This is a question which I am asking myself with increasing frequency, especially since the start of Q3 2019.
When I first started investing in crypto, I thought that I knew the answer: more than about 2% of your portfolio value in crypto is a bad idea.
I have been an adherent of the ” invest 1% of your net worth in crypto” principle. It makes sense: you’re putting in an affordable amount, an amount that you can lose without significantly disadvantaging your life, and an amount that is enough to significantly grow your wealth if BTC really takes off.
But now I am doubting that logic.
Reality has been hitting uncomfortably close to home this month. My portfolio value is growing, but only in my local currency.
I like a diverse portfolio, and mine is fairly diverse, but still rather traditional in construction. Over 50% of my investments are still sitting in an array of high-yield local fiat vehicles. 20 years ago this would have been a recipe for success – it’s most certainly how I was taught and what I was always advised to do. In fact, it’s still what financial advisers would recommend. The last time I consulted and invested through a finance professional was less than a year ago, and that’s still very much the tune that he was singing.
Perhaps because I am from Generation X it’s hard for me to think outside those terms. To me a cushion of growing fiat money still represents “safety”. I imagine that it’s possibly easier for younger people to think outside the traditional box in this regard, though the mainstream advice which they would be getting is probably much the same as what I get.
My crypto holdings have gained value this year (despite the bad altcoin market), my shares (which I streamlined mainly towards precious metals over the course of the last year) have done excellently and my physical precious metals holdings are finally waking up and making me money. Thanks to those, and some growth of my fiat, I have seen rapid growth of my wealth – but mainly in local terms. The sad truth is that with so much value in fiat, I am struggling to gain value in USD at all. As fast as I gain value in crypto and metals, my fiat depreciates against the dollar, and because I have most of my wealth in fiat, even a small depreciation costs me a lot.
I’ve grown my wealth by 20% in the last 6 months – in local currency, but only by 10% in USD. I know that sounds good (hell, most pro investors would kill for that), but I’m not happy with it, and here’s why:
Sitting with so much fiat I am very exposed to market fluctuations based on the political and economic situation of my home country and of the world in general. Two weeks ago my 10% USD gain was a 15% gain. I lost about 5% of my entire portfolio value (in USD) within two weeks – DESPITE climbs in crypto and precious metals. That’s a scary reminder of just how fast my portfolio can devalue. It also shows how the more volatile assets like crypto are not alone in their power to rapidly eat into the value of your portfolio when they turn bearish.
There is another consideration: The general trend of precious metals prices is an upwards one: they increase in value against USD. The general trend of my local currency is the exact opposite. Normally this doesn’t matter too much, as the interest I can gain on fiat holdings negates their devaluation and still makes me a small profit, but this is no longer the case.
At this stage you may wonder: “why not just transfer your fiat holdings into USD then?” Well, it’s inconvenient and a little costly to do so. I still need fiat for my daily transactions, so I still need a local fiat buffer. But the real reason is that USD doesn’t look healthy in the long-term either.
As many of us have been predicting for some time now, the economic house of cards that the world is built upon has become exceptionally fragile. It’s precariously balanced on a base made up of a trade war, a weakening and splitting European economic bloc, negative interest rates, quantitative easing and lending rate cuts, spiralling national debt which dwarfs GDP, and derivatives, derivatives and more derivatives. Options, futures, funds, shorts – everything BUT the underlying assets. The financial world is dealing in so many assets with zero inherent value, that the underlying assets themselves no longer even feature! And they have the gall to criticise crypto for having “no inherent value”… (which I can prove is false)
The collapse of fiat structures is looking uncomfortable close, closer and possibly more severe than I even had imagined. At this stage I doubt that this will be the end of fiat as we know it. Unfortunately, this is all happening a little too early for crypto to just step in and pick up the slack, crypto adoption has not yet reached that level of mainstream use and trust. This means that fiat will rise again and that it will probably only be after the following big crash that crypto picks up the slack.
It’s not to say that that following big crash won’t happen soon after the one which is about to happen. It’s hardly been a decade since the last semi-decent sized market crash. With another one already on the cards, it is clear that the entire shaky system is just rebuilding itself on its former ruins each time – thereby creating an increasingly shaky base – and consequently guaranteeing that each successive crash will not be too far off. In addition to this, each crash of fiat, its related markets and its plethora of derivative assets is another boost for cryptocurrencies.
Even mainstream investors can now see that Bitcoin is fast becoming a replacement for Gold, or at least an alternative to it. This is not to say that Bitcoin won’t dip in price when markets crash, but like most BTC dips, that will be a temporary one – a desperate rush out of stored value in order to try to prop up the failing fiat-based assets. It’s ludicrously stupid and doomed to fail, but it happens; just take a look at what happened to the prices of precious metals in 2008: Gold lost 30% of its value, Silver lost 60%, Platinum lost 67%. Admittedly most bounced back within a year – faster and harder than the stock markets did.
Don’t get me wrong, I still support investing in Gold (and other precious metals). My macroeconomic opinion of the 2008 crash was that it was more a correction than a crash. The problem with such a correction is that it delays the inevitable: the BIG crash will still happen – only now it’s going to be even more severe when it does. As I said earlier, I don’t know if what we’re seeing now is the start of such a crash, or perhaps just another mini-crash/correction.
Either way, I’m scared to still have so much money sitting in fiat. It’s only a matter of time before the American markets give that one big sneeze – the one from which all other markets will catch a cold – or perhaps a disease far more serious. Looking at my portfolio now, I can’t help but think that the assets which are generally seen as “risky” today, are probably more “safe”. For crypto this is still tricky to say: as much as I love crypto, I’m hesitant to throw more than the recommended 1% into it, 2% maximum. Thanks to the growth of crypto, I’m already way past that mark, I’m now well into the 20% territory. Is that too much, or is it not enough?
Precious metals are a little easier, especially Gold. The chance of Gold losing its millennia old store-of-value status is practically zero. For this reason I will probably increase my holdings in precious metals and decrease those in fiat. Simultaneously I will look to increase my crypto holdings by a similar amount. Yes, crypto remains risky, but is it really riskier than fiat?
In a world of inflationary assets, only those with finite supply can be considered consistent long-term stores of value. I’m not a trader, so I’m not after short-term gains or volatile markets, I’m after long-term growth. For now it looks as if precious metals and crypto offer me the best chances of that; not only good returns, but also relative safety compared to fiat – as unconventional as that may sound and as contrary as it may be to my education in such matters.
At this stage it’s worth asking the question: “What about property?” I think that’s a valid question, but I don’t believe that it is the answer to my dilemma. In times of plenty (as we have enjoyed for the last decade), property is one of the things which balloons in value. I watched the price of my own home race upwards pre-2008, then I watched the market pop and the value of my house stagnated for about a decade. Only in the last two or three years has it suddenly climbed again. Remember that the 2008 crash is largely blamed on factors including the unsustainable property price bubble. Already I can see that property prices are suffering in my area. Houses which are for sale just don’t sell, sellers are slashing prices by large two-digit percentages. Rental properties stand open as people rather downgrade their lifestyles than pay such exorbitant prices. The housing market is in trouble – itself an indication that the next crash is already actually underway.
Property IS limited. There will always be demand for it, thanks to a growing human population. BUT it is overvalued, and a price crash will probably be rather severe. It takes a long time for property prices to recover from a crash – people don’t emerge from a depression with a wad of cash to splurge on an expensive house. I would rather not be in property during such an event. For the nimble trader with cash at hand, a few great property deals should become available at the worst point of the crash – but that’s beyond the scope of this post.
So what now?
Truth be told, I was on the verge of shifting money out of fiat two weeks ago. Unfortunately for me, I was a few days too late. I watched helplessly as Bitcoin roared back into quintiple digits territory, Gold shot to new 6-year highs and my local currency dropped like a stone – all simultaneously of course.
This leaves me in the old catch-22 situation: buy high or wait for a dip that may never come?
To make things even worse, Bitcoin is riding a very non-committal path along the top of my diagonal Fib retracement levels. It’s giving no clear indication of whether it will drop again (as I hope it will), or it it will shoot off to a new 2019 high.
Looking carefully at the market, I would say that exceptionally poor altcoin sentiment may well indicate that crypto sentiment as a whole is poor and that BTC should drop lower. Conversely, the global fiat fears could kick BTC higher and ignite a bull run at any time. I’m leaning slightly towards there being another dip. The little dashed line you see on the chart is an alert which I have set at $9350, my current buy price (subject to change). Whether we will reach that mark or not, I do not know. Perhaps BTC will reach it and drop far lower – in which case I will probably buy like a maniac. For now I consider my previous BTC post to still be valid – so I still think that I can get my BTC dip.
Once I do buy, whether low or high, I will probably convert a fair amount of my BTC into altcoins (diversified altcoins). I’m a firm believer in buying when there is blood in the streets. As a value investor, altcoins look like a great buying opportunity to me now, possibly the greatest buying opportunity I’ve ever seen. To hedge this bet I will probably leave about 50% of what I buy in BTC. BTC may not grow like the alts when things are going well, but it is the most secure and durable of the cryptocurrencies, and it will weather any further price drops better than what the altcoins will. With BTC dominance at over 68%, I can’t see altcoins getting left behind for much longer- hence I am keen to get money into them NOW! This CoinGecko “Top 100 coins” chart illustrates the extent of BTC dominance:
Where I come from we call that “unsustainable”. Sorry BTC maximalists – your coin is great – but so are many altcoins.
Similarly, when it comes to buying metals, I may look at alternatives to Gold. Like with BTC, I will put more into Gold than the other metals, but I almost certainly buy more of the higher ROI potential Silver and/or Platinum. Much of that also depends on how close to spot price I can get on each asset, and also on some local laws and regulations which affect precious metals trading, especially the taxation thereon.
As you can see, this most was mainly just me thinking out loud. I apologise if there is no specific actionable information and if it is more opinion than fact or hard analysis. Also, much of it is specific to my situation. However, I believe that parts of this post will pertain to most if not all of you, and that you should be asking yourselves similar questions and have similar concerns. I have no doubt that we shall still see large financial changes, call them “upsets” within our lifetimes. We will probably see a few such events. I believe that the scarce resources such as Bitcoin, Gold and property are good assets to hold for the long-term, depending greatly on local conditions and on when you buy them. It is now my immediate goal to increase my scarce asset holdings and decrease my fiat holdings as soon as I can. If a dip does not come soon, then I will be forced to start DCAing into such assets at higher prices.
The world has changed and fiat is no longer the safe asset it once was. The rate of this change is surprising even to me – a staunch anti-fiat campaigner. I am acting accordingly. I suggest you seek qualified advice in doing something along similar lines.
Yours in anything that isn’t fiat-based
"The secret to success: find out where people are going and get there first"
~ Mark Twain
"Crypto does not require institutional investment to succeed; institutions require crypto investments to remain successful"
~ Bit Brain