Since I’m getting the feeling that the hype around Bitcoin and cryptocurrencies could be slowly growing again, I figured it would be a good time to address this topic.
Therefore, I decided to share my three years of experience in this highly volatile market with you via this post. This includes both major ups and downs, as well as how my strategy changed over time.
My goal is to keep you rational, so you don’t get too caught up in the hype and throw your asset allocation out of the window because you think everything is going to the moon!
At the same time, while nothing I say should be considered financial advice and you should always make up your own mind before investing into anything, I do want to talk about why I think having a small percentage of your net worth in Bitcoin and potentially other cryptocurrencies like Ethereum might not be a bad idea after all.
We’ll also discuss my mistakes and what I would do if I was starting from scratch, some exchanges I trust and the steps you need to take to keep your funds secure.
Last but not least, I’ll also briefly touch on a less fun yet very important topic, taxes. This part is often overlooked when Bitcoin is mentioned, yet I believe that adapting your strategy to your local tax laws can make a significant difference.
My Experience Investing In Bitcoin and Crypto
Last year I published an article showing you my entire investment portfolio in detail, where I also mentioned that I had bought 20.100€ worth of mostly Bitcoin and Ethereum in the end of 2017, when the whole world was talking about cryptocurrencies.
To refresh your memory, here is the roller coaster that my investments went through in the two years that followed.
So while my investments went up all the way to 67.245€ (+235%) in January 2018, I didn’t sell any of them, as I got greedy. Fast forward to December 2019 and my 20.100€ investment was suddenly only worth 7.998€. That’s -88% (!) compared to the top and -60% when looking at my initial investment.
You can probably imagine what that period felt like, and I hope it gives you a bit of a taste of what can happen in this highly volatile space. I’m showing you this, so that you don’t get too caught up in excitement when prices go up, forgetting that things can move in the opposite direction very quickly.
I didn’t buy any more since the beginning of 2018, as I felt that I already had way too much of my portfolio allocated to this very risky asset class. On the other hand, I also didn’t sell any of my cryptocurrencies, as I was confident that we would see another bull market at some point.
What My Crypto Portfolio Is Currently Worth
Luckily, I was right. As of November 21st 2020, my portfolio was back in the green by a significant margin, at 35.750€ (+77,8%).
The Difference Between Now and 2017
Somehow, things feel very different compared to the explosion in prices in December 2017. Back then, everyone was talking about Bitcoin and cryptocurrencies. Bitcoin was all over the news and I even remember family members asking me if I owned any during a Christmas brunch.
Even though the Bitcoin price has recovered a lot and isn’t far off its all-time high, I rarely see news articles about it. And if we look at Google trends, we can see that searches for Bitcoin are a tiny fraction of what they were in 2017.
Meanwhile, adoption is growing, with Paypal now giving its users in the US the possibility to buy, sell and hold cryptocurrencies directly on the service.
We’re also seeing more and more investment funds entering the space and several famous investors & billionaires openly admitting that they own bitcoin as part of their portfolios. And I believe this trend will only continue.
So to me it looks like there is a lot more interest from an institutional perspective, but that the general public hasn’t played a large role in the recent run up.
Bitcoin vs. Gold
I see Bitcoin as a good alternative to owning gold and as a hedge against inflation, in addition to other assets like stocks (I use ETFs) or real estate. Especially right now, with more money being printed out of thin air by central banks than ever before.
It is limited in supply, and is uncorrelated with the other asset classes. While of course it has nowhere near the thousands of years of history gold has as a store of wealth, Bitcoin has a lot more upside potential. By comparison, at 9 trillion dollars, the current market capitalization for gold is 26x as large as Bitcoin.
Of course the potential upside also comes with more risk, but it’s a bet I’m personally willing to take with part of my portfolio.
I also never found buying gold to be very practical. You either have to buy it physically and find a way to store it safely so it won’t be stolen or you have to trust a third party when buying shares of a gold ETC (ETC stands for exchange traded commodity). To me, Bitcoin is a lot easier to handle in that regard.
How I Would Invest My Money If I Was Starting From Scratch
Before we get to the next part, please remember that this is not financial advice, just my opinion as a 30 year old Half-Italian, Half-Austrian guy on the internet. So please always do your own research and make up your own mind!
If I was starting from scratch today and thinking about adding cryptocurrencies to my portfolio, here is what I would do, based on my experience so far and on some of the mistakes I made.
First, I would decide how much of my investment portfolio I want to allocate to these digital assets. This is completely up to personal preference and risk tolerance, but I wouldn’t go above 10%. For most people, 1-5% is likely plenty already.
To keep things as simple as possible, I would then do a 70:30 split of that amount into only two cryptocurrencies. I would put 70% into Bitcoin and 30% into Ethereum, the second largest cryptocurrency by market capitalization.
Why I Now Avoid Buying Altcoins (With One Exception)
Three years ago, I wasted too much time and money buying several different cryptocurrencies, often broadly referred to as altcoins (“alt” stands for “alternative” to Bitcoin). While these can shoot up in value very quickly if you get lucky, they can also drop significantly more compared to Bitcoin.
And while Bitcoin is back near its all-time high right now, many altcoins are still down 50-90% compared to when I bought them back in 2017.
Luckily, back then I put the vast majority of my money into Bitcoin, followed by Ethereum, which is why my portfolio recovered.
How To Buy Bitcoin and Ethereum
In case you’re interested in how to buy or sell Bitcoin and Ethereum, here are a few personal recommendations.
First of all, I would only use licensed exchanges that have a good reputation in the community, based in countries with a trustworthy regulatory environment (eg. the US or Europe). A good, long track record can’t hurt either.
Bitpanda is my favorite place to buy cryptocurrencies. The exchange was founded in 2014 and is based in Austria, my home country. They even offer investments in their own crypto index funds, which could be something worth looking into in the future, as well as precious metals like gold and silver. Bitpanda even offers personal saving plans, which allow investors to dollar-cost-average into all of these volatile assets.
Kraken is my second exchange of choice. They were founded in 2011 and are based in San Francisco, USA. They have slightly lower fees compared to Bitpanda. However, in my opinion the exchange is a lot more complicated and less user-friendly compared to Bitpanda. Kraken doesn’t offer saving plans.
Let’s Talk About Security
Even though both of these exchanges have excellent security standards, please make sure you use secure passwords that you don’t use anywhere else (using a password manager makes this a lot easier) and activate two factor authentication to protect your accounts.
Also, if you own a couple thousand euros worth of cryptocurrencies, it’s probably worth buying a hardware wallet, like the Ledger Nano S. That way you can easily & securely store your funds off the exchanges.
One thing you shouldn’t forget is that when it comes to cryptocurrencies, you are your own bank. So it’s up to you to ensure your investments are safely stored.
Bitcoin Taxes: What You Need To Know
Alright, let’s talk about one topic that I hear mentioned way too rarely when talking about Bitcoin and other cryptocurrencies, taxes.
This part is often overlooked, but adapting your strategy to your local tax laws can make a significant difference. Of course, I can only make general statements here, so make sure you get the right information for your home country.
To start things off, you should keep a record of every transaction (purchase, sale or trade) as proof.
And here comes the part that most people don’t know. In many countries exchanging one crypto for another (eg. trading Bitcoin for Ethereum), counts as a taxable event.
Here is an example:
- You buy Bitcoin for 1.000€
- Two months later, you decide to buy Ethereum with the Bitcoin you bought previously
- If at the time of the exchange, those Bitcoin are worth more than when you bought them (eg. 1.200€), you just realized a 200€ taxable profit.
- And that’s even though you didn’t actually realize a profit in cash, but only exchanged one cryptocurrency for another.
Therefore, what I would do personally, is only buy & sell cryptocurrencies like Bitcoin and Ethereum directly with Euros or whatever your local currency happens to be. It will make your life (& accounting) a lot easier as well. Luckily, you’re able to do that on the two exchanges I mentioned, Kraken and Bitpanda.
Obviously, the situation may be different in your own country, but hopefully you now understand why knowing your countries’ tax laws regarding Bitcoin is important.
Conclusion & What I’m Doing Next
While I’m feeling bullish on Bitcoin and Ethereum, especially in the current environment, I could very well be wrong. I’m planning to rebalance my own allocation to this highly volatile sector back down to 10% over the coming weeks.
Still, I hope that you were able to learn from my own experience, both good and bad, in this post.
Try to stay rational and don’t be afraid to realize some profits along the way if prices go up. And please never invest money you can’t afford to lose!
For more detailed questions around Bitcoin & Ethereum, you should be able to find plenty of websites & YouTube channels that are a lot better than me at explaining everything in detail.
For the time being, I’ll stick to talking about investing in P2P Lending and stocks via ETFs for the most part, I hope you don’t mind.
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Disclaimer: Investing involves risks of losses. You should always do your own research before investing into anything. Also, some of the links are affiliate links, which help support me, the website & YouTube channel. I only link to services I use myself, none of them are sponsored.