Bogleheads should consider a long-term investment in cryptocurrency
Updated: August 29th, 2021
I know that many hardcore Bogleheads will be completely against cryptocurrency investments. After all, why take on the additional risk to your portfolio when you can simply invest in Total Stock Market Indices and keep your costs low? I get it.
BUT, if you look at the full Bogleheads philosophy, there is no reason that cryptocurrency cannot fit into it:
- Develop a workable plan
- Invest early and often
- Never bear too much or too little risk
- Never try to time the market
- Use index funds when possible
- Keep costs low
- Diversify
- Minimize taxes
- Keep it simple
- Stay the course
Now let’s look at this again and see how cryptocurrency investments can if into this philosophy:
- Develop a workable plan – Yes, we can do this with crypto.
- Invest early and often – Yes, we can do this.
- Never bear too much or too little risk – Yes, we can do this.
- Never try to time the market – Yes, we can do this.
- Use index funds when possible – None with low fees (yet).
- Keep costs low – Yes, we can do this.
- Diversify – Yes, crypto will further diversify our portfolio.
- Minimize taxes – Yes, because we aren’t selling.
- Keep it simple – Yes, we can do this.
- Stay the course – Yes, always do this.
So you can see that the biggest blocker to a Boglehead investing in crypto right now is going to be the lack of an inexpensive index fund.
Passive index investments do not yet fully capture the entire crypto market
Bitwise offers the first OTC Index Fund with its Bitwise 10 Crypto Index Fund (BITW), but the fees are 2.5%! That is just not going to cut it.
That means taking on any crypto investment is going to require that you actively manage your portfolio.
I don’t love this, but it’s also not a deal breaker for me. As a Boglehead, I want to buy and hold. So while I do have to actively manage my crypto in this case, I am only really buying once and holding. That is not very active.
No one should be investing all of their assets in crypto. But as Boglehead, I want to be exposed to everything that the markets have to offer. This includes cryptocurrency that cannot be currently captured only through Indices.
If you are investing only in the stock market, you are not fully capturing the entire current market.
Many Bogleheads want to only invest in a 3 or 5 fund portfolio. I am all about the simplification, BUT I also want to capture cryptocurrency and blockchain investments in my portfolio. I firmly believe that decentralized finance is here to stay, and I want it in my portfolio!
So how much is too much when it comes to cryptocurrency? Updating your Allocation Strategy.
Bitcoin is a store of value. It is an Alternative Investment.
Ethereum is an tamper-proof online ledger, that runs decentralized applications (dapps) with smart contract technology. This is also an Alternative Investment!
So my thesis is this: Cryptocurrency (or at the very least Bitcoin and Ethereum) should be considered in your Alternative investment strategy.
So when I built out my allocation plan, I earmarked 10% for Alternatives with 1-2% of that being an investment in Crypto.
I settled on 1-2%, because I am comfortable completely losing that amount of money. But not one penny more.
For me, 1-2% is enough to gain an entry point into the market, but not enough that it puts anything else at the risk.
Whatever risk you think you can tolerate, make sure that it is not enough to put your financial future at risk.
On the wild volatility: don’t try to time the market
Cryptocurrency is volatile as hell, with wild swings up and down.
If you invest at the current moment, you may well be looking at a 50% loss on your investment tomorrow. But you also may double your investment. Bitcoin and Ethereum could each increase 10x. We just don’t know.
Timing the market is off the table.
Yet by the time I finished my allocation plan, Bitcoin and Ethereum had skyrocketed in price. I figured that there would be an inevitable burst to this current bubble and prices would head back down a good 30-40%.
But at the time, prices did not. Tesla had just bought $1.5 billion of Bitcoin, and NFTs were all the rage. A drop wasn’t guaranteed to happen anytime soon.
If I wanted to start investing in crypto, I just had to start dollar-cost averaging.
Once you set your allocation, the best thing that you can do is set up dollar-cost averaging.
No matter where the cryptocurrency market is, do not try to time the market. Just don’t.
Stay the course: create a plan and stick to it
Keep it simple. Create your plan and stick to it.
Buy only what you know. For me, this is Bitcoin and Ethereum. That is all for now.
As I learn about new emerging uses that show real-life promise, I will consider investing in those cryptocurrencies as well.
But otherwise, I am buy, hold, and stake.
Why I am invested in cryptocurrency and blockchain technology
There are real financial uses for cryptocurrencies and blockchain technologies that are now coming to fruition:
- Peer-to-peer Transactions and Payments
- Digital Identity
- Digital Marketplaces
- Borrowing and Lending
There are already cryptocurrencies out there that will pay 5% APY or more interest when you hold and stake your coins via staking rewards. In fact, I recently staked my Ethereum 2.0 on Coinbase and am now earning 5% APY.
BlockFi also has an interesting strategy where their BlockFi is acting like a modern bank and lending your money, so with a BlockFi Interest Account (BIA), you can earn up to 7.5% APY.
So not only are there real benefits for investing and capturing the entire market, but there are short-term lending/staking benefits as well.
And this is just the tip of the iceberg. There will be many more financial and non-financial uses for cryptocurrency. Blockchain technology is here to stay.
Bogleheads can invest in cryptocurrency
- Investing in cryptocurrency fits within the Boglehead philosophy
- Bogleheads should consider investing a small portion 1-2% of their assets into cryptocurrency
- Bogleheads should NOT be trying to time the market, even if there is a current bubble
- Bogleheads create a plan and stick to it. Stay the course.
Coinbase for easy entry into cryptocurrency
I recommend Coinbase for easy entry into cryptocurrency investing. I personally use them to manage my crypto investments.
You can easily send/receive cryptocurrency within the Coinbase app, as well as instant transfers via bank, credit card, wire, or paypal.
And if you are worried about security, you can also pair Coinbase with the Coinbase Wallet app to securely store your crypto yourself.
P.S. Accidentally Retired is for informational purposes only. We are not experts. We are providing our personal opinion and it should not be taken as legal, financial, or tax advice. Accidentally Retired may receive commissions for links included in articles to Amazon and other affiliate partners.
Hi AR,
New to your blog, found it through JLCollinsNH.
I “invested” 1% of net worth in BTC, ETH since October 2017. Not touched it since.
I like BTC (first-mover advantage) and ETH because of the smart contracts thing – it is now really supporting real businesses, driving some real efficiencies and simplicity; it IS taking off and rightly so. Some of the biggest shipping port operations in the world have their backends on the Ethereum infrastructure – e.g. CargoX and TradeLens.
There’s a long way to go up (and down and up and down and up etc).
Good luck to all, stay sane, stay on plan 🙂
Hey Vorlic! Thanks for dropping by. I bet that 1% is quite a larger percentage of your portfolio now! I wish I had leaned into Crypto a bit more at that time. I can remember one of the VC’s I follow was talking about it at around $13. I just was very busy and spread thin, and didn’t realize the true disruption opportunities out there. But hindsight is 20/20, and it’ll be interesting to see what we all think about this in the next 10 years or so.
I’m dollar cost averaging into China, not Crypto…!
I do consider myself Boglehead, in 90% of my investment process, and yeah, I think crypto is here to stay. However, I don’t directly own yen, renminbi or euros. Bogleheads own income producing assets, not currency, as a general rule.
I do have a tiny sliver of BLOK, which tends to ride bitcoin up and down. I also own a sliver of ARKK which for now is doing the same. For now that’s good enough for me.
Makes sense. Both of those have Expense Ratios of 0.75%, so much better than Bitwise (BITW). BLOK is certainly giving you more real exposure to Crypto. ARKK’s top holding is TESLA, and while they do hold Coinbase as well, this is more of a technology fund than anything. Still, if you don’t want to hold Crypto directly, I get this approach. Like you said, BLOK will ride up and down with Bitcoin.
Not sure that strict Bogleheads would invest in crypto. Problem is there is so many varieties and not all are the same or as liquid.
Yes, an ETF/Index would be the best solution. Bitwise would be the simplest solution. I just cannot justify the fees in my mind. I’d rather hold onto the top two players and I’ll continue to adjust from there until there is an affordable ETF/Index solution.
I like your advice on limiting your portfolio budget and insulating allocations in interesting, high potential, but ultimately speculative positions.
The Boglehead 10 steps listed above really deal with “how to invest,” the process, not “what to invest in.” The philosophy was intended to be applied to broad holdings of stocks (ownership) and bonds (lending). In regards to crypto (?), I can’t resist pointing out that Jack Bogle himself said to “avoid it like the plague!”
I understand why he said this. As an underlying asset Bitcoin itself has value only if it becomes a store of value/currency. Four years after his comment, that is still somewhat up in the air, though certainly gaining more momentum daily.
Etherium and many other DeFi cryptocurrencies on the other hand will have real underlying value in the products that are built on top of them that disrupt the existing financial markets with products that blow away the current solution.
Think of all the bloat companies like Wells Fargo or Bank of America have. A “new” bank build on the blockchain will have none of that. No overhead, no bloat.
So anyways, Bogle was not wrong. No Boglehead should be putting a large percentage in cyrpto, but you are also not getting the entire returns of the market, and it will be awhile before fees come down on the current crypto ETFs.
Ha–I should have come here before I posted about this today. I finally bit the bullet and starting dollar cost averaging into Bitcoin and Ethereum, which I plan to continue doing at BlockFi. Glad to see this!
Yeah. It’s funny because I was reading the financial prospectus’ from a few wealth advisory firms last night and they are all strongly urging their clients to stay away from Crypto.
We are just seeing the tip of the Iceberg with this asset class. I also picked up COIN stock this week as well as part of my Crypto holdings.
It’s fascinating at how personal finance blogs are actually starting to embrace the technology behind bitcoin, DeFi, and blockchain. First, it was the speculators, then now legitimate personal finance bloggers are supporting it.
It can only be a matter of time before institutional money and the masses start to adopt it. Meaning, we are literally just at the START.
Yeah I think we are right at the start. We are past the Innovators stage, and now onto Early Adopter stage…perhaps on the brink of Early Majority. The internet will likely end up being retooled using blockchain technology. It’ll be more secure, and even more distributed than it already is. More money will be made here for sure.
You hit the nail on the head. As an investor with Boglehead foundations, I was originally pretty skeptical about crypto. But when I got rid of my assumptions and looked at it objectively, I started to realize that if you invest in crypto responsibly, it can absolutely be in line with Boglehead philosophy. (Aside from the simplicity aspect… setting up a crypto wallet is definitely harder than a simple three fund portfolio!)
Otherwise most of the principles are similar. Long term holding, diversification, hedge against risk, etc.
Especially the part about timing. “It’s a new all time high” has always been a bad reason to avoid dollar cost averaging into VTSAX, and I think it’s an equally bad reason to avoid crypto.
Well, at least setting up a crypto wallet is much easier now than it was 3-4 years ago. And if Paypal and other secure banking applications are allowing users to hold Bitcoin and other coins securely, then this is likely to be a non-issue altogether.