S3E5: We Need To Talk About Crypto
Where is the value in cryptocurrencies like Bitcoin and Ethereum? Can they help returns without introducing too much risk? Is Bitcoin getting more stable? If you want to invest, where do you do it? Tom Rodgers is a freelance financial writer and analyst specialising in cryptocurrency. He is the former Head of Research for ETC Group, which runs the biggest Bitcoin fund in Europe. He helps us discuss all those questions and more.
What you should remember from this episode
Crypto is built on technologies that are difficult to understand.
Tom says Ethereum is a platform, a bit like the App Store, which allows people to launch other crypto currencies on top of it. This is one reason that Tom thinks it has utility and value.
Tom thinks a key reason that Bitcoin has become valuable is that it’s scarce and people value scarcity.
Bitcoin has become a financial asset that has been folded into the financial system, says Tom.
He thinks that everything that gold does as a financial asset, Bitcoin does better - e.g. you can’t counterfeit Bitcoin (but you can gold).
Token Terminal can be worth looking at (a site that provides some data on crypto).
If you’re going to invest in something, particularly as risky as crypto, you should do the work to really understand it. What does it do? How does it make money? Who is the team behind it? Please do your research.
There are bull and bear markets in crypto which have historically revolved around the bitcoin halvening - and we’re approaching a new halvening at the time of writing.
The average bull market lasts for 385 days, whilst the average bear market is 585 days long. However, he also explained later that there is no industry standardised way to classify when crypto bull markets begin and end.
You can check out more info/data on Plan B.
With the introduction of crypto ETFs, Tom thinks volatility will drop.
Tom was the Head of Research at ETC Group, who run the largest Bitcoin fund in Europe. Whilst he was there, they analysed the classic 60:40 portfolio, which is 60% equities and 40% government bonds, and they ran experiments to see what would happen if you invested 3% - 5% in Bitcoin or Ethereum instead.
Here’s a bit of analysis from CoinShares which presents similar results to what they’d found (and is publicly available). Basically, if you take 2% from stocks and 2% from bonds (4% total) and invest it in either Bitcoin or Ethereum instead, your returns would’ve roughly doubled over the last 7 years. Plus the downside would’ve been fairly protected too because the maximum drawdown (the maximum amount your portfolio could drop) wasn’t that bad because even if the price of Bitcoin halves, you are only exposed to 4% of your portfolio at the point you invested. However, critically, this relies on you rebalancing to keep your allocation at 4%. If you don’t then the maximum drawdown becomes a lot worse than in a classic 60:40.
Dollar cost averaging (or pound cost averaging) is when you invest a certain amount every month so you don’t need to think about whether it’s a good time/price to buy or not. You’re basically betting that the asset will go up in value over the long term whilst also acknowledging that you can’t time the market - and want to avoid the stress of trying to do so.
Here’s the 2024 crypto crime report from Chainalysis which Tom likes.
If you don’t know what you’re buying, please don’t buy it.
This is Tom’s newsletter Charting Futures in case you want to sign up.
