almost 3 years ago • 3 mins
The rapid rises (and falls) of cryptocurrency prices in the last few weeks have dominated conversations among investors and non-investors alike.
✍️ Connecting The Dots
Let’s start with the original mac-daddy: bitcoin. Its original vision was a peer-to-peer digital digital payment system that was self-sustaining, secure, and stored on decentralized blockchain infrastructure. Its network, then, was built accordingly, meaning it only really does one thing well: storing and swapping value. And while many see its singular focus as a weakness, it’s also a source of strength: there’s arguably no better alternative to bitcoin for that specific purpose.
Then along came ether. The Ethereum network was built to be the world’s programmable blockchain: it executes code and has its own programming language, with ether tokens fueling operations. Anyone with an internet connection can run decentralized Ethereum-hosted applications (dApps), which include games, financial services, and social networks. Ethereum’s also home to “smart contracts” that are automatically executed when certain conditions are met, essentially removing the requirement for a third-party verification – a technology that underpins “decentralized finance” (DeFi) and non-fungible tokens (NFTs). Oh, and ether – like bitcoin – can also be used as a store of value and a method of payment.
But it’s not a zero sum game: bitcoin’s price is up 73% this year and ether’s is up over 330%, albeit apparently for different reasons. Bitcoin’s perhaps been buoyed by decisions from major companies – PayPal, Goldman Sachs, and Citi – to get more involved with cryptocurrencies, while ether’s become more popular as the potential of its growing dApp ecosystem dawns on buyers.
Of course, price volatility is still a big risk to all cryptos. Case in point: Tesla sent bitcoin’s price soaring when the EV maker announced it’d accept payments in the cryptocurrency – only for an abrupt about-turn last week to send the cryptocurrency tumbling.
1. Bitcoin isn’t an inflation hedge, no matter what people say.
With investors so focused on the rising prices of goods and services last week, you wouldn’t be blamed for looking for a “hedge” – that is, an investment whose price movements should offset its impact. But even though some people insist that bitcoin fits the bill, they’re missing something. See, one requirement of a hedge is that it’s correlated with the thing you’re trying to protect against – i.e. bitcoin’s price rises when inflation does. But while US inflation since 2013 has averaged 1.5% annually, bitcoin’s price has risen an annualized 150% per year. That rise has nothing to do with inflation, which means it’s not a good hedge. And if you needed more proof, just take a look at bitcoin’s 15% drop last week: it coincided with the US reporting its highest level of inflation in more than a decade.
2. Here’s where crypto fits in.
If you’ve decided crypto’s worth including in your portfolio, there are three steps to determining how big a position you should take. First, decide how much you’re willing to risk: between 0.5% and 5% of your “active budget” per trade usually makes sense. Next, figure out when you’ll sell if things go wrong – perhaps based on a drop in dollars. Put those two figures together (by dividing the first number by the second), and you’ll come up with a position size that fits both your risk appetite and your risk tolerance.
🎯 Also On Our Radar
US companies have announced almost $500 billion worth of share buybacks so far this year, probably as firms return the cash they hoarded at the height of the pandemic. And given that buybacks tend to boost share prices, this record haul could help prop stock prices up for the rest of the year.
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.