One of the things I’ve learned in my long trading career is that
investment allocations can be one of the trickiest things to nail down.
Case in point: Netflix stock is up 65x in the past 10 years.
If you’d been fortunate enough to invest in Netflix in 2008 —
and hold on until now — you would’ve done extremely well…
provided you had allocated your portfolio properly.
Let’s say you had $100 to invest in 2008.
You decided to invest $1 in Netflix and the remaining $99 in GE.
Your total today would be... drumroll…. $107 and change (excluding dividends).
Compare that to a 100% allocation in the S&P 500 over the past 10 years,
which would have been $200 (excluding dividends).
The point is, position sizing is one of the most important skills in investing.
It’s not enough to choose an investment.
You also need to choose the right amount.
That leads me to one of the questions I am frequently asked about cryptocurrency...
How much should be allocated when investing in bitcoin vs. ethereum?
Let’s take a deeper dive to decide...
The Potential for Enormous Gains
Ethereum has tremendous potential as a platform for decentralized
applications and smart contracts.
But what many people forget is that ethereum is still very early stages.
Consider this… Late last year, a trading game for breeding and trading digital cats
— called Cryptokitties — consumed almost all of the capacity of the ethereum blockchain at a point.
In fact, one of the lead ethereum researchers, Vlad Zamfir,
has said repeatedly that “Ethereum isn't safe or scalable. It is immature experimental tech.”
On the other hand, the potential of ethereum is astronomical.
If ethereum takes off, it will make the returns from Netflix look like garbage.
One main factor leading to ethereum’s rise:
The technical and management skills of the leadership team are world class.
The importance of the team cannot be overstated…
Right now, anyone who knows just about anything about developing blockchain
or smart contracts can write their own ticket and command 6 or 7 figure salaries.
The competition for skilled developers is fierce.
However, the ethereum development team is probably the best of all.
The concentration of talent and skills working on ethereum is unparalleled.
The currency has a well-organized group supporting its leadership and development,
led by one of the most respected names in cryptocurrency, Vitalik Buterin.
In short, ethereum is like a pre-launch rocket ship.
It’s been fueled up with high-octane rocket fuel.
But it’s risky.
There’s a chance it could explode on takeoff.
Although this chance is far less than other currencies.
There’s also a chance it could blast off, soaring deep into galaxies we’ve never seen before.
The Safer Bet
Alternatively, bitcoin looks like a comparatively conservative investment.
It’s been around the longest of all cryptocurrencies...
It has more resources dedicated to mining than any other cryptocurrency...
Its open source code base has been peer reviewed obsessively for security flaws...
Its lower ambitions mean that the code is less complex and (arguably) less prone to error...
And there’s an active derivative market which allows banks to take exposure.
Plus it has household name recognition.
That being said, bitcoin has its challenges too...
Without clear leadership, political infighting is rampant.
The network also has issues handling large transaction volumes.
And many of the influential developers have opposed prior efforts to introduce changes.
Last summer, the network nearly split in two as developers opposed a code change,
which they felt would concentrate mining in the hands of a few big players.
Although their efforts preserved the integrity of the network “for the people, by the people,”
it also suggests potential resistance-to-change.
That may threaten to splinter the currency again in the future.
Ultimately, bitcoin’s prospects are bright, but not nearly as bright
as best-case investment scenario for ethereum.
On the other hand, ethereum could become a big zero.
History is littered with companies, organizations, and regimes with grand
ambitions which, push-come-to-shove, couldn’t compete with reality.
Bottom line:
For most people, a 50/50 allocation should give good exposure to both ethereum and bitcoin.
And that’s what I recommend for our portfolio.
Now, another path may be better for your own personal risk tolerance and ambition.
If you really like the possibility and opportunity of ethereum — and your time frame is long enough
(it could be years before ethereum really reaches its potential) — consider investing up to 70% in
ethereum and the remainder in bitcoin.
If you think investing in cryptocurrency is risky enough as it is, or you have a shorter time frame,
consider investing up to 70% in bitcoin and the remainder in ethereum.
P.S If you want to mine bitcoins and ethereum on autopilot without any risk , then this is best option