I remember Bitcoin’s rise really well.
My whole career, I’ve been building software.
And when the technology came out around blockchain, I knew it would revolutionize the world.
You see, in my past life of writing lines of code in the security world, one problem always persisted… something we call “nonrepudiation.” The concept is simple….
The blockchain solves this problem… and I immediately LOVED the concept.
What I didn’t know at that time was that Bitcoin would become an investable asset… a “digital gold,” if you will.
Fortunately, I did eventually put a very small amount of money into Bitcoin and a few other “cryptos.” And frankly, I’ve LOVED the returns as well.
Over the last 10 years, Bitcoin has generated a compound annual growth rate of more than 200%.
Yes, you read that correctly… Bitcoin has more than tripled on average, each and every year, over the past ten years.
That’s enough to turn $1,000 into MORE THAN $63 MILLION… which is almost certainly the greatest 10-year return of any asset in history.
Given these returns, you might worry it’s too late to invest… You may be thinking that the best days for Bitcoin — and cryptos in general — are gone.
Well, if you tuned in last week, you know I disagree.
I believe there’s still massive potential upside for Bitcoin and other select cryptos in the years ahead. (And I currently have around 2% of my entire net worth in these assets — mostly Bitcoin — to prove it.) So, this week, I’m going to help you get started.
Let’s get to it…
When investing in cryptos — whether that’s Bitcoin alone or any of the thousands of “other cryptos” I mentioned last week — there are two general approaches I recommend.
We’ll start with Bitcoin…
The first approach is also the simplest: Just put a small amount of money into Bitcoin and hold it for the long term.
Now, if you’re a regular TradeSmith reader, you know we don’t usually recommend a “buy and hold” approach when investing in stocks and most other assets. Our research shows you’ll typically do much better over the long run by using trailing stops to limit your risk.
But we’re willing to make an exception for Bitcoin.
Given its unprecedented returns to date — and its real potential to become a global “store of value” and “medium of exchange” in the years ahead — even a relatively small investment in Bitcoin has a real chance to generate life-changing returns.
You can’t say that about any other asset in the world today.
So, if you don’t have the time, energy, or desire to learn more about cryptos — or you just want to keep things simple — there’s absolutely nothing wrong with just buying and holding a small position in Bitcoin.
In fact, if you take away nothing else from today’s lesson, I implore you to do just that…
Open an account on Robinhood (or one of the other easy-to-use exchanges we’ll cover next week)… buy a little Bitcoin (even $100 or $200 is enough to start if money is tight)… and forget about it for the next 5 to 10 years. I’m confident you won’t regret it.
Bitcoin has a unique “asymmetric” risk profile you won’t find in most other assets or even other cryptos. It has the potential to rise hundreds of percent in a very short time, but also has a relatively low Volatility Quotient (VQ) of about 20% (most cryptos have VQs of 50% or more). This combination makes it a great fit for our usual TradeSmith investment approach as well.
By using our proprietary Health Indicator Entry Signals and trailing stops to define and limit your risk, you can potentially use a larger position size than is safe when following a simple buy-and-hold approach.
This approach may lag the total percentage gains of a long-term buy-and-hold approach. But it will likely deliver bigger nominal gains simply because you can safely invest more money in these trades.
But you don’t necessarily have to choose one or the other. Personally, I’ve used both.
As I mentioned earlier, I’ve held a relatively small position in Bitcoin for several years now. And I don’t intend to sell it until or unless Bitcoin reaches its monetary potential.
But I have also taken advantage of several well-timed Entry Signals to make profitable, shorter-term trades as well.
These same two general investment approaches apply to “other cryptos” as well. But there are a couple of important differences you should be aware of…
As I mentioned last week, even the most established of these assets are still more speculative than Bitcoin today. If you plan to buy and hold these cryptos, you’ll need to take a more hands-on, fundamental approach than you do with an investment in Bitcoin alone.
I like to think of this as a “venture capital” approach. Successful venture capital firms tend to place lots of relatively small bets in the most promising start-ups, hoping to find a few huge winners among the many “also-rans.”
This approach can make great sense in “up-and-coming” cryptos, too. But to be successful, you’ll need to be able to identify those with real potential from the many thousands of scams, frauds, and useless projects.
Unless you have experience in technology, this likely means relying on the analysis of experts.
We here at TradeSmith don’t officially endorse any specific crypto research services. But there are several excellent ones available from our newsletter partners, including those from my friends Teeka Tiwari (Palm Beach Research) and Eric Wade (Stansberry Research). If you’re going to take this approach, I encourage you to learn more about these services.
Your other option is to take a more technical, momentum-based approach. Like I mentioned earlier with Bitcoin, our Health Indicators can get you into explosive cryptos that are performing well, while helping you avoid those that are performing poorly.
This approach is less likely to produce as many “home runs” as you might see with a buy-and-hold approach, but you’ll also avoid many of the losers as well. And again, there’s no reason you can’t try both approaches to see which style suits you best.
The general rule of thumb for crypto investing is to risk only what you can afford to lose.
For most folks, that’s probably somewhere between 1% and 5% of your total portfolio, but the actual percentage will depend on your risk tolerance.
In any case, I generally recommend putting at least half of that money into Bitcoin, while spreading the rest among a small basket of other promising cryptos if you so choose.
But again, crypto investing doesn’t have to be complicated or super risky. Setting aside even $100 or $200 into Bitcoin could be an investable legacy that you leave behind.
My team is also putting together a more comprehensive e-book you’re going to love!