I will try to provide reasons for and against owning crypto. Then if you decide it should be part of your portfolio you need to answer the following question: How much crypto should you own?

You probably don’t need another person talking crypto to you in 2021 so feel free to stop reading if you’re fed up with the subject 🙂

If you tell me crypto has zero value and has no place in my portfolio I can’t blame you. It’s very high risk. You are an investing adult so you don’t need FCA telling you you can lose all your money. It’s true. Don’t blame me if you buy some and it then goes to zero.

But you can also make a killing if you can stomach it. Maybe.

You may already have 10x your money and thinking:

• Is it time to sell?
• Am I being too greedy or will this do another 10x?

Or

You may be watching from a distance and wondering if you’re too late to the party.

In other words: How much crypto should a portfolio own?

The truth is: nobody knows.

As all assets like stocks and property make all time highs, crypto is no exception. BTC is around $51,000 (£36,000) as I’m writing this and ETH has reached $4,000. Quite a ride if you think £10,000 last year (2020) could buy 106 ETH. This is now worth £300,000 (May ’21).

A story from the Great Depression era (1929):

When Joseph Kenedy sat on a warm leather stool to get his shoes polished, the shoeshine boy talked stocks. The boys didn’t just parrot the latest tips. They owned a piece of the cake.“

If shoeshine boys are giving stock tips, then it’s time to get out of the market.”

Joseph Kennedy sold out his significant portfolio and shorted the market. Subsequently, he banked more on the short sell than in any other business venture.

Although shoe shining is not part of my daily routine I have enough evidence. Here is my 2021 version:

• Friends who were afraid of investing in crypto now going heavy in Bitcoin mining stocks
• Listening to 14-year olds praising bitcoin outside my house
• Elon Musk’s SpaceX launching satellite Doge-1 to the moon next year (literally 😄 )

Where will this rally go?

You can make the case for both arguments.

Crypto is in a massive bubble

The price has gone parabolic. People are shouting “Take my money” as they purchase digital ownership of GIFs that can be downloaded by anyone with a dial-up internet connection (remember those?).

If you have 30x your money, you might start thinking, how high can this go? Trees don’t grow to the sky, the party has to stop at some point.

A friend reminded me that I held some Doge in a private wallet which I bought to test the wallet function and totally forgot about it.  I paid $50 and they’re now worth $2,500. LOL, is this for real?

The bear market after 2017 was painful. BTC climbed up to $20,000 and crashed to around $3,500 2 years later. 80% loss not easy to stomach for those who bought at an all time high!

Of course staying the course paid off big but the ride is not easy. And even if I’m willing to wait, there are no fundamentals to convince me that if I stay the course I will eventually get paid.

Like gold, crypto doesn’t pay an income. There are no quantitative limits. When you own a stock you might say I buy it on 15x earnings or 20x earnings. When you own property that pays £1,500 monthly rent you know that buying it for £100k is too cheap, and £1M is probably too expensive.

But when you buy something that doesn’t produce anything, all bets are off.

Bitcoin makes no sense at $8,000 and it makes the same amount of no sense at $60,000.

Sure more people are using it, more services are built around it, more wallets in circulation etc. So should it be $1,000, $20,000 or $100,000? And why?

The old adage still applies: Be fearful when others are greedy. All I see around me is greed greed greed.

Not to mention the environmental impact for it to operate. In this era of sustainability and ESG investing shouldn’t we be more thoughtful about how we spend our energy? Tesla has just suspended the option to buy a car with Bitcoin, citing environmental concerns.

That stinks to me – as if he didn’t know 2 months ago – but it’s a valid argument nevertheless.

Some coins solved this by switching to a proof-of-stake model. But the environment is worse off when talking Bitcoin which operates a ‘proof-of-work’ model. For the network to operate it needs bitcoin miners. Miners need to buy hardware chips which first of all need energy to manufacture. These chips are purposefully built for the BTC network by the way, they are no good for anything else really.

Then you have power plants where miners host their chips that consume energy to operate. Some of it is renewable like hydro and solar but so what. All this hardware, manufacturing and energy spent on bitcoin.

The Crypto rally is only getting started

Here’s the counterargument. Crypto has a long way to go.

1. Bitcoin has been declared dead 390 times since 2010

While its network security is only getting stronger as more computing power is required to attack it over time. Read this great security modeling article if you’re into it.

But although the initial idea of BTC was to be a peer-to-peer decentralised payment network, it has evolved into a form of ‘digital gold’ over time. Given BTC can only handle 7 transactions per second, the tax overhead for transacting in BTC and some other limitations, it hasn’t evolved much.

A whole new world is emerging in crypto. Crypto is not just BTC.

There are a few new use cases that have a chance to actually make a difference!

2. DeFi

DeFi is accelerating at a massive pace. Decentralised finance is when you don’t need a bank to lend you money or a market maker to perform a trade. Or when you don’t need a central authority like Binance to buy and sell digital goods.

I recently heard of the Internet Computer (Dfinity project) which sounds very promising. The internet is a network of computers. For the info to be displayed, processing needs to happen on a computer. Most companies do this on Amazon (yes, the popular Amazon) which rents out processing power for a profit. Some people don’t know this but that’s actually how Amazon makes most of its profits.

So now with Dfinity you can upload your code on the blockchain and run it on the Internet Computer instead. It’s part of the Web 3.0 movement and it’s very very promising from a tech point of view. There are projects in the DeFi space like Vega that’ll hopefully democratize finance.

3. Proving ownership of digital goods

NFTs (non-fungible tokens). An NFT is a digital proof of ownership that allows collectors to reward creators for their work. Anyone can verify the ownership of a digital good on the Ethereum blockchain.

Owning a digital piece of art or music may actually sound stupid to some, as it’s more a digital bragging right but so what. People pay so much money for collectibles like cards and antiques. You can have fake copies of a popular piece of art that look exactly the same as the original. So there has to be some value to “owning” a digital piece.

NBA has released short clips of slam dunks and other footage as NFTs and people have really paid attention (+ dollars)!  eBay has just said they will allow people to exchange NFTs on their platform.

4. A growing but small percentage of population owns crypto

The crypto market cap is $2.22T much smaller than Gold’s $11 tn one. If BTC is digital gold then if it can match gold’s market cap the price can go a lot higher.

BTC and ETH are emerging asset classes. Suddenly institutions argue whether a 1-2% allocation to crypto can bring higher returns. A small crypto portfolio is even suggested by the big players like JPM that used to make fun of it. The more people want to own one BTC the higher the price. Simple.

There are some pricing models for BTC based on scarcity, activity etc. Based on the popular stock2flow model BTC is on track!

Also check out MVRV Z score if you’re into BTC on chain analytics.

5. TINA: There Is No Alternative

Interest rates are close to zero and inflation is showing up. Savers are punished and are willing to take more risk. Bonds offer a lower reward than usual. People dial up the risk with stocks, crypto etc. Property in the UK is at an all-time high. The average UK house now costs £258,000. That’s £20,000 higher since the first lockdown started.

The safe 10-year bonds that used to yield 6% in 2000 now yield only 0.82%. It’s not surprising that many people seek those returns in riskier assets. More people want a slice of the riskier asset pie naturally driving their prices up (including Bitcoin’s).

Last but not least, the UK government among others, has started exploring the idea of a central bank digital currency. Unlike Bitcoin, they’re controlled by a central authority. And unlike USDC or other stablecoins, they’re not pegged to a currency. They are the currency, just in digital form. That’s not really a catalyst for crypto, but it just shows that their direction is digital.

So as you can see, there are arguments for and against owning crypto. Let’s say you decided to buy crypto, how much crypto should you own?

What is the right amount of crypto to own?

Typically people make crypto decisions like black and white. You either like it or hate it. You either sell everything or HODL forever.

For me the best approach to owning crypto is to decide on a fixed percentage in your portfolio and rebalance every month.

Take too much risk and volatility can kill you. Take too little risk and big returns won’t have the impact you can brag about at cocktail parties.

Let’s talk numbers.

Cathie Wood and ARK Invest have done some backtesting. I read their Big Ideas 2021 report which, by the way, includes some very interesting findings for industries like electric vehicles, automation, 3d printing, DNA sequencing, deep learning and yes, bitcoin.

There are thousands of portfolios in the above picture, some with more BTC than others. Each dot is a portfolio with some crypto in it.

An efficient frontier in finance is this top black line showing what the optimal portfolio is (highest return) for the given level of risk (volatility).

A 2.55% crypto allocation focuses on sleeping well at night.  The red star, (6.55%) is when you want the highest risk-adjusted returns but you should expect a bumpier ride.

Ark suggests:

Based on daily returns across asset classes during the past 10 years, our analysis suggests that allocations to bitcoin should range from 2.55% when minimising volatility to 6.55% when maximising returns.

Apparently if institutions start adding a BTC allocation to their portfolio as per ARK, this could impact Bitcoin’s price by $200,000 to $500,000.

Let’s say you want to own crypto because you think there’s a bright future.

Make up an allocation that you’re comfortable with, say 5% of your portfolio. If your total investments are £100,000 this means you will always have £5,000 in crypto. When crypto goes up then you have to sell some profits in order to reduce your position back to the desired level. Psychologically that’s hard.

But you know what’s harder? Seeing your crypto bleeding and having to buy more.

If crypto drops and you now own only £2,500 of it, you need to “buy the dip” and bring the allocation back to the £5,000 level! That’s the hardest part.

Buying when losing. But a fixed allocation makes sure you always buy low and sell high while having a system to avoid being super emotional. Emotional investing leads to buying high and selling low.

If you’re too worried or stressed out, just drop the allocation percentage until you’re confident you can execute it.

Judging from my experience 5% can be too high for a beginner actually. The drops are sudden and painful.

How much crypto I own

I’m struggling to even call crypto an ‘investment’. It’s certainly in the speculation category in my portfolio.

Personally, I’m going with 5%.

Part of the reason is I used to own crypto back in 2017-18. It was a small amount (~2%) which has naturally become bigger. I recently sold one ETH for $1800 which I had bought for $200. Painful to watch it climb up to $4k! But profit is profit.

So yeah, that’s what I’m doing and it’s within the range that backtesting suggests.

Hopefully this post gives you a framework for owning or avoiding crypto as a new asset class. I want to hear from you! Some good arguments in the comments pls.

Keep it civilised 🙂

Do you run a Limited Company and sit on idle cash earning zero interest? Would you like to learn how taxes and investing works for LTD companies?

The Company Investing Course goes live again 17th May – 14th June. Spaces are going fast. Put your business cash to work.

Related: How to buy crypto through a limited company

UK limited companies can invest in crypto like Bitcoin and Ethereum. Also, HMRC has even given clarity on how cryptocurrencies are taxed (more on that later).

So how do you buy crypto using your business funds? You can do it in three different ways:

1. Use a crypto exchange, like Kraken, suitable for limited companies
2. Use a proxy stock
3. Buy the Bitcoin ETF (not yet available)

Disclaimer: Cryptocurrencies are high risk and very volatile. See this warning issued by the FCA. Buy at your own risk.

With the disclaimers out of the way, let’s go!

1. Use Kraken to buy Bitcoin using your company funds

My go-to way for buying Bitcoin is to buy directly on a crypto exchange, like Kraken.

When it comes to cryptocurrencies there are so many platforms around. But not many platforms offer corporate crypto accounts.

My preferred choice is Kraken. On Kraken, you can open a company account and buy Bitcoin and other cryptocurrencies through your limited company.

The process is not very quick, due to the number of documents they need from your LTD company. If you’ve opened a corporate account for buying stocks & shares then you know what I’m talking about.

It’s not complicated, it just takes a bit of time to gather everything.

So why Kraken? I like that they are a big company and one of the leaders in the crypto space. They have an intuitive interface suitable for both novices and experts.

They also follow high-security standards, such as 2-factor authentication, and have a huge following in the crypto community. That doesn’t prevent them from being hacked but it’s always a good sign.

Note: Coinbase also offers company accounts but you need to get accepted as an “institutional investor”. Not sure they actually accept small businesses – I never heard back from them. I use them for buying crypto on my personal account and here’s my referral sign-up link where we both get a free £7 BTC bonus if you sign up (and thanks!). Kraken offer a lot more crypto pairs than Coinbase and they’re cheaper too.

So let’s see how we can buy some crypto using company money.

Here are the detailed steps and what to look out for.

Step 1: Open a Kraken Business account with Pro limits

Head over to Kraken and click the Create Account button. Make sure you use the Business option, as shown on the image below.

Use your company e-mail if you have one and a strong password.

Kraken will send you an email to activate your account. Once you click the link in the email, you can log in and view the interface.

You then need to verify your business account before you can buy or sell any crypto.

Click on Verify your Business account.

As a UK limited company, you can only sign up for the Kraken Pro account.

This requires full verification but also allows you to use all features that Kraken offers such as earning rewards with staking, NFT trading etc.

It’s free to hold a Kraken business account.

If you just want to buy Bitcoin, Kraken Pro offers that as well at no extra cost.

Step 2: Verify your Business Account

To buy crypto through your limited company you need to complete the verification process. This takes time but has to be done.

There’s nothing complicated about it, though.

Here’s how the verification screen looks like. I will go through the screens one by one.

In section 1, enter your business information, such as LTD company name and full address. In the company registration documents, you will need your Incorporation certificate, which you can find on the companies house page. Search for your company -> Filing History.

In section 2, choose Corporation if you are a UK limited company. Your government-issued business registration is your company number.

In Section 3, you need to provide the source of funds. In other words, where did this money come from?

Depending on your business, the source of funds will vary.

For example, one could say that ‘The business acts as a proprietary investing firm, investing its own funds. I am the sole director. The funds come from my technology consultancy services.‘.

Be specific about the "Source of funds", even specifying names of your other business (if so) that generated the funds. This will avoid unnecessary questions over email.

Section 4 asks why you want an account.

Spot means the plain crypto service for buying and selling coins. It’s called ‘spot’ to differentiate between other more complex products such as futures/options.

Section 5 wants to know your company structure and who controls the kraken account.

If you own 100% of the investment company and you declare you maintain control over the company, then the beneficial ownership info is redundant. You are the beneficial owner.

Well, that’s all you need to know about the Kraken business verification process.

You now submit everything and wait.

The Kraken verification process took 2 weeks for me. They asked a few more questions over email, such as ‘why is there no website for your business’. They also wanted to make sure I do not invest US client money, which I don’t.

After about 2 weeks I got an email saying my business account is ready to go.

Kraken pros and cons for limited companies

Pros:

• Fiat to crypto deposits (GBP)
• Easy to sign-up
• Low cost and well established

Cons:

• Risk of exchange hack or losing your keys (if you take coins to your own wallet)
• Another platform to maintain
• Risk of bank account getting frozen because crypto transactions can be easily flagged

2. Use a Bitcoin Proxy Stock

You can own a stock which behaves like Bitcoin if all you need is price action.

This is particularly useful if you already have a company account with Interactive Brokers or with another broker.

This method won’t give you self-custody. So you cannot own the coins. But you own a public stock which owns the coins.

The closest match to a public company with Bitcoin characteristics is MicroStrategy, on Nasdaq (ticker: MSTR). Since holding the majority of its reserves in actual Bitcoin, it behaves as if you’re investing in Bitcoin itself.

As you can see, owning MicroStrategy is similar but not exactly the same as owning Bitcoin. Some drift is expected. After all, you own an operating company with humans behind the driving wheel, some debt etc.

Note that this will only give you Bitcoin price characteristics, not altcoin exposure.

Other options include owning other crypto stocks like Coinbase or crypto mining stocks. But I found Microstrategy to be the closest match to Bitcoin for UK limited companies.

3. Use the Bitcoin ETF (not yet approved)

You can invest in Bitcoin through your limited company by buying the Bitcoin ETF.

The retail version of a Bitcoin ETF is not yet available.

I expect this will be the most popular way to own the bitcoin price action, but it will come with some fees versus self-custody. You pay some fees for convenience and you do not own the private keys to your coins.

Contrary to the common belief, I think it might actually be safer for the ordinary person to hold bitcoin. I have heard many stories of hardware wallet getting lost, passphrase lost or eaten by the dog, people getting hacked or scammed and as a result, losing their cold storage bitcoin.

How cryptocurrencies like Bitcoin are taxed for UK limited companies

That’s the first question that comes to mind before purchasing. What tax do I pay on the bitcoin I bought through my limited company? What if I made a loss?

HMRC have now provided great clarity given how popular cryptos are lately! Perhaps HMRC employees are hodlers too. Reading.

If the activity concerning the exchange token is not a trading activity, and is not charged to Corporation Tax in another way (such as the non-trading loan relationship or intangible fixed asset rules) then the activity will be the disposal of a capital asset and any gain that arises from the disposal would typically be charged to Corporation Tax as a chargeable gain.

The main gist of it is that yes, you need to pay corporation tax on the profits. Similarly to most investments made through a limited company, only the tax gain part is subject to tax. In other words, if you bought £100 and sold £120, you need to pay 19% tax on £20 = £3.8.

You pay tax only in the tax year that you sold the investment, not if you just hold it.

Clever me thought: Ok, if I want out, I’ll just exchange BTC to USDT (the dollar equivalent “crypto”) and not pay any tax, ever, unless I withdraw fiat. USDT is crypto after all. But no, you need to pay tax even if you exchange crypto for another crypto. That’s considered disposal too!

Not bad if you’ve made a fortune on Bitcoin but still subject to tax.

There are some special rules for short-term trading (<30 days). See pooling rules – Exercise for the reader.

Reminder: If you are an individual, you’d still need to pay capital gains taxes on your crypto profits. That’s 10% tax (basic rate taxpayer) or 20% tax if you’re a higher/additional rate taxpayer.

Further reading:

• Cryptocurrency taxation for a UK limited company (HMRC, see corporation tax section)
• Cryptocurrency taxes for individuals (HMRC)

Happy crypto investing. I’d be interested in knowing your % of net worth allocated to crypto (before and after 2021!). Mine is just over 2%.

FAQ

Be careful with crypto and as always, do your own research!

If you liked this article, feel free to share it with someone who owns a Limited Company and told you “I told you so” in 2017.

If you follow this life-hacking blog you probably know that I hate paying high premiums. The market frenzy around cryptocurrencies has led exchanges to charge very high fees and rip off customers. Time to change all that!

Technically, you can follow this guide to buy Ethereum, Bitcoin, Bitcoin Cash and Litecoin without paying any fees whatsoever. What you see is what you get.

Be careful though. I only treat it as a small gamble and I’m prepared to lose everything. This is not investment advice and you should do your own research before buying any cryptocurrencies. They are speculative investments and are very risky! I’ve written my thoughts on crypto here.

Let’s now see how we can buy Ethereum as an example.

The simplest option is to follow what everyone else is doing. Sign up for Coinbase, top up the account using your debit card and hit the Buy button. If you sign up using this link we both get $10 worth of free bitcoins. I won’t blame you since this is the most hassle-free choice but it will cost you 4% in fees. If you’re buying a small amount of crypto maybe that’s ok, but for large amounts, percentage fees hurt!

For those of us who want the more advanced but cheapest option to buy Ethereum and other crypto, read below.

Cheapest way to buy Ethereum in the UK

1. Sign up for Coinbase
2. (UK only) Transfer funds to Revolut
3. Make a bank transfer to Coinbase
4. Move the money from Coinbase to Coinbase Pro
5. Buy Ethereum using a limit order for a 0.50% fee

Step 1: Sign up for Coinbase

The only reason we need to sign up for Coinbase is to use their Coinbase Pro exchange. This is the interface advanced users use to buy and sell Ethereum, Bitcoin and Litecoin every day. In other words, they trade on Coinbase Pro.

Why Coinbase? They’re one of the biggest well-known exchanges and they’ve been around for many years. It’s also a public company listed in the US stock exchange.

Coinbase Pro and Coinbase are the same company and you can transfer money between those two instantly and for free. After you sign up for Coinbase, they’ll ask you for a proof of ID. The verification took a day for me to complete.

[UK only] Step 2: Transfer funds to Revolut

In the UK, banks may block transfers to crypto exchanges such as Coinbase and Binance.

I use Revolut to transfer funds to Coinbase.

Your bank -> Revolut -> Coinbase.

Revolut is a free mobile app / bank but built for the 20th century. You can open one instantly online which also gives you the option to exchange from GBP -> EUR at market rates. Plus, they will give you a EUR IBAN so you can deposit money to Coinbase as if you’re a EUR account holder if you want.

I initially thought that perhaps you can also use Transferwise to deposit EUR at Coinbase. However, many Reddit users warned me that Transferwise doesn’t allow deposits to crypto exchanges. It’s a shame because Transferwise is awesome. I really like the work they’re doing. That’s what I used for my NY trip earlier in 2017.

Step 3: Make a bank transfer to Coinbase

Time to finally load up Coinbase.

Make a bank transfer from your Revolut (or EUR or USD bank) to the Coinbase account bank. When making the transfer, make sure you type in the reference number you were given.

Otherwise, you’ll have to deal with the Coinbase customer service to find out why your money is not there yet…

If you have a Revolut app, you can make a transfer like this: From the main screen click on the Payments icon -> To Bank account and fill in the recipient bank details. Do not forget to add the reference number.

You can always send a small amount like 10€ first to test the waters and once you’re confident enough send the real amount. The money showed up in my Coinbase account a few hours after the bank transfer.

Step 4: Move the money from Coinbase to Coinbase Pro

We will be using Coinbase PRO to buy Ethereum without fees. Therefore, we need to move the money from Coinbase to Coinbase PRO once the bank transfer completes. As mentioned earlier, Coinbase PRO is the same company as Coinbase and they share accounts. No need to register again.

Step 5: Buy Ethereum using a LIMIT order

Now that you have your money on Coinbase PRO a limit order costs 0.50% in fees. What’s a limit order? You basically place an order that says: “I want to buy X Ethereum when the price drops to Y”. Let’s say I want to buy 0.5 Ethereum.

I selected the LIMIT from the buy options and typed in the amount of ETH I want to buy.

As you can see, 637.80 is the price people want to buy at and 638.03 is the price people want to sell. To have your order filled as soon as possible, type in the green top price.

That’s it! After a few seconds, your order will be filled and you will be 0.5 Eth richer :)

What if I want to buy other cryptocurrencies (Monero, Dash etc)?

Coinbase PRO only supports a few cryptocurrencies. However, there is an awesome service called Shapeshift.io where you can exchange your coins for other coins.

You only pay the miner fee which is typically less than a cent.

You send your coin from Coinbase PRO to Shapeshift and they transform it to your desired coin, sending it to your wallet address.

However, this assumes you have your own wallet!

If you don’t know what this means or can’t be bothered, just sign up to Binance which is an exchange that has hundreds of cryptocurrencies and very low fees.

If you prefer to buy via an actual exchange like Coinbase PRO, sign up to Binance that lists hundreds of coins. It doesn’t require verification and it’s pretty cheap (0.075% fee per trade).

This is actually one of the cheapest ways to buy Ethereum in the UK.

If you make a few trades per day then Coinbase PRO 0.50% fee might be too expensive for you. Better deposit GBP directly to Binance (sign up using my link and we will get back some free BNB coins when trading).

Thoughts

You can repeat the above limit orders for buying Bitcoin cash, Bitcoin and Litecoin. This is a great way to buy or sell your cryptos.

Of course, it’s not the most convenient thing to go through, but once you’re verified at Coinbase and have some funds in it, then it’s the best way to buy Ethereum.

Only buy using the money you can afford to lose. Cryptocurrencies are very risky and very volatile. This article is not investment advice. Do your own research!

If you’re looking to make some money on the side, check out my Matched Betting series for a risk-free profit. No betting experience required.

In 1630, the Dutch imported tulips from Turkey. Beautiful flowers as they are, tulips began to become popular in Holland.

The Dutch started paying a premium for owning those rare flowers. But after a while, a virus hit the flowers changing their appearance and giving them ‘flames’ in colour. This helped to increase the price of the flower.

As a result, more and more people started paying multiples of the initial tulip price. Governed by the fear of missing out, people started selling their assets to buy tulips. This resulted in an extreme boom for the tulip price which was once sold for the price of a luxury home (!).

Since no one was willing to pay more for a single tulip, a decline followed. The madness had to stop. People started selling their tulips in a frenzy mode and despite offering lower prices, no buyers were willing to pay any higher for a flower. Fortunes were lost in the so-called “Tulipmania bubble”.

This story my friends reminds me of today’s crypto-world. We see an extreme increase in the price of digital coins which were once trading for next to nothing. If I remember right, one of the first transactions were two Papa John pizzas bought for 10,000 bitcoins – $80 million dollars if the pizza boy held on their bitcoins!

Bubbles usually occur when people don’t look at the intrinsic value of the asset. They buy assets simply because they’ll definitely sell it soon to other people for a higher price. It always goes up after all!

If you’re interested in economic bubbles, like I am, have a read of the South Sea bubble (1711), the Florida real estate bubble (1929) or look no further than our own 2008 mortgage-backed securities ;)

But let’s take it from the beginning.

What is Bitcoin?

Back in 2008, our wonderful banking system failed us all. This led to a financial crisis that was so strong people lost faith in the system.

And a new crypto-world emerged from that. Satoshi Nakamoto created a digital coin called Bitcoin. It’s worth mentioning that nobody knows if Satoshi is a real person, a team or a mysterious nickname. As the legend has it, Satoshi remained anonymous similar to how anonymity is preserved when making Bitcoin transactions. See what they did there? ;)

So Bitcoin is a currency living on the internet and can be traded globally almost for free. A businessman in the US can send bitcoin money to some Lithuanian software developer instantly and without costs.

This strong network of computers around the world operates these transactions and anyone can join. Those computers are called miners. They also help discover new bitcoins by solving complex math problems. For mining and for helping with validating transactions, miners are rewarded with Bitcoins.

Blockchain is the technology behind Bitcoin, and you can think of it as the history of all transactions that have ever happened. Every computer in the Bitcoin network knows about all the valid transactions that took place and will be stored there forever. If you think about it for a while, you can find other interesting use cases, apart from money. Storing, for example, all the legal transactions between property owners!

Why Bitcoin?

Since everyone buys and sells in bitcoins there is no need for foreign exchanges, middlemen and more importantly, failing banks!

When sending money across the globe, and especially small amounts the fees are so high that is really not worth doing. Bitcoin can be traded around the world very cheaply and everyone can hold the same currency.

Bitcoin, also, cannot be controlled by any government. The amount of GBP (£) floating around in Britain is controlled by the central bank.

A committee decides whether we should print more or less money depending on the current economy. Here’s an excellent video on how the economic machine works by Ray Dalio. You may have heard of “The Fed” in the US which is really controlling these complex monetary policies.

The central bank also operates fractional banking. This means that they only hold a small percentage of your customer deposits, say 10%, and they lend your other 90% to people and businesses in order to boost the economy and make profit.

With Bitcoin, THERE IS no government! Noone says we should create more bitcoins and inflate or deflate the currency. More coins are created in a stable and predictable way according to a predefined algorithm that cannot change.

only $21 million coins can ever be created! Sort of like… Gold

Which is what drives people crazy. If there is a limited supply of coins, each coin will be extremely valuable if the demand increases.

Speaking of gold, gold is a precious metal that so many generations have used to store their wealth. Because of its physical nature and limited supply, gold can preserve its value over time.

During 27 B.C, Roman Centurions were paid around 40 ounces of gold per year.40 ounces of gold today is worth around $46,000 – the equivalent of what a US Army captain is paid today! Same amount of gold 2,000 years ago, same amount of gold as salary today.

People call Bitcoin “digital gold” because it has similar properties and can also be traded on the internet.

So there you have it. Cryptocurrency is becoming more and more popular today. One global currency, history of all transactions, decentralized nature without governments involved and no bank fees.

Everyone says Bitcoin is a bubble

Things become more interesting when the value of the recent cryptocurrencies is going crazy. In October, a single Bitcoin was worth $7,000, in November it’s worth $11,000!

Had you bought $100 worth of bitcoins in 2010, you would now be $75 million richer ;)

In fact, the volume of crypto transactions has become so big that CME, a big financial organization announced it will soon allow Bitcoin futures trading on its platform. NASDAQ, the famous stock exchange will support Bitcoin futures in 2018 too.

Of course, whoever states this doesn’t say the obvious: You should hold onto your bitcoins throughout these years to realise some gains. It must have been so easy to sell your bitcoins for a loss, let’s say in 2014 when for many years nothing is happening.

As you can see from this graph, Bitcoin’s growth makes the Tulip bubble look like a US treasury bond.

We have not seen something like this before and whether a Bitcoin supporter or not you’ll have to admit history broke a new record here.

To understand if Bitcoin is a bubble we have to see what previous bubbles consist of. The data will tell us.

Bubbles consist of 4 things:

• Extreme increases in price of an asset (high volatility)
• Buzz, fear of missing out
• Euphoria
• No real connection between the selling asset price and its true price. Would you pay £100k for a tulip?

Looks like there isn’t a better candidate than our Bitcoin version 2017. Everyone talks about it and everyone thinks it’s a bubble. So why doesn’t it burst then? This is an interesting question.

Should I buy some cryptocurrency? Maybe buy Ethereum?

The recent increases in cryptocurrency prices make it even scarier to enter the market at its peak. An even trickier challenge is to try to evaluate a bitcoin. How much should it be worth? Should it cost $100 or $100,000? Why?

How do you know if Bitcoin is too expensive or too cheap at this point to make a rational decision on whether to buy?

In case of stocks, a simple valuation would be to take its future dividends paid at present time. That’s how much the stock is worth. In plain terms, you kind of know that if the company keeps earning at this rate, you will get a share of the profits back.

A pack of tomatoes costs £2.50. If you go to the supermarket and tomatoes today cost £4.00 you’ll say “no, thanks” and wait until they become cheaper again.

In case of a digital coin, there is no way to calculate what the intrinsic value of a digital coin should be. Also, the internet world has not adopted cryptocurrencies yet. Therefore, the only way to spend them is to sell them and spend dollars instead!

Buying Bitcoins is Like going to the supermarket and buying tomatoes without a price tag, knowing that you cannot eat them, but only sell them later on!

Even if you believe in the blockchain which I’m a strong supporter of, the dust needs to settle first. The Blockchain is an amazing technology which can improve the world like the internet did.

Property owners will only have to agree on blockchain upon selling their house and the validity will be there for everyone to see. It can help fight fraud and make this terrible bureaucratic process simpler.

Speaking of agreements, Ethereum is another interesting technology built on Blockchain. According to its philosophy, connected computers around the world run “smart contracts” which are agreements between two parties without any middleman or any intervention. Imagine you place a bet with your friend and the computers will pay someone the winnings after a game finishes.

But Michael, you’re still not answering. SHOULD I BUY BITCOINS?

You probably shouldn’t buy any cryptocurrency yet unless you see it as a gamble. It’s like going to the casino at this moment. Even Jack Bogle said “Avoid Bitcoin like the plague”.

The Crypto world is very immature yet and digital exchange wallets get hacked one after the other. Tip: The recommended way to store your coins is to buy a hardware wallet like Trezor. I’m not going to spend £80 though for storing £500 worth of crypto but good to know.

Oops! I just said I bought some. That’s just play money though to keep myself entertained and if I lose everything it won’t bother me much. I used the Coinbase exchange (invite link where we both get $10 / £7 if you buy at least £100). You don’t need $10,000 to buy bitcoins, you can still buy a fraction of it.

Here’s the step-by-step process I followed to buy Bitcoin and Ethereum without paying any fees.

But what about the smaller coins? Bitcoin is just too expensive. I really liked this tweet: Bitcoin sneezes, altcoins catch a cold.

Simply put, there is a high correlation in price between Bitcoin and other coins like Litecoin, Ethereum, Monero etc. Buying these doesn’t really diversify much, as the prices move up and down very similarly. However, if a use case is found for one coin this will skyrocket its price so I see some value in that.

I believe 2018 will be a very interesting year for cryptocurrencies. The US Fed may create its own crypto coin, the price will crash and rise again, and the governments will want their fine cut. I plan to write a more detailed article on how to actually buy cryptocurrency without paying any fees. What are your thoughts? Have you bought any?

If you’re looking to make some risk-free money on the side, check out my Matched Betting series. No betting experience required.

Interesting articles and Resources:

• Kevin Rose Show: Bitcoin’s true potential
• Bloomberg | Nasdaq to launch Bitcoin futures in 2018
• Bitcoin original paper
• Investopedia | 5 steps of a bubble
• Coinbase Bitcoin exchange
• How to buy Ethereum without paying any fees in the UK, US and Europe

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