There are vast new and rich lands for the taking and there's literally never been a time in history when the average person could stake their claim on a new territory so easily. And, the rewards can be huge. People are literally becoming billionaires from dog coins.
However, there are also thousands of people getting scammed and losing their life savings. I don’t want you to be one of those people. This is the reason why I want to talk to you about how to enter the crypto wild west safely and intelligently, maximizing your chances of massive and potentially life changing long-term profitable returns.
To be clear, I am not going to talk about the next shitcoin that will give you 20x returns in 20 days. Instead, I will talk about building real long-term wealth, but still compounding at annual rates that are insane and unlikely to ever come around again.
Please note, this advice is relevant for you IF you’re financially doing alright already, you have your expenses covered and you have savings and are thinking long-term. Again, no 20x in 20 days stuff here, this is to help you get set up correctly for the next 5 years.
1. Portfolio Construction
How much to invest?
Deciding how much to invest is a very personal decision that you should make. There is no single amount of dollar to invest. When deciding how much to invest, you should consider the following:
- Comfort level. Ask yourself, are you going to lose sleep over this money if you put it into crypto? Crypto is volatile, it changes by five percent almost everyday. Would you be able to sleep at night despite the volatility? If the answer is no, then lower the amount that you are going to invest to the level that you are comfortable with.
- Your finances. What is your current financial situation? Only invest what you can afford to lose. If most of your income is going to your expenses right now, you probably can’t afford to put that much into crypto. The amount that you’ll invest is going to be lower but that’s still okay.
- Your time horizon. To keep it short, I recommend that you don’t think of anything less than three years as a minimum or up to five years. Personally, I am thinking of this as a ten-year thing. I will be moving in and out of the crypto market during that time but when I think about maximizing the returns of my investments, my estimate is it would take around 10 years.
Concentration vs. Diversification
We know that concentration builds wealth. How you get rich is by concentrating. Take a look at the richest people in the world, they don’t get there by investing in the S&P 500 and diversifying their wealth, they get there by investing all their time and energy and all their capital as well up to the point of being bankrupt like Elon Musk. They concentrate and take one really big risk that pays off exponentially.
You need to concentrate. We are talking about building wealth here, we are not talking about diversifying and just keeping things stable.
If you are going to invest in crypto, you are taking a really big risk so what’s the rest of your life looking like? The specific things that you want to watch out for are:
- Source of Income: What is your income stream right now? Is it a pension that is guaranteed for life? A government job which is not guaranteed for life but is considered very stable? Are you working a risky job where the income is much more variable or are you just starting out a business where the cash flow is not as stable?
- Risks. Where are you taking risks in your life right now? If you start taking risks in too many areas of your life, you could actually cascade when one starts to go bad and you need to withdraw income from one of your investments to pay off the costs of the “risk” that went bad for you. That is how people get wiped out. Your objective here is to NOT get wiped out.
At this point in time, we are concentrating our risks so what you need to do is to concentrate your risk heavily into what is going to pay off the most.
For example, if you have an Amazon business that you are growing rapidly. It’s very profitable and you need more money for inventory. If this is the case, your risk is already concentrated in your business so you need to be careful in taking another risk in crypto.
On the other hand, if you have a stable income and you are not taking any financial risks in your life right now then you could afford to take a huge risk in crypto. I am not saying you should but this is how I am thinking around this.
Entry: Timing the Market vs. DCA
This simply means “when to buy” and “what strategy should you use when you choose to buy”. You can DCA (dollar cost average) which means you are investing in a way where you are just putting a fixed amount of money routinely, it could either be weekly, monthly, or every couple of months. You are regulating it so that you don’t have to get caught in the ups and downs, you don’t have to get caught up trying to time the market and you don’t even have to spend time following the markets all the time. This is a great strategy for beginners but I personally don’t do this. What I recommend that you do is Risk adjusted DCA.
Although, I must mention that this still depends on your cash flow. If you have a regular cash flow coming in, then you can definitely DCA. In my case, I had a liquidity event so I have a bunch of money sitting in my account but I don’t have much cash flow coming in.
Risk adjusted DCA
Ben Cowen talks about risk levels. Understanding that sometimes, crypto shoots up which means it’s not a great time to buy. Historically speaking, that’s a bad time to buy because it’s generally just going to come back down to the mean. It cannot keep shooting up forever, it will eventually come down to a lower level and sit around there for a while before it makes the next leg up.
Overall, I can tell when things are cool or when things are really heated up. When things are really heated up, I will not buy. I will only buy during the dips.
The last dip was back in May - July, during that time, the Bitcoin price went from $60K down to $30K - $40K where it just kept bouncing around. At this point in time, I was DCA-ing — but only during that period of time.
You can mix and match those strategies and pick which one suits you best. What I don’t recommend is FOMO-ing.
FOMO simply means fear of missing out. For example, the crypto prices are shooting up and you feel like you need to get all your money in crypto right away. This is not a great strategy because things are going to cool down eventually and the prices will go down. When this happens, you will probably be sitting at a loss for a while and this will not make you feel good. This is also not financially smart because you will be buying at the wrong times.
I can’t talk about this in detail because this will depend on where you live and the tax regime that you live under. You need to do your own research for taxes but keep in mind that it will probably not affect your timing of buying but it will definitely affect your timing of selling.
In general, there is going to be some sort of capital gains tax liability. For example, you make a gain of $10,000 on your investment. Until you sell, you don’t have to pay any tax on that gain.
Don’t quote me on specifics but a lot of jurisdictions will have a discount so that if you hold your asset for more than 12 months, you actually pay less taxes on that gain when you do sell it. What that means is that you are incentivized to hold these assets for more than 12 months so you end up paying a lower rate of tax.
Please, do your own research for your own taxes and what you have to pay. When and whether it changes for the time period, and when it does change, keep in mind that it shouldn’t change how you buy these things but it will change how you sell them.
What coins to buy?
Keeping in mind that we’re talking long term here, my advice would be to have most of your portfolio in the “blue chips” of crypto. That’s going to be:
If you have given yourself the luxury of thinking for the long term and you’re doing this relatively hands-off like me, I would say put the majority of your investment in these two coins.
As a generalized advice (not financial advice), what I’ll be doing if I am in your shoes is to put 75% of my portfolio into Bitcoin and Ethereum divided almost equally between the two.
Historically speaking, if you want more return and you’re okay with more risks, Ethereum has been better than Bitcoin. If you want less return and less risks, then you should buy more Bitcoin than Ethereum. Either way, they are both good.
For the remaining 25% of your portfolio, that is where you have the room to speculate on other Alt coins. Keep in mind that crypto is very narrative driven, certain types of coins will be very cool for a certain period of time and then people eventually lose attention in that area.
NFTs, Metaverse, and gaming are big but they all go through these cycles, so with that remaining minority of your portfolio is where you can allow yourself to get sucked into them. I am not saying that they are not lucrative, it is. However, it’s also very high risk. Having been a witness to the crypto market for the past seven years, I’ve seen a lot of ones that look really good at a particular time and they never look good again. They just slowly fade away…
I know with a pretty high degree of confidence that if I could just own a perceived piece of the crypto market right now, that piece will be a lot more than it is today in 10 years.
Be a little skeptical about it, I probably wouldn’t invest much in dog coins like DOGE or SHIB.
Keep in mind that it’s not just about what you’re buying, it’s also about:
- How you’re managing your risks
- How your managing your time horizons
2. Stable Coins — how do they fit in this investment strategy?
What I consider stable coins to be as cash equivalents. You need cash in your portfolio because you need cash to pay for the basic things in life. You need to have something that is liquid and you know that you can spend it whenever you need to.
You need to have a safety buffer. I am conservative so my safety buffer has always been very high so that I can take risks in the other areas in which I want to take risks and I’ll still have that very safe core that I could always come back to.
The stable coins are going to be:
- USDT (though I don’t really like it)
I consider USDC to be much more safe than USDT.
In today’s day and age and in the monetary and macroeconomic environment that we’re living in, inflation is a real thing.
Inflation is an indirect tax on you. The more cash that you have in the bank, the more you are being indirectly taxed by the government or the organization that is printing money. They are taking away your wealth and they are spending it on themselves. That is the overall picture of how it actually works.
Right now, the stated inflation rate is around 5% but it’s really not that simple of a number. I consider the inflation rate to be around 10% right now.
For example, if you have $100,000 worth of cash in the bank right now, you are losing 10% of real purchasing power. That is a significant tax and I don’t want to have to pay that if I have to. This is where stable coins come in. I am now considering a stable coin to be a potentially better alternative to having some of my cash in a form that is still stable and liquid, and I can still pull it out and convert it back to dollars to pay for my things if needed. But, instead of generating 0.1% like US dollars do, stable coins can earn you 10% interest which means you are balancing out the inflation rate with the interest rate that you’re earning from your stable coins.
What I recommend you do with stable coins is move in and out of the stable coin if you are doing an active or a semi-active trading strategy with crypto. When you decide to sell crypto, instead of just selling and converting to dollars, you can sell that into a stable coin and leave it to earn interest until things cool down again. You can then convert the stable coins back to crypto when things cool down.
Conceptually, the way you want to think about this is there are two different worlds. The real world and the other one is the crypto world.
The real world is already explored. It already has all these rules and regulations which will come to the wild west but that will happen over time.
The crypto world is where all the gains are, this is where these life-changing returns are. That’s the wild west. Since the wild west is where the gains are, you want to keep as much as you can in there. Yes, it’s crazy and it is risky but the more you keep there, then the less the real world inflation is going to eat away your wealth which you are working so hard to generate.
By the way, I have a video about how I am using Celsius to generate yields. Their rate fluctuates between 8% - 12% per year on whatever USDC deposits that you have with them.
3. Loans and Leverage
How can you use loans and debts responsibly to maximize your overall returns? We already know that the inflation rate is at least 5% - 10% which means if you have cash sitting in the bank, that money is losing 5% - 10% of its purchasing power per year.
However, when you take out a loan now, the situation is reversed. What happens is when you borrow $100,000 in the bank with an interest rate of 1%, you’ll have to pay back 1% of the money owed from the bank per year. Now, inflation is on your side and it’s helping you. You are now paying back less and less in purchasing power per year.
In other words, inflation is starting to eat away your debt. Over time, you are owing less and less real money.
When I figured this out, I realized that leverage and debt is a really powerful tool IF used wisely.
Now, how does this affect you if you have a portfolio of cryptocurrencies and how does this affect your investment strategy?
- You can leverage debt so that you don’t have to sell your crypto at the wrong time. For example, if you are a person with an Amazon business and you need additional capital, you don’t have to sell your crypto to cover the additional expenses. What you can do instead is to take out a loan on Bitcoin to cover additional capital that you need. Be VERY careful with this. This is not a beginner strategy but an intelligent strategy. I am just giving you the tools to be able to do this and make a use of it for yourself.
- You are not going to realize capital gains because you haven’t sold your crypto. Since you took out a loan instead of selling your crypto, you don’t have to pay the capital gains tax yet.
Again, you have to be VERY careful with this strategy but if you want to get a long-term loan at a very low interest rate, Celsius offers 1% interest rate loans. We know that the inflation rate is at 10% and you’re paying 1% interest rate so you are actually getting a margin of 9% on that loan which means you are paying 9% less each year.
Leverage is a tool that is very powerful so I have to remind you again to please be very careful with it and use it intelligently.
Risks in Cryptocurrency Investing:
- Liquidity Risk. Are you investing in something that is highly liquid? If you decide to sell your crypto if something bad happens or if you want to take profits, are you actually able to get out of it? If you are buying an alt coin that is not a top coin at all and has a really tiny market cap, be aware that if you buy a lot of it you may be able to make paper profit but you might not be able to exit when you want to.
- Smart Contract Risks. When you’re looking at which cryptos you want to invest in, understand that all of these things are programmatic. They are a bunch of codes and contracts. There are risks that those contracts or those codes are going to break down so be very careful when you’re putting money into these things. The smaller the project is, the least time that it’s been around, the more risky it is.
- Counter-party Risks. Here, the first thing that comes to mind are rug pulls. When you’re investing in smaller coins, you need to know who the actual team behind the project is. Check out the team behind the project, are they anonymous or do they have a legitimate history of working in the industry. You need to consider these things when you’re investing into smaller coins.
- Price Risk. You are investing in something now, there is always a risk that the price will come down. In smaller cryptos, the price risk goes up a lot.
- Theft, Hacks, Phishing attacks.
Three rules that you can use to navigate through the risks of the crypto wild-west:
- Spend time to understand the risks, not just the possible gains.
- Don’t invest what you can’t afford to lose.
- You're responsible for the risks that you take.