What are the rules for investing in cryptocurrencies? Faisal Khan reveals how he invests using the four currencies that ‘make sense’.

Over the past couple of weeks, a lot of friends, family and associates have been asking me if they ought to invest in bitcoin. Have they missed the boat? Is there still an opportunity to make money?

First, let’s get something out of the way: I am not an investment oracle. Not even close. I can barely understand the world of investments myself. I, too, like many other people, started investing and saving very late in life. I’m not qualified to dispense investment and/or savings related advice, and neither are a large number of people out there advocating what to buy (or not).

How high will bitcoin go? No one knows. I think it’s fair to say that 99% of the trade happening in bitcoin’s volume is for speculative purposes or investment (long -term). Here are some rules you need to abide by if you’re thinking about investing – there are rules for investing in cryptocurrencies:

  1. Be prepared to lose all your capital.
  2. Be prepared to lose all your money forever, if your wallet is hacked.
  3. Be prepared to lose all your money forever, if your wallet provider gets hacked.
  4. Be prepared to lose all your money forever, if you’re tricked into sending money to someone else.
  5. Be prepared to be questioned by lawful authorities on the money that you have stored in cryptocurrencies.
  6. Trying to mask vast amounts of wealth for purposes of tax evasion and/or flight of capital will be unmasked. You’re not that smart. The LEAs (law enforcing agencies) are a lot smarter.
  7. If you cannot show the origin of your capital, or refuse to disclose your ID, expect trouble.
  8. The cryptocurrency could be deemed illegal, and cashing out becomes impossible.
  9. The cryptocurrency could be a fraud, and you can lose all your money in an instant.
  10. Do your homework. You must read up on what you’re buying. If you don’t, you’re an ass!
  11. If you decide to buy coins because you read an article, or a friend or relative told you, you’re an ass!
  12. Whenever investing, do your homework. Go to YouTube, go to CoinDesk and Coin Telegraph and read articles. Ask around. Listen to podcasts, etc. DO YOUR HOMEWORK! Do not invest blindly.

Having gotten this out of the way, let’s talk about investing in bitcoin. This is an example of how I would do it. Nothing else. I’m not dispensing advice on how you should do it. This is how I do it.

Bitcoin Classic and Bitcoin Cash

There’s a lot of information for and against bitcoin out in the media. You will be convinced that bitcoin is the instrument to invest in, and then as always, there will be articles telling you that bitcoin is poison! I did my own research earlier on, and I was OK with Point # 1 in investing in bitcoin. If I lost the money, that was OK too! Only I was to be blamed. There are tons of cryptocurrencies out there. The four currencies, if you will, that made/make sense to me are:

  • Bitcoin
  • Ethereum (Ethers)
  • Ripple (XRPs)
  • Litecoin.

The newest one is ERC20 Tokens or other Non-ERC20 Tokens. I’ll talk about them separately. Within the bitcoin world, you now have two currencies: Bitcoin Classic and Bitcoin Cash. Think of the United States splitting up into two countries and you might end up with the US Dollar Classic and the New United States Dollar. In the same way, bitcoin has two:

  • Bitcoin Classic, denoted by BTC.
  • Bitcoin Cash, denoted by BCC.

Ethereum is another currency, so to speak. The currency’s name is ‘Ethers’, used to power Ethereum blockchain or smarter contracts. There’s a lot of fantastic work being done on Ethereum, which puts the demand for Ethers high!

Ripple is another distributed ledger technology company aiming to change the way money is moved across the world. The Ripple solution uses something called ‘XRP’ to move money within the Ripple ecosystem. Even this is being debated, but for now we can assume this will be the case and the XRP’s value has slowly been rising. Just as we follow a stock and then bet on the price, the same way, I look at Ripple, study what they’re doing and make an investment if I feel confident in the management and what they’re doing.

Litecoin is another currency that’s almost as old as bitcoin. Its price is heavily pegged to the price movement of bitcoin. I have it, for no other reason than I was a very early investor in it. It’s liquid enough, mined a lot and then exchanged for other cryptocurrencies.

These are the four base currencies I invest and dabble in. From a portfolio viewpoint, here’s how I have it configured with the four base currencies:

  • 50% of the portfolio investment is in bitcoin.
  • 25% of the portfolio investment is in Ethereum (Ethers).
  • 15% of the portfolio investment is in Ripple (XRPs).
  • 10% of the portfolio investment is in Litecoin.

The goal here isn’t to make mega money! Who wouldn’t like that? Of course, everyone would love that! The goal here is to make sure the money I’ve invested stays ahead of the curve; ahead of the traditional investment instruments (of which you should also invest in – more on that later in a different article).

If the US dollar is losing its purchasing power, or the euro or Saudi riyal, what the heck do you invest in? Gold? Ummm, I don’t know about that, but cryptocurrencies were a godsend. If you don’t get greedy and are able to exercise restraint and discipline, you can very comfortably attain a net positive portfolio that will perform better than existing investment instruments and general currencies and precious metals.

ICOs

A year ago, Ethererum was priced at about $12. Today it’s over $300. So, by that example, if you had invested USD 1,000 a year ago, you would have USD 25,000 today! That’s astronomical by any standard. At USD 300, people wonder if it’s the right price to get in on the action? The answer is … it depends. If you’re thinking there will be a repeat of x25 returns within the next 12 months … I dunno! It could happen! However, if you want to stay ahead of the general market, like get a 10% return, I think that could very easily happen. But then again, refer to rules of investing in cryptocurrencies (above).

How much of your money should you invest in cryptocurrencies? I would say maybe a quarter or a third of your portfolio. Certainly no more!

In addition to the four somewhat dominant coins listed above, there are a lot of new coins (read cryptocurrencies) that keep coming out. There is IOTA, Dash, zCash, Stratis, Monera, and so on – you will have to do your own research and decide if these are coins you want to take a position on. Buying a few will not hurt, provided you adhere to the above rules of investing in cryptocurrencies, as well as do your homework.

You will also have recently read about something called ICO (Initial Coin Offering). ICOs are tokens or coins being issued for a very specific function. Some examples of successful ICOs are Tez0s, Filecoin, Everex, and so on.

Investors have been pouring money into ICOs. Most of the money is speculative money. However, all astute investors know what the company stands for, what their solution means and what these token offerings are for, and they understand the global and local regulatory laws under which the company might operate.

Play smart, invest carefully and remember that if you go in blind, expect the unexpected to happen.

READ NEXT: Forking hell – the bitcoin split

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here. Image by vextor studio, Shutterstock.com

About the author

Faisal Khan

Faisal Khan specialises in cross-border money transfer and payment systems as a payments consultant and evangelist for digital money. He is a regular contributor to the Around the Coin podcast.

1 Comment

  • Let me ask a couple of dumb questions: Who owns the cryptocurrencies like Bitcoin, Ether, Ripple etc.? How is the actual value of these currencies decided? I would love to see the clear distinction between the real currencies and the cryptocurrency to actually understand the pros and cons associated with it.

Leave a Comment