I predict that cryptocurrencies will be one of the best investments over the next decade. It is easy to find investors that I greatly admire who think nothing good will come from cryptocurrencies, while others can't stop singing praises over it. I don't think cryptocurriences will replace government money, but I do think that as an asset class they will thrive over time. In another post I will give details as to why I project them to do so well, but for now let me show you how I invest in cryptocurrencies. At the end I will give you a tool that makes it easier to do the calculations.
Which crypto currencies do I buy?
I buy the top ten crytocurrencies. How do I measure what is the top. I do it by market cap. So, say there are 17 million Bitcoins in circulation and the price per Bitcoin is $6,000. Then the market cap of Bitcoin is $6,000* 21,000,000 = $102,000,000,000. That is $102 Billion. So, I find the top ten cyrptocurrencies by market cap using the website www.coinmarketcap.com. I also limit my purchases to coins that are traded on public exchanges that I have accounts with.
How much do I buy of each crypto?
If you are familiar with stock market index funds this concept will be rather familiar. I weight my portfolio by market cap. So, I calculate the market cap of the top ten cryptos and add their market caps together. Let's say the sum of the top ten cryptos by market cap is $200 Billion and the market cap of Bitcoin is $102 Billion. That means Bitcoin accounts for $102/$200 * 100% = 51% of the total value of the top ten cyrpto currencies. So, it will be 51% of my portfolio too. I go down the lines and do this for each crypto currency. So, if I have $1,000 to invest I will put $510 into Bitcoin.
What do I do after I own cryptos?
I don't lend them out or do any other kind of gimmicks, I just hold them. That is right. For a year I just hold them and go on with my life enjoying it. Then after a year and one day, I come back and look at my portfolio (in reality I check it more often because it is so tempting). Now when I look at my portfolio some of the coins have done great others have done terribly others have gone broke and there are some new cryptos in the top 10. So, I do a re balance. I sell and buy enough of each crypto to approximately match the market cap size again. So, if now Bitcoin's market cap is only 40% of the total market cap of the top ten but is 80% of my portfolio I sell enough to have it be only 40% of my portfolio and I put the earnings from the Bitcoin into the other cyrptos.
How has this performed for me?
To be honest I haven't even been doing it for a whole year as of today, 10/14/2017. However, I have backtested this since May 9, 2013 by using web archives of coinmarketcap.com that are available through www.waybackmachine.org. Since then it would have returned 4,939%. That is 142% a year! As a comparison I have put the table below comparing this index fund vs. Bitcoin.
[caption id="attachment_2040" align="aligncenter" width="535"]
Figure 1 The annual returns of buying and holding the top 10 cyrptocurrencies by marketcap.[/caption]
Why do I invest this way in cryptocurrencies?
I am firm believer that it is smart to be diversified and while I do believe cryptocurrencies will continue to grow in value I do not know which ones will become or remain popular. Also, by holding my cryptos and not selling for a year and one day I make sure that I am charged a lower rate of taxes. Above all else though I think that this strategy will over the next decade provide excellent returns with very little work.
Warnings, where to buy, and resources...
I only put a small portion of my net worth into cryptocurrencies. Currently only about 5% of my net worth, though I may consider going higher later. I convert all the USD I want to put into cryptocurrencies into Bitcoin through www.gemini.com. Then I transfer enough of the Bitcoin to www.kraken.com where I buy the other cyrptocurrencies. If a currencies is not available on www.kraken.com I typically exclude it and take the 11th largest cryptocurrencies. If you want to double check my back test here is the Excel Workbook: WayBackMachine Index.
As some of you know, I do actively trade the markets of cyrpto currencies and stocks. If you would like to find more information like this I encourage you to follow my blog, twitter, steemit, or Collective2.
How do you invest in cryptocurrencies? Tell me in the comments.
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