Cryptocurrency: Tips and Tricks for Investment

Everyone around me knows that I am a huge fan when it comes to reading about investment tips and tricks. To me, money is like a coupon for my time. I use my time and labour in exchange for these ‘coupons’, which in return allow me to trade for goods and services. These coupons, although legal tender, can fluctuate in value. No one wants to be in a situation where their hard-earned savings are devalued year on year because of inflation.

In New Zealand, our seniors are “doing more” and working well after the retirement age, as many find it hard to live on the pension. First home buyers, on the other hand, are struggling to keep up with house prices while scraping their deposits together. And with the recent economic shock caused by the pandemic, low-interest rates are the “new normal”. To me, this is a warning sign that relying on good money habits like saving alone is not enough.

But what can I do? What can we all do?

I have tried to look for answers, and the internet provides a plethora of resources for those who seek. Although these “cheat sheets” on personal finance and wealth tips may differ in their exact strategy, there were general themes that threaded through.

Here are some tips and tricks that might help your investment plan:

Understand risk and your risk appetite

Investment risk is the probability of losses rather than the expected profit. This can happen when the price of assets fall — you see this in shares, your Kiwisaver, housing prices and of course cryptocurrency assets. Even to some extent, there are risks associated with the cash you save in your bank.

Although I was only 16 when the Lehman Brothers collapsed during the Great Financial Crisis, I still recall the vivid image of my jaw dropped parents watching the news. For my parents, it didn’t make sense how the fourth largest investment bank in the United States could collapse.

In New Zealand, we do not have deposit insurance for bank depositors. The last I checked, the Finance Minister said they were “in consultation” about such protection. However, “there’s no plan for it to be set up before 2023”. The Treasury, OECD and IMF, have all cautioned that insurance around deposits in banks are needed to ensure adequate “financial safety nets”.

So yes, there are risks involved — be it savings or investment. One must have such awareness and an understanding of one’s risk appetite (i.e. what sort of risk you’re comfortable with). A good strategy to “reduce risk” is to have a long-term outlook, and this brings me to the second theme I have discovered; the perks of starting early.

Start early!

I’m sure many of you have heard the popular Chinese proverb that “The best time to plant a tree was 20 years ago. The second-best time is now”. This theory applies to grow your wealth too, and Warren Buffet is probably a living proof that this method works. In fact, Buffet said, “Someone is sitting in the shade today because someone planted a tree a long time ago.”

In economic markets, there is volatility — this means one day prices may go up, the next they may fall. Higher price swings are associated with a higher degree of risk because prices are less stable. I’m sure it would have been brought to your attention about the different kiwi saver fund types and their associated risks. A closer read, and you’ll notice that funds with “higher risks” usually have a longer recommended investment term in their product disclosures.

The logic follows that there are good and bad times in the market, but if you’re in the investment for the long-term, the assumption is that you’ll ride out the losses with gains, eventually have a decent long-term advantage. This is why people who are investing for the long term typically enrol in funds with higher risks. Log onto your Kiwisaver or check out your provider’s risk indicators!

Be consistent and stay committed

You may have started your investments early, but are you consistent in your contributions?

Putting away small sums of money may feel slow and tedious, but that’s mostly how investing works.

Paul Samuelson, an American economist once joked that “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” His wise words couldn’t be more true.

Almost all of the money gurus out there will say it is alright to start small, but consistency is vital. Consistency in investment allow one to create a sustainable habit. While some financial bloggers rave about setting up automatic payments, others discussed a need to construct set targets. Personally, I think about investing as “paying myself”. Just like how you pay your bills and have them as “non-negotiables”, it is essential to “reward” yourself. Some days, to “trick” myself into putting more away (say $20 more that week), I convince myself that “it’s just one less takeaway”. Whatever the strategy, it must be one that suits you; one that you can commit.

Regular investment allows you to adjust your mindset, thereby accumulating your wealth through the “art of compounding interest”.

Compounding interest — the eighth wonder of the world

Albert Einstein once famously said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.” Remember how I said investing is mostly slow and boring? Except when you’re in your investment for a long, long time and towards the later part of your investment term, compounding interest starts working in your favour.

Compound interest works in such a way that the growth curve usually follows an exponential graph (just like the graph of New Zealand’s COVID-cases before the lockdown). Have a play with a compound interest calculator when you’re working out your investment strategy.

Diversify

The last theme I noticed that was communicated in many of the investing tips is the need for diversification. This is perhaps the mantra I hold the closest.

Diversification is the practice of spreading your investments around, and by doing so, you are not exposed to any one type of asset. By diversifying your investment, you balance the risk and reward in your investment.

I do acknowledge that some of the greatest investors of our time are against diversification, and Warren Buffet may be one who has situated himself in that camp. However, let’s not forget that he also said, “Wide diversification is only required when investors do not understand what they are doing.”

For most people, researching into specific assets (e.g. a particular share or cryptocurrency coin) is time-consuming. And if you’re studying full-time or working 9 to 5, summoning the energy to make sense of all the information is challenging.

Although diversification does not guarantee a profit or no loss, it does mean that one mitigates risks by potentially reducing the number and severity of stomach-churning ups and downs. This is why, apart from shares, index funds and commodities such as gold and silver, I am an enthusiast for cryptocurrency investments like Bitcoin.

There are increasing numbers of heavyweight investors advocating the need to include cryptocurrencies in their investment portfolio. Such investors include Chamath Palihapitiya, Raoul Pal, Paul Tudor Jones and Bill Miller.

Each of these investors has different holding compositions of cryptocurrency assets such as Bitcoins in their portfolio. Miller, for example, has openly admitted that half of his hedge fund is made up of Bitcoin. A survey conducted by Fidelity Investments revealed that as many as 36% of large investors own crypto assets. Without a doubt, there is a growing prominence of crypto assets as such Bitcoin and Ethereum in investment portfolios.

Investment is one aspect of living a good life, but it has such importance because if one understands how it works, new opportunities are paved. Everyone invests for different reasons; some invest for retirement, some for buying their first home, and others for their children.

And it all starts with thinking about investment, having a plan, and slowly building your portfolio. Check out what other crypto assets people are buying with our “Newly popular this week” indicator. If you’re needing help with getting started about building a savings or investing habit, check out our Auto-Buy feature that allows you to invest from as little as $40 dollars a month!