If you’ve read my post detailing my investing reflections for the first quarter of 2021, then you must have definitely seen the part where I mentioned that crypto was one of my best performing investments for the year.
Ever wanted to start looking into this mysterious and seeming extraordinarily volatile asset class, but not really sure where to start?
Fret not, I was like that not long ago. Like many others, I thought crypto was just another just a fad and that it was way too risky.
What is Crypto?
To understand crypto, we need to understand the blockchain, which is the very technology which makes crypto and all its innovation possible. The blockchain can be seen as a sort of database, which is distributed and open for everyone to view. Distributed simply means that the database is not controlled by a single entity and instead is controlled by all the users who are using it. The blockchain is open, in that everyone can view every single transaction that has occurred. Yes, that means that if you know my crypto wallet address, you will know what I’ve been doing with my crypto hehe.
The block in blockchain comes from how transactions on the blockchain are stored as blocks which are then added to the database of past blocks (of transactions). Each block stores the transactions that have occurred as well as a hash of the current block and the block before it. A hash is a unique string of characters which identifies the block, similar to our fingerprint. The hash is generated from the data within the block. A small change would cause the hash to change. As such, by containing the hash of the previous block, this links all the blocks in the blockchain, making it very difficult to change data that has already been entered into it without anyone noticing.
This is further secured with the distributed nature of the blockchain. This means that new blocks have to be verified by the users in the network, in order to be added to the blockchain. This is known as Consensus and this makes it hard for fraudulent transactions to occur and still be added to the blockchain.
Well… so what’s this gotta do with crypto?
Cryptocurrencies are built on blockchains, and because of that, this makes it hard for cryptocurrencies to be duplicated or double-spent, which presents a very attractive value proposition for its users.
What Can Crypto and Blockchains Do?
One article will not be able to explain what crypto and blockchains will be capable of, but right now, cryptocurrencies are beginning to take over parts of the finance system with applications built on blockchains to carry out functions that a typical bank might offer. Such services can include lending/borrowing, exchanges, insurance, asset management and many more. But that’s of course a story for another post!
Looking to the current heavyweights in the crypto scene, Bitcoin currently is being seen as a digital store of value, with many likening it to digital gold. More than that, Bitcoin can be acquired by literally anyone with an internet connection and a device that connects to it, making it much more accessible to the average person.
Ethereum, on the other hand, has expanded much further to support a huge network of decentralised applications (DApps) which provide a whole array of services and functions to their users.
So why did I finally take the plunge?
I will admit, I started to do a bit of research into crypto partially because of FOMO. I saw Bitcoin shooting up past the 20k mark, which was a milestone in December as it broke through the ATH of the last crypto bull run.
But as I went down the rabbit hole, I was fascinated. I was amazed by the possibilities that lay ahead, especially in the realm of decentralised finance (DeFi). More importantly, during this period, there was much greater acceptance and adoption for cryptocurrencies in mainstream finance, with Tesla accepting Bitcoin as payment and banks beginning to integrate Bitcoin into their systems.
Photo by David von Diemar on Unsplash
Even more than that, crypto has actually been adopted by Venezuela on a pretty large scale too, due to the hyperinflation and sanctions that have plagued the nation. Large stores and outlets have begun accepting cryptocurrencies such as Bitcoin, Ether and Eos as payment.
For me, this meant that crypto was something that was too big to ignore and the more I read into it, the more I realised that blockchain technologies would likely change the way we did things in the future.
Instead of seeing crypto as risky, I began to see it as being more risky if I had stayed out of crypto.
How Did I Do It?
I took the plunge finally, entering with a 50/50 position in Bitcoin (BTC) and Ethereum (ETH). Pretty vanilla by most accounts.
I allocated about 5% of my portfolio to it at that point in time. Something which I felt I was comfortable with, to not think about the fluctuations at night and yet enough to get my feet wet.It has certainly been a ride so far and wow I must say, despite being branded as a risky asset, it seems like Bitcoin might actually be less volatile than some of my stocks in the last tech focused drawdown in March haha.
What Should You Do?
At this point, you might be thinking, well crap, what should I do now? Should I enter? What if it crashes from here?
I will say, while Bitcoin has seen an insane rally, I do think that investors should still tread cautiously. Bitcoin can still see violent swings and crashes in the months and years to come. In fact, from late 2017 to end 2018, Bitcoin fell more than 80% over a year and in the March crash last year, Bitcoin fell 38% in a single day!
If you wish to enter the space, do conduct some of your own research before entering the space. Understand what you’re getting into and the technology behind it. A resource that I found useful when navigating this field was the Hash Power Podcast. They do get a bit technical at times, but it really helps you understand why so many people believe in it and also, on the flip side, the risks that may come with it.
Lastly, do also allocate your position size properly to match your risk tolerance. If you’re risk averse, you can go with a small 1-3%. If you’re feeling much more bullish, you can of course, adjust it upwards.
Invest safe and see you on the moon!
P.S. If you’re wondering how to get into the crypto space and which exchange to choose, stay tuned for next week’s post where I’ll cover an easy option to get started with!
Photo by Bermix Studio on Unsplash