My Portfolio Strategy Part 1: How Much Crypto Do You Need?
Hint: more than you want, less than you think.
When you write about bitcoin’s price long enough, people think you must know something.
Eh, maybe, maybe not. But it’s nice that people ask me questions. I’m happy to answer!
Of all the questions I get, the most popular is “is now a good time to buy bitcoin?” followed by “do you think bitcoin’s price will go [up/down]?” as a close second.
What question is third on the list?
“How much bitcoin should I buy?”
I’ll answer that question and do you one better. Let’s go beyond bitcoin. If you’re down with bitcoin, you should be down with altcoins, too.
Note, for more about this topic, read My Portfolio Strategy in the Crypto is Easy newsletter.
How much is “enough” crypto?
Before I get into that, a big picture view.
For me, crypto is just one part of a diversified financial portfolio, mostly built along the lines of modern portfolio theory.
Modern portfolio theory is an investing strategy that minimizes market risk while maximizing returns. It is based on…
To oversimplify a more nuanced strategy, modern portfolio theory demands that you spread your investments around non-correlated assets, i.e., assets that generally go up and down at different times for different reasons in different market conditions. The forces that drive one asset’s movements do not usually affect another asset’s movements.
As a result, you have a lot of flexibility within a portfolio to respond to life events and changing market conditions without exposing yourself to too much risk at any one time or in any extreme. At the same time, you can get different benefits from owning each of these different types of assets, e.g., cash flow, tax efficiencies, hedges, etc.
So instead of putting $1 million into stocks and bonds, you allocate to a variety of other assets like real estate, bitcoin, altcoins, stocks, bonds, private equity, precious metals, collectibles, annuities, cash, and cash equivalents.
That’s great, but what about crypto?
Put all your money into it. Mortgage your house if necessary. Can you sell your kids? Or somebody else’s? Or perhaps a kidney (you only need one)?
If so, do it. Put it all into crypto.
In my next post, I’ll tell you my ideal bitcoin/altcoin split.
Just kidding! Except for the part about the ideal bitcoin/altcoin split, I’ll post that soon.
Start with your overall portfolio
How much you put into crypto depends on your personal situation. Before you settle on an amount, build a portfolio that makes sense for what you want to accomplish in life. Then see how crypto fits.
If you didn’t have crypto, what you need to be comfortable and secure?
Think about your debts, investments, available lines of credit, financial commitments (e.g., rent, car payments, social clubs), and everything else that you consider valuable or important to your happiness and well-being.
To help you sort everything out, get a free account with Personal Capital.
Once you create your account, you can link all your financial information to a dashboard that shows all of your investments, including your crypto. Use this dashboard to see everything you own.
Also take advantage of free debt/savings calculators, cash flow management, net worth, portfolio performance, and budgeting tools. That way, you can take inventory of your assets, liabilities, and the risks and opportunities that come with them.
If you really like Personal Capital, you can sign up to get wealth management from a financial advisor. The dashboard is free no matter what you do.
Once you have the big picture, you can start to tackle your crypto allocation.
Better to overshoot than undershoot
While I don’t assume I’ll get the massive, explosive gains the OGs got from buying bitcoin in 2012 or Ethereum in 2015, I do expect prices will go up a lot each year for all cryptocurrencies.
As a result, I would feel comfortable putting a significant portion of my wealth into crypto, with a strong bitcoin position and hefty allocation to altcoins. Some say 6% max but I would go above 20% of your net worth if you can swing it.
If crypto keeps doing what it’s always done, you’ll be fine. You don’t need to put that much money in. Even if the market only doubles each year, you can put 20% of your wealth into cryptocurrency now and expect your total net worth will double within a decade — even if the market tanks 50% today.
People like you and me don’t have that kind of opportunity with any other asset. While you shouldn’t do anything that would jeopardize your financial health or important life needs, you won’t have many chances to build long-term wealth from owning a new asset class. Now’s no time to skimp.
I have about 25% of my net worth in crypto, less when the market tanks, more when the market booms.
Why don’t I put all of my money into crypto?
The volatility is too much. Unlike Russell Okung or Michael Saylor, I can’t convert everything into bitcoin — I still need to pay my mortgage in US dollars and it will take years for cryptocurrency to realize its ultimate potential.
Sure, I can get crypto loans or draw from cheap lines of credit on my properties, but I don’t want to add that much risk to my portfolio.
Taxes make a big difference
Until I got into real estate, I didn’t realize how much your taxes could change depending on your financial decisions and how you account for “things.” A decision that makes perfect sense for one person could make no sense for another, simply because of their income, circumstances, and applicable laws.
Even staking or rebalancing your portfolio can drastically change your overall portfolio results, simply from changes in the amount of taxes you owe or the value of the deductions you can take.
Does your country treat crypto transactions as taxable events? If so, do you know the tax consequences of buying, selling, and using bitcoin and altcoins? Can you deduct the losses from your taxes, saving you money?
How do you account for gas fees, swaps, and withdrawal fees? Staking rewards?
What about dead altcoins — can you claim those as total losses without selling? And airdrops — how do you declare those? Do you even need to?
What about tax-loss harvesting? Do you have non-crypto assets with gains or losses to offset your crypto gains and losses? Does it even make sense to do that given your tax situation?
The list goes on.
Over the long run, small changes in your life or the tax code can change the costs and benefits of every decision you make.
I haven’t found any accountants knowledgeable enough about crypto to advise me, nor any good online tax preparation services for crypto. Hopefully, somebody will fill that gap soon.
Better yet if governments make sane, simple rules about how to account for cryptocurrencies, but I’m not HODLing my breath.
I help normal people make the most of crypto markets. Writer of Crypto is Easy, a Top 10 newsletter on Substack (now on Beehiiv). Also the author of three books and a top Bitcoin writer on Medium and Hacker Noon.