, in theory steal it.

The volatility makes these interesting to hold – 20% to 50% daily moves are not uncommon.  This makes them not as useful for holding value as they could be – but as they become more mature I would expect value to stabilize.  The total value of all cryptocurrency is $159bn of which $71bn is bitcoin.  Even this overstates it – lots of early Bitcoin were lost so some of that value is possibly not real.  To put this in context all crypto are worth about as much as Cisco, in the overall scheme of things not that much…  If investors decide to put just 1% of their portfolios into this the potential gains are phenomenal.

My portfolio is as below:

Litecoin - 32%

Monero - 31%

Ethereum - 22%

Bitshares - 7%

Neo - 5%

Bitcoin - 3%

I would love to know what people think, this is highly speculative but I believe still has good risk / reward.  I think most of my readers are quite hard-core value investors who dislike the more speculative side, but things like this are why I describe myself as an investor / speculator and not just an investor!

Article by Rob Mahan, Deep Value Investments Blog