Regular readers will recall that in the first phase of my 2022 FIRE campaign plan I’m expanding my crypto portfolio. I know this won’t be to everyone’s taste and I still believe that you shouldn’t rely on crypto for FIRE. My main investments this year include my (hopeful) relocation and my pensions, but crypto is a significant investment area for me.
The crypto element will be about 20% of my portfolio contributions overall.
This begs the quest: what’s going into my crypto portfolio?
Disclaimer/ reminder: this isn’t financial advice. It isn’t even necessarily a good idea. Crypto is a high risk, unregulated asset class. Do your own research, make up your own mind. Don’t trust your future to some random on the internet!
What I look for in a crypto purchase
All the crypto in my portfolio has met some – although not necessarily all – of the following criteria.
1. Do I believe in the project’s utility?
Buying a crypto token is a lot like investing in a tiny tech start-up. You don’t know if it’s worth anything yet, and you won’t know until there’s a demand to use the product.
This is a pure judgement call. No-one can be sure that a particular project will have utility. In general, I tend to think the following have utility:
- Smart contract platforms that enable decentralised finance (DeFi). I’m convinced that decentralised finance will continue to grow, empowering millions in countries without trustworthy financial institutions.
- Stablecoins that allow other countries to preserve their wealth in US$. That’s not necessarily useful in the UK (although you tend to get good interest rates on these…), but in some parts of Africa, Latin America and South-East Asia, this is a game changer for personal finance. Not everyone in the world can trust their banks or payment systems.
- Bizarrely, Bitcoin. This is purely because it seems to have proven its immutability over time. I agree that it’s hard money. Actually, I think Litecoin is the better product; but in terms of crypto that’s a straight up replacement for fiat money… I suspect it’s a lot like Highlander. In the end, there can only be one. I suspect that one is Bitcoin.
2. Has it survived a previous bear market?
I think we’re overdue a crypto bear market – i.e. a massive pullback.
I’m also reasonably convinced that we’re going to see an equities bear market after COVID, it’s just that investors tend to withdraw from their highest risk investments first in bear markets. Crypto is definitely more volatile than most main market shares, so prices tend to get hammered when markets are uncertain.
Most crypto developers take at least part of their pay from the crypto tokens they sell. So, if a project devalues quickly, quite often the developers stop working on it and it just dies, making the token worthless.
As a result, my theory is that crypto which has survived a bear market and is still in development is probably going to survive another bear market.
3. How decentralised is it?
Crypto is meant to be decentralised. That means it should be a network where the few nodes or holders can’t stop the network, um, working.
Decentralisation increases the security of the network. There’s no point in buying a token that’s at risk of network failure. It’s the main reason I won’t buy Solana (SOL) – that network has been the victim of several high-profile Denial Of Service attacks which brought it down. Nope, sorry, not for me.
Now, almost all networks have some kind of compromise on this. Bitcoin and Litecoin are notable exceptions. Generally though, especially while crypto is new, many networks have a concentrated number of node providers. I’m not too picky, but I want to be convinced that the network isn’t going to collapse because one big player in the network decides not to support the network anymore.
Faster blockchains compromise decentralisation to increase speed. There are exceptions, but generally “faster” means “less secure”.
If I’m buying into a faster blockchain, I want to know how it’s compromising decentralisation. Sometimes I’m OK with it, sometimes I think they’ve gone too far for me.
4. Does it have price growth potential within 5 years – and if it doesn’t, can I use it?
Not everything in my crypto portfolio is going to achieve these magical 10x gains you hear about. I’m OK with that. However, if I don’t think it’s going to make me a millionaire overnight, I want to know that I can stake it for a reasonable return or use it in DeFi to earn some growth.
I tend to want 10% or better growth in the number of tokens I hold if I’m staking. That’s just because crypto is a huge volatility risk and I want some reward. There are two exceptions I make:
- With Bitcoin, I know I can lend it for 4-5% yield. However, I think Bitcoin is lower risk than most crypto – I’m confident it will be around in 5 years – whereas I’m less sure about my other picks.
- With stablecoins, I’ll accept a slightly lower yield, but I’ll want a minimum of 7% yield potential from staking to compensate me for the trust I’m putting into what is basically a rival to the real US$.
My picks for the crypto portfolio of 2022
I already hold (well, hodl) some crypto from previous years, but here are the ones that I’m still willing to buy for 2022:
- Terra USD (UST)
- Bitcoin (BTC)
- Polkadot (DOT)
- Kusama (KSM)
- Cosmos (ATOM)
- Tezos (XTZ)
Crypto enthusiasts will see that the main theme here is crypto chains that connect to other chains… plus Bitcoin and Terra USD. I also hold Elrond (EGLD), but I’m not looking to buy more of this in 2022.
Why? Because there’s only so far you can spread your purchases in crypto while cost averaging to compensate for the huge price swings, so I’ve limited my selection
By weight, most of my cash is going into Terra USD (UST). This is while I can get a 19.5% yield on the Anchor protocol. I’m adding a smaller regular purchase of Bitcoin, then another small purchase into one of the other four crypto tokens each month.
Let’s look in more detail.
Terra USD (UST) is the basis of my crypto portfolio
UST has many risks, but it’s a lot less volatile than most. I believe in the project’s future as an algorithmic dollar stablecoin. The Terra network is basically an ecosystem to decentralise basic, everyday finance, and it does it well.
When I get beyond a certain amount, I’m going to either diversify into other stablecoins or start buying the insurance. For 2022, that’s not quite a concern.
For true cypherpunks, this heavy weighting is like having a stocks and shares ISA that still invests 50% in government bonds. However, I’m not that hardcore, and the reduced volatility risk is reassuring.
Terra hasn’t really survived a bear market. It did survive the COVID crash, but that’s not the same thing. That said, I’m relatively confident that UST will keep its value, or that I’ll at least have long notice of an increased risk of default.
UST is an algorithmic stablecoin, meaning that it’s basically a variable slice of other crypto that grows and shrinks to keep its value at approximately $1. It’s never perfectly $1, but it’s pretty close. This means that I don’t think the US government crackdown on stablecoins is likely to include it.
I also like that UST is looking to be “bridged” across to other blockchains. Yup, you might be able to buy UST outside of the Terra blockchain. It could replace Tether (USDT), which is a pretty shady stablecoin.
Yes, I find the names confusing, too.
Why I’m buying Bitcoin in my 2022 crypto portfolio
After the launch of the first (futures) Bitcoin ETF, I’m pretty convinced that Bitcoin is gaining mainstream financial approval. It’s only a matter of time before spot price Bitcoin ETFs hit US stock exchanges.
Bitcoin is pretty volatile, but I’m confident that it’s here for the next 5-10 years. With cost averaging of regular purchases and lending it on Crypto.com, I’m comfortable with the volatility risk.
I also like its level of decentralisation. The ownership of the tokens is becoming increasingly centralised over time, but anyone can build a Bitcoin node anywhere in the world.
Polkadot (DOT) and Kusama (KSM)
So, funny thing: these are basically the same project on two networks.
I’m actually quite well stocked on these, and I loaned out my tokens on their recent parachain auctions, so I’m only going to buy them if the price temporarily crashes.
Polkadot/ Kusama are interoperability blockchains. That means that people build their own blockchains on it. All blockchains built on Polkadot can talk to all other on Polkadot; same with Kusama.
They’re not the most decentralised networks I’ve ever seen. A company, the Web 3 Foundation, still controls the central chain. That’s going to be the way for quite a while. However, anyone whose blockchain is voted in (using the parachain auction process) gets connected to them, so it’s not too bad.
I also like that if I put them on the Kraken centralised crypto exchange, I can stake the tokens and get a yield of up to 12% per year.
The difference is to do with the governance and audit processes. Basically, from a tech point of view, Kusama is light on regulation and isn’t audited. The sales pitch is that it’s the “canary” or experimental blockchain of Polkadot. However, there are a lot fewer tokens issued on it and projects that want to be on Polkadot are probably going to be launched on Kusama first, so it seems like a good deal for me.
Polkadot/ Kusama are also backwards-compatible with Ethereum projects. Well, so I’ve heard. Ethereum is the second largest blockchain by market cap (after Bitcoin) but the price appreciation and the growth in users has made it pretty much too expensive for plebs like me to use.
Cosmos in the crypto portfolio
Cosmos is interesting. It’s basically a build-your-own-blockchain kit. Any blockchain built with this kit can talk to any other built with it, and the Cosmos ATOM token is used to switch/ communicate between the blockchains.
Terra is one of the blockchains built using Cosmos. Yup, that UST I mentioned earlier.
I think Cosmos is going to become more important over time. It’s reasonably decentralised, anyone can build a blockchain with the Cosmos kit (well, maybe…), and you can stake it for a yield of up to 14%.
Better yet, you can stake it on a wallet you own. That’s right: no reliance on an exchange.
There are disadvantages to staking Cosmos in this way, such as the 21-day lock-up period. Unless you’re going to code a Cosmos node yourself, you’re also going to have to delegate it to a provider you’ve never met to stake on the network for you. If they misbehave, you get punished.
Overall though, I’m happy with this one.
Tezos
Tezos is interesting in that it was one of if not the biggest blockchain ICO launch ever, then went silent until last year over infighting amongst the founders.
What I like is that it’s incredibly decentralised, it has survived a bear market, it evolves – uniquely – by representative democracy and you can stake it on your own crypto wallet.
I used Tezos for my first yield farming experience. I’m no longer using the PLENTY yield farm on that particular post, but I’m still enthusiastic on the Tezos overall project.
The problem with Tezos is that even though it has a great community of developers, it’s not compatible with many other blockchains. That’s why it’s no longer my main crypto portfolio component. It could be great, or it could be an evolutionary dead end, like the Neandethals.
I’m partly staking Tezos on my wallet. I’m also partly using Youves USD (uUSD) saving on the Tezos network. This is a stablecoin pegged to the US dollar, that presently earns a little over 15% annual yield.
Percentages of my crypto portfolio
I’m splitting my crypto investments into five parts each month:
- 2 parts go into UST on Anchor.
- 1 part goes to Bitcoin.
- 1 part goes on either Polkadot, Kusama, or Cosmos.
- 1 part goes into Youves USD on Tezos.
That’s my allocation for the first half of 2022. Yup, simple and easy to execute. I’m happy with it.
That means I plan to invest around 60% into stablecoins. While this will limit my upside potential, I’m hoping that it will insulate me a little for the inevitable market dips that frequently pop up in this space.
Wait! Shouldn’t Ethereum be in your crypto portfolio?
Ethereum is the original smart contract blockchain. It’s an interesting project, and it’s the one that I’ve seen other bloggers (like Banker On FIRE) talk about.
There are two problems with Ethereum that mean I’ve long since sold the tokens I had in it:
- It hasn’t scaled to meet demand, so it’s now too expensive for me to want to use. I don’t YOLO £10k at a time, I’m not that wealthy.
- I don’t believe that it’s going to scale up to meet that demand. “Ethereum 2.0” is a long way behind schedule (read: years). I just don’t think it’s coming, and when it does I think it will be too little too late.
These problems might not bother you, or you might believe that my assessment is wrong. Hey, feel free to disagree! I just don’t think it’s for me, and I won’t put my money into something I don’t believe in.
Crypto portfolio from previous years
I still have Elrond (EGLD) from last year. I’m holding onto it.
I have tried yield farming on Elrond’s Maiar Exchange. Having made good initial gains, I have left the profit locked on it to accumulate (a sub-token called MEX – don’t worry about it). I’d bought that token for about £10 each and I cashed out 200% of my original cash deposit amount, leaving the rest of the EGLD staked to accumulate.
This seems to be a good project, good enough that I’m happy to hold the tokens. I just can’t spread my spending too far – crypto is only 7% of my net worth, and I’m not rolling in it – so I’ve focussed on stable projects and interoperability this campaign year.
Final thoughts and a reminder
Crypto is high risk. Just because I believe in it, doesn’t mean you should. Read around, get some second opinions and make up your own mind on it. Don’t blindly follow me on the internet!
My crypto portfolio is a big allocation this year, but in the long run it’s not expected to be more than 25% of my non-pension assets. My partner, who is on this campaign with me, doesn’t invest in crypto at all. This means that my crypto portfolio is actually going to be a tiny portion of what we – as a team – do.
I invest in this for the huge upside risk. I’m hopeful that it will bring me a year or two forward, or become essential to international finance so that I can travel and manage it remotely.
That said, if it all fails (I doubt it) and crypto becomes an evolutionary dead end, my early retirement will still be assured, thanks to my other investments. All I’ll need to do is work for another year.
Make sure that if you’re in crypto, you can afford to lose – then I hope for both of us that you never will!
