Having worked in product management within the blockchain industry, I’m often asked about investing in crypto, and felt it would be useful to include a related chapter.

First, I believe blockchain technology will have an impact on the world similar to that of the internet, and so it seems sensible to consider adding cryptocurrency as an asset class to one’s portfolio. In this chapter, as a starting point for further investigation, I’ll try to provide an overview of the landscape along with some notes and warnings.

The crypto landscape

As of this writing, December 2024, the following is a very high-level overview of the blockchain & cryptocurrency landscape:

  • Money — Bitcoin (BTC) stands alone in addressing the use case of a form of money or store-of-value that is decentralized, permissionless, sovereign, and censorship resistant. It’s often referred to as “Digital Gold”.
  • Smart-contract networks — Smart contract networks are literally global computers, on which any kind of software system can be built and interacted with permissionlessly by anyone in the world. Whereas most transactions on the Bitcoin network are simply the transfer of BTC from one person to another, a transaction on a smart-contract network is the execution of software, the cost of which is a function of the complexity of the computation. There is an inherent trade-off between cost of computation, speed of computation and decentralization. At the time of this writing Ethereum (ETH) and Solana (SOL) are arguably the leaders in smart-contract platforms. ETH and SOL are the respective native cryptocurrencies used to pay transaction fees on these networks.
  • Stablecoins — Smart contract networks support multiple currencies in addition to their native currencies used to pay transaction fees. Perhaps the most important are stablecoins, which are tokens like USDC and USDT that can be thought of as a digital US dollar. In the world of stablecoins, some are issued by companies which, in theory, maintain one-to-one bank or cash-equivalent reserves for each issued token. Then there are pseudo-decentralized stablecoins run by smart contracts, like USDS and USDe, which use over-collateralization or other mechanisms to attempt to maintain their one-to-one equivalence to one USD. Stablecoins have become popular in countries where people prefer to hold USD rather than their local currencies, and also because there are opportunities on smart contract platforms to earn higher yield than in the traditional financial system (banks, etc.)
  • Tokenized Real World Assets — We are beginning to see the appearance of tokenized versions of real-world assets appearing on smart contract platforms. At the time of this writing, BlackRock (one of the world largest asset managers) have deployed a tokenized version of US treasuries on the Ethereum network, and a number of companies have issued tokenized versions of gold. I expect to see tokenized versions of other real-world assets like real estate, stocks and bonds.

There are many other categories of blockchains, cryptocurrencies and use-cases, but these are currently the leading ones.

Investing in cryptocurrencies

As an investor, you can choose to treat blockchain/cryptocurrency as yet another asset class, and follow the approach outlined in this book. Within that asset class, you might choose to hold a small number of the leading currencies that are likely to survive in the long run, such as BTC, ETH and SOL, assign percentage targets to them, and rebalance when necessary. BTC and ETH are even conveniently available now for purchase as ETFs in brokerage accounts!

How large should your allocation be? This can only be answered based on your age and risk profile—tolerance for risk, need for risk, and capacity for risk—and with the awareness that the asset class has traditionally been extremely volatile, i.e. losses of 50% to 90% within a year have not been uncommon, although one would expect that to settle as the industry matures.

For example, it wouldn’t seem prudent for someone close to retirement to hold a large allocation to crypto, whereas, for someone in their 20s, with more human than financial capital, a larger allocation might make sense. (Just remember, however, that every dollar saved early has far greater wealth building potential due to compounding returns than dollars saved in the future.)

As one data point, Wences Casares, famed “Silicon Valley Bitcoin Patient Zero”, historically recommended a 5% allocation to Bitcoin. If things work out as he expects, that 5% will do wonders for your overall portfolio, and if it goes to zero, you’ll survive.

Here’s a link to a BlackRock report about Bitcoin in particular as a portfolio diversifier.

A warning

Because fortunes have been made in cryptocurrencies and publicized in the media, many people attempt to speculate in the area trying to get rich quick. Be aware, however, that for every success story you read, there are innumerable untold stories of people who have lost everything to poor decisions, smart contract hacks, theft by scams, etc.

We even now have on-chain data that demonstrates that, just like in the traditional finance world, active trading in crypto is a losing strategy — in the aggregate.

In conclusion…

My suggestion for anyone deciding to invest in cryptocurrencies is to follow the high-level approach outlined in this book, and try your very best to not get pulled into the multitude of near irresistible forces — from behavioral finance errors, to YouTube “influencers”, to experts in timing the market cycles” — that will, probabilistically, result in the loss of your money.

(It you would be interested in a separate guide on how to operate on crypto networks, please drop me a note on the contact page.)