Why own crypto
This is not financial advice. Just my opinion :)
I have a confession to make. I am a devout student of Berkshire Hathaway’s Charlie Munger and I love crypto. Yes - the same Charlie Munger who fiercely believes that bitcoin is worthless rat poison. Why do I discount Charlie's view on bitcoin? Crypto is outside of his circle of competence.
Warren and I don’t feel like we have any great advantage in the high-tech sector. In fact, we feel like we’re at a big disadvantage in trying to understand the nature of technical developments in software, computer chips or what have you. So we tend to avoid that stuff, based on our personal inadequacies. - Charlie Munger
As a software engineer and investor I like to think that crypto fits into my circle of competence. It's amusing to me that I identify as a conservative investor yet I deploy nearly all new investment dollars into magic internet money and JPEG’s instead of stocks.
My friends and family are somewhat aware of my obsession for crypto and because of that I often get asked: "Should I buy crypto?". The answer is Yes. While it's simple to do, it is surprisingly hard to execute.
Why buy crypto
There are two reasons why you should buy crypto:
The financial return has the potential to be life changing.
It's the fastest way to learn about crypto. Once you own and use it - you'll understand it better.
Why it could be life changing
Our game is to recognize a big idea when it comes along when one doesn't come along very often. - Charlie Munger
Simply put - crypto is the biggest idea I've seen in my life. The more time I spend studying it, the bigger I think it is. Many others have written great pieces on why to own bitcoin and ethereum that explain the bull case for each asset better than I can. Instead, i’ll show you two charts:
The compound annual growth rate (CAGR) of bitcoin has been ~200% for more than ten years. For comparison, Tesla has grown at 64%, Amazon at 34% and the S&P at ~11%. Pretty incredible right? It must be near impossible to find another asset that appreciates this much.
Well, Ethereum has outperformed Bitcoin since it’s launch 🤯. The product market fit of ethereum is astounding and the total addressable market keeps growing. It is truly mind bending. Ok we now we have two assets appreciating at 200% per year on average - how do we buy them?
How to buy crypto
Wences Casares has the best advice on this topic. I've updated it to include ethereum and increase the allocation percentage given that the risk of going to 0 has decreased substantially. Bitcoin and ethereum are the two largest cryptocurrencies and have proven product market fit.
Here are three simple steps:
Take 5% of your net worth, and put half in bitcoin and half in ethereum (all at once and at the market price)
Carry it at cost
Do not sell it for at least 10 years
This formula may sound easy but it is not. The psychology of investing in assets that grow at 200% per year with extreme volatility takes a stoic. Here’s why these steps work:
Investing 5%, and only 5%, gives you a good amount of exposure while allowing you to keep a cool head. If you invest more, the ups and downs will be hard to bear. Your position, especially in the beginning, may be down 50% or more. If you invest too much, these pull backs inevitably lead to panic selling and will make your life miserable.
Carrying at cost will help you not get too gleeful when your position increases dramatically in price. You’ll be tempted to take money off the table which will undermine the potential of returning multiples of your net worth.
Not selling your bitcoin and ethereum for 10 years puts you in a mindset where you won't be influenced by constantly changing sentiments about crypto. It’ll keep you grounded when your mom is laughing at you because the price goes down 50% and your friend calling you a genius when the price is up 10x.
Not selling for 10 years is the hardest part of this plan. It's hard in traditional stock market investing and it's even harder with crypto.
“Sit on your ass. You’re paying less to brokers, you’re listening to less nonsense, and if it works, the tax system gives you an extra one, two, or three percentage points per annum.” - Charlie Munger
The tax advantage you get in the US from not selling crypto is dramatic. If you invest $100 in the stock market and return 8% and pay 20% capital gains tax then you’re paying uncle sam $1.6 or 1.5% of your gain. If you do the same in crypto and return 200% and pay capital gains tax you’re paying uncle sam $60 or 20% of your gain per year in taxes.
Education
Arguably more importantly - you'll now spend the time to go down the crypto rabbit hole. What did I just buy? As the value increases and decreases you'll be forced to think harder about it. Want to get your hands dirty? Here are a few ideas that will help you understand bitcoin, ethereum and how they're different:
Buy a hardware wallet
Send bitcoin and ethereum to your hardware wallet
View your transactions on etherscan and blockstream
Browse popular wallets on zapper. How cool is it that this data is all public?
Use DeFi apps, buy an NFT
Send a wire or take out a mortgage. Be reminded of how archaic the current system feels.
While I’m confident this strategy will work well over the next 10 years there is always the possibility it does not. You will, however, have given yourself the chance to return multiples of your net worth as well as learned a ton about crypto along the way. Crypto is a very welcoming industry so hopefully you'll make a few friends along the way, too. Buckle up and enjoy the ride.