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Cryptocurrency Investing: Isn’t that an Oxymoron?

January 11, 2018 30236 AM EST


I’ve been training as a value investor and I make a mental distinction between “investing” and “speculation”, that’s why the idea of “cryptocurrency investing” seems so ridiculous to me.

It’s more like gambling or trading in my head, since Bitcoin and all the other coins and tokens don’t seem to have much value and it’s just a game of “the greater fool”. I’m wagering that I won’t be the biggest fool at this gathering, but only time and trades will tell.

I initially thought it was totally ridiculous to take part in this mania, but the tinkerer in me persuaded the more responsible me to see it as an exercise and experiment in achieving above average gains with a logical set of rules and some trial and error, while trying to minimize risk and not have too much capital at stake (less than 5% of my net worth, not a portion to be taken casually, but not so big that if I lost it I couldn’t recover by working a little harded and taking on some more consulting work).

This is the important stuff that I’m hoping will keep me out of trouble, my main focus is minimizing risk and losses, secondary is making big bucks. I feel that making this distinction might limit my gains some, but more importantly it’ll keep me from quickly losing a large portion of it, so as to give me enough practice to learn how to trade.

I’m borrowing momentum investing ideas from the tactical investing folks to help me narrow down the list to focus on higher probability trades. And then reading charts to find more specific trades worth entering.

The list below will change as I gain more experience and I’ll try my best to keep it updated.

Rules of engagement:

  • No Margin
  • Regularly Pull Out Profits (weekly withdrawals of 50% of profits)
  • Before entering a position decide of exit prices (if the price drops X% and hits Y sell OR as the price rises continue to move the sell price X% below the peak to ride the winners and sell once it goes below that using Stop-Limit orders)
  • Set a maximum amount that you’re willing to lose, and once you lose that… Game Over and stop
  • Position limits up to 1/3 of portfolio and as low as 1/7 of portfolio

As a long-term value investor this seems totally crazy, but I see it as a separate operation and entirely speculative. The main motivation for me is to see what type of returns can be achieved in this volatile market, the backstory of this is that when the tech bubble was going on I was too scared to jump in and invest, it’s been in the back of my mind when I look back at old charts. I’m probably better off since if I invested in the tech bubble I would have just been another fool “putting money in the slot machine” and wouldn’t have the tools and skills I’ve developed from investing and analytics.

And now I see it as a second chance at that experience where I can see what type of returns I can make. Sort of like reliving a childhood dream, since these bubbles don’t happen that often and it’s an interesting and potentially profitable experience (with the right set of rules). It’s been about 18 years since the tech bubble, so using those numbers I’ll probably only have 3-4 of these volatile markets in my lifetime and I want to jump into this one so I don’t have that “what-if” in the back of my mind when I’m older.

I DO NOT see this as an investment, I’m going in with eyes wide open and aware of the mania and ridiculousness of it all. It’s purely speculative and gambling for me since I see the value in blockchain, which the banks will probably repurpose for themselves, but I don’t think it’s worth anywhere near the $730 billion price tag the market is putting on it. It has utility, but as a value investor it’s hard to imagine it has $730 billion dollars worth of utility (as of 1/10/2018 for Coins+Tokens), which would make crypto worth about the same or more than these companies that actually have profits, intrinsic value, provide lots of utility and have competitive moats (as of 1/10/2018):

  • Alphabet Inc. $768B
  • Microsoft Corporation $675B
  • Amazon.com, Inc. $602B
  • Facebook, Inc. $545B
  • Berkshire Hathaway Inc. $505B

Just trying to put the insanity into perspective and show how ridiculous this bubble is.

I still want to be a part of it and join the “crazies”, but I have not drank the Kool-Aid and I don’t see the value or a sustainable business model here, so I will stand next to all the others, but I will have a very different point of view and goal.

I also see the risk/reward opportunity here, since with all the volatility the capital required is much lower to profit $1,000 since a 20% change is quite common within a weeks time, which means you can potentially make this amount with as little as $5,000 versus less volatile investments that move much less each week. Let’s assume stocks move roughly 5% a week, you’d need to risk $20,000 to make that same $1,000 gain.

Same $1,000 in profit, but with lots of volatility only 25% of the capital of stock investing is needed to make the same amount. Volatility is a form of leverage, so instead of using margin as leverage I’m using volatility.

Not entirely sure which is better to use, but for now I’m betting on volatility combines with bringing a conservative set of rules to the casino to not get pulled in the wrong direction.

I’m also bringing my ability from value investing to somewhat remove my emotions from the trading, and stick to my rules to protect me from potential losses.

Some of the value investing skills I’ve honed are transferrable to trading, but it’ll be a big learning curve and I will have to adapt and adjust as I go.

If you’d like to read more about my journey into crypto and have a progress report with some real numbers let me know in the comments below.

Or for the haters that would like to see me commit financial suicide you can also comment (and I’ll publish it if it’s constructive).

For now I’m figuring out how to fund my trading account, my first attempt is taking extremely long to transfer into my wallet, and I haven’t even gotten to the transfer from wallet to trading account.

I also want to learn about the taxes and see what the fees will cost after a few weeks of trading.

Lots to do…

Comments on this entry are closed.

  • Natalie January 11, 2018, 7:28 am

    Great article! I look forward to reading more about your journey!

    • Tim Livian January 16, 2018, 8:35 am

      So far it’s been a rollercoaster while I test some ideas during my “training wheels” period.