A lot* of people have asked me recently about whether or not they should buy cryptocurrency as a retail investment so I thought I’d share my view/method on here. I’m going to refer to Litecoin throughout but this is my method for pretty much any crypto investment.
Please note I am not a professional financial advisor. Do not take financial advice from me. The value of cryptocurrency can fall as well as rise. Past performance is no indicator of future value.
Some beliefs about Litecoin
First a few things I think are true about Litecoin:
- Its price at any point in time is not easily predictable;
- Its price is volatile;
- It has a chance of becoming a reasonable long-term store of value (think silver to Bitcoin’s gold);
- It has limited supply;
- Its creators are credible and smart;
- Its more environmentally friendly than Bitcoin.
Next I would assign probabilistic outcomes.
Please note these are not arbitrary, this requires a lot of thought, observation and research. See investing Rule 1 here.
When I bought Litecoin I’d say:
- 30% chance of being worth $0 at some point in the future;
- 10% chance of being worth 10x;
- 10% chance of being worth 100x;
- 20% chance of being worth 3x;
- 30% chance of being 1x.
But how much to buy?
That’s quite a risky investment but if I’m right it suggests Litecoin was, at the time I assigned the probabilities, undervalued so I should buy some. But given the risk profile how much? I’d say about as much as you can afford to lose and shrug your shoulders afterwards. Everyone would be different but for me that’s maybe 2% of my net liquid assets. So if you have $100K, maybe around $2,000.
Now whilst there’s a high probability you’ll lose your investment, if you invest and you’re wrong the most you can lose is 1x (and you’d shrug your shoulders), if you don’t invest and you’re wrong the most you can lose is 100x.
Sell, sell, sell
Furthermore it’s statistically improbable that you’ll invest at the peak of the market. So you buy $2,000 worth of Litecoin but then at some point the value of those Litecoin rises to $3,000. At this point I would sell 2/3rds of your holding. You now have your initial outlay of $2,000 back, you have $1,000 of Litecoin still and you have around a 10% chance of getting something close to 100x (depending on how quickly your investment went to $3,000), which given your initial net liquid assets of $100k, is pretty much doubling your wealth. And from there you can’t lose.
What if it never rises to $3,000?
Well you either shrug your shoulders or you assume a lower level at which to get your initial stake back. Maybe 50x-100x of $500 is meaningful to you so you get your $2,000 out when you have $2,500 worth of Litecoin. That’s up to you to decide. I guess it can’t be $2,001 since then, even if you get 100x you’ll be up $100 and I assume you don’t care about that (especially after transaction costs!). The important thing is to figure out how much would be meaningful to you and have the discipline to stick to it.
- maybe 10 people