You can’t go an hour on cryptocurrency forums, subreddits, or Twitter chats without hearing the advice to hodl. For the uninitiated, “hodl” has become the rallying cry for the cryptocurrency community. It sums up the advice to hold your assets, even in the face of market volatility. Hodlers take the view that blockchain will win out in the long term, so investments in Bitcoin, Ethereum, and other projects should be long-term plays. With this talk of holding long-term, the Bitcoin stock divide grows. Investors want to know where to put their assets to maximize growth while avoiding risk.
Long-term investing in cryptocurrency is at a turning point. Now, institutional investors and private equity are starting to take notice of the gains to be had from cryptocurrency. Legitimate investing tools like mutual funds and portfolio balancers are gaining traction. The New York Stock Exchange even lists a Bitcoin index (NYXBT). Crypto is no longer a fringe subculture. It’s rapidly gaining recognition and legitimacy.
Crypto’s climb as a legitimate investment vehicle has left many investors curious. Could I invest in crypto on the order of decades? Is putting my retirement savings in cryptocurrency a good idea?
While I’m sure some crypto diehards out there would enthusiastically say yes, this article takes a more measured and nuanced approach. If you’re talking about true long-term investing, on the order of decades, adding diversified crypto as part of a complete portfolio does have some advantages. There are also serious drawbacks that mean you should keep investing in the regular stock market as well. However, the Bitcoin stock divide doesn’t have to be a divide at all if you adopt the right strategy.
Growth Potential
There’s no question that investing in Bitcoin and other cryptocurrencies has massive growth potential. Between Jan 1, 2017 and Jan 1, 2018, the S&P 500 grew 22%. That’s an enormous year for the stock market. Over the same time period, Bitcoin grew 1300%. It’s incredible the return on investment a cryptocurrency trader can see.
Admittedly, 2017 was a massive year for Bitcoin and all cryptocurrencies. The Bitcoin stock comparison isn’t exactly fair for 2017. The truth is we don’t yet have enough historical data on Bitcoin to predict average annual returns. 2017 was such an enormous anomaly of a year that we’d be making a mistake to assume all years will be similar.
For the foreseeable future, there’s a good chance many cryptocurrencies will continue to appreciate in value. Blockchain adoption is only accelerating and many projects will become more valuable as it does. The overall growth potential for a long-term investment in crypto far outweighs the potential for stock market investment.
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Volatility
The massive upside and crushing downside are two sides of the same coin when it comes to crypto. Some investors like “high risk, high reward” investments while others prefer lower risk investments. In a bear market, any investments you made at the peak quickly deteriorate. It can be difficult to stomach the losses when you’re holding long-term. More difficult, however, are the losses that never recover.
While blockchain and distributed ledgers are likely to win out in the end, there’s no guarantees that any of the current blockchain projects on the market will end up being successful. Projects that seem like a good idea today could tank next year. This is the reality of long term investing in the crypto space. The challenge is picking winners and staying on top of your investments when things look like they might start to go awry.
That’s a lot of work and risk for a retirement account or college savings plan for your kid. Cryptocurrency investing is still so speculative that it feels incongruous to think about it in the context of retirement or college savings.
Volatility and speculation is a major reason why the traditional stock market still makes sense as an investment vehicle for long-term, predictable returns. Of course, there’s no guarantees there either. If you were planning on retiring in 2009, you probably had to work another 5 years before your portfolio stabilized. On the whole, however, we can predict the stock market much more easily than we can crypto, and it’s rare that a public company’s stock goes to zero.
Diversification
One way to mitigate volatility in long-term investing is diversification. Instead of betting it all on one or a handful of projects, consider buying a small stake in a lot of projects. All it takes is one look at coinmarketcap on an ordinary day to see why this makes sense. At any given time, some projects are gaining while others are losing. Diversification helps you average out the gains and the losses. Sure, it mitigates the massive growth potential, but it also tempers the losses.
Diversifying makes crypto a more attractive investment that still has big upside with less volatility. However, determining which projects to invest in and at what allocation can still be time-consuming. Additionally, you’ll need to rebalance your portfolio regularly so it doesn’t become too heavy on one project. Rebalancing requires going through an exchange with many orders, and that can quickly get expensive. You’ll also need to review your list of projects in your allocation frequently and stay on top of the news about these projects.
Index Investing
A new development in cryptocurrency investment is index funds. These funds track the top cryptocurrencies and automatically rebalance based on market cap. Instead of buying the cryptocurrencies directly, you buy a share in the index fund. This automates much of the process of research and diversification. Instead, you’re now just tracking the overall movement of the cryptocurrency market.
For example, an index fund might own a proportional share of the top 50 cryptocurrencies. If a project begins to slip and falls out of the top 50, the fund automatically sells those coins for whatever new project has entered the top 50. As a result, your assets get spread across 50 different coins and you get exposure to the entire market.
Index investing is popular in the traditional stock market, too. Warren Buffett has praised index investing as the best way for individual investors to take advantage of the total stock market. He has even instructed his own estate to stay 90% invested in an S&P 500 index after he dies. Over the years, the compounding interest of investing in an index for decades will pay massive dividends.
Taxes…
For long-term investors, one serious consideration is reducing your tax liability. In the United States, there’s no tax sheltering for cryptocurrency investments. Every time you sell, you’ll need to pay capital gains taxes on your crypto. Those taxes can seriously eat into your earnings.
On the other hand, the U.S. government (and most governments in the world) offer tax-advantaged accounts for retirement, college savings, and other forms of long-term investing in the stock market. Most people fail to appreciate the level to which taxes should influence your Bitcoin stock market decision.
Each individual’s situation will vary, but take taxes into account when considering the long-term benefits of a given investment strategy.
A Mixed Bag
For most investors interested in long-term cryptocurrency investing, it makes sense to hold a diversified crypto portfolio alongside a diversified stock portfolio. Bitcoin and crypto should be a part of your overall investing strategy. However, don’t neglect the stability and tax advantages of the stock market, and don’t invest more in crypto than you can afford to lose.
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