Cryptocurrency Investment for 401k Guys

Zane Blanton


I’ve become a crazy crypto guy during the COVID-19 lockdown. With nothing to do or buy and plentiful stimulus checks, one year later my crypto investment is up x4 (a couple of days ago it was x6). Being a generous person, I wanted to spread the Good Word about crypto to my friends so that they could share in the gains (and perhaps pump my coins even more). Unfortunately most of them are wedded to buying index funds and decry crypto as speculative trash. I find this somewhat offensive because the stock market is to some degree also speculative trash.

Everyone Forgot Stonks Go Down Too

Dow Jones Industrial Average over time (but millenials only remember the 1980s onward)
Japan’s stock index, the Nikkei 225. It just recently recovered to its peak

To some degree the stock market is smoothed out in the US by central bank policy and the constant influx of new money into S&P 500 indices versus retirement funds, but eventually people will retire. And if at some point the US government can’t prevent a downturn, it seems like you would want to hold something other than stocks.

Diversification: Why Even Normies Should Own Crypto

I still own a lot of stocks (it’s the American Way), but I got nervous March 2020. It’s hard seeing your portfolio take a 30% loss! The usual answer is to keep a tiered investment structure (emergency funds, medium-term investments, and retirement accounts) and to diversify your portfolio between stocks, bonds, real estate, and perhaps a little gold. Unfortunately, bonds have very low yields now, the real estate market experienced a divergence in the pandemic, where single-family homes gained value and office space lost value. So we need something else as a portfolio diversifier. And, despite cryptocurrencies’ famously high volatility, we can reduce our overall portfolio risk by diversifying into it (not too much though please!) since it’s not perfectly correlated with our other assets. Before we move on though, let’s talk about the two biggest reasons why most people buy cryptocurrency, aka

Why why should crypto even go up?

Bitcoin as a hedge against fiat inflation

Bitcoin is gaining a reputation as “digital gold”. There’s a finite supply (21 million), it has a 12 year narrative as an increasingly accepted store of value, and it’s much easier to transmit and store than physical gold. If there’s as much demand for Bitcoin as there is for gold, it should hit 200k UD per coin in 2021 prices. Also, there’s widespread worries about inflation due to fiscal and monetary stimulus after the pandemic, so it might make sense to hold some gold and/or Bitcoin as a hedge against inflation.

Crypto as a tech play

Crypto is going to eat the world the same way software has eaten the world. We’re seeing financial exchanges, cloud computing, digital cash, derivatives, collectibles, gaming, and oracles all moving into the crypto space. There’s a lot of hype and dumb projects so people like to disparage it, but eventually central banks, commercial banks, Big Tech, and most everything else will be crypto-enabled. It’s not a guarantee that any of the current set of projects will capture the value being generated in this space (Facebook and China also want to dominate this space), but we will all be using blockchain technology in the future.

So what’s my recommendation?

Keep 3–5% of your portfolio in crypto.

I got this number by reading a bunch of mainstream finance articles ( Numbers vary, but I think if you have sort of a middle class portfolio then it’s not really worth your time to manage a smaller share of your assets than 3% since there’s a bunch of extra administrative overhead associated with crypto assets. On the other end, 5% also starts to be a bit high if you consider there’s a reasonable chance your investment goes to 0. (crypto banned, exchange hacked, your coins get replaced by competitors).

But even if 3% sounds like too much, just jump in for $100. Once you get comfortable managing your coins and start to see them appreciate over time, you can actually increase your allocation to more significant levels.

But don’t buy them all at once

Right now, the crypto market is going crazy. We had BTC at 10k in December 2020 and both 65k and 30k in May 2021. By the time you’re reading this BTC could be back at 10k or up to 100k. One easy solution to this problem of extreme volatility is Dollar Cost Averaging. DCA is when you slowly buy up to your target allocation over a longer period of time. Let’s say that you 95k in your portfolio and want to hit 5% crypto allocation. If you buy 14 USD worth of crypto a day, then after about a years you’ll hit 14 * 365 = 5000 USD + fees, a 5% allocation. If you get hit by high fees by trying to make daily buys, just switch to weekly or monthly DCA instead.

In cases you’re interested, here’s the 1 year moving average for Bitcoin. There’s always pain when investing in Bitcoin, but at least this strategy minimizes some of it.

What to Buy

Buy large-cap coins. Smaller projects tend to grow then collapse, so it’s risky to hold any of them long term. Bitcoin has historically held around 45–55% of the total value in the crypto ecosystem, so just holding bitcoin is probably sufficient. Incredibly, Bitcoin is actually the most stable store of value and trustworthy cryptocurrency you can buy!

Ethereum is the substrate on which the rest of crypto grows. Most blockchain (Web 3) applications run on Ethereum, including a variety of other cryptocurrencies and financial services, so an investment in ETH is like an investment in the space. They’re also rolling out a bunch of new features soon to make it more attractive to hold ETH, so your investment should be actively growing on top of its price appreciation.

Just for fun, here’s the most valuable coins on right now on May 22nd, 2021. Everything that’s not Bitcoin or Ethereum is basically comparable to Dogecoin in market cap, so if you want to avoid the chance you’re buying pure hype, don’t buy anything but BTC and ETH.

Only BTC, ETH, and USDT are consistently on this chart, and USDT is not an investment asset.

Where to Buy

Buy on Coinbase. They have the highest fees but they’re also the most reliable. I don’t think it makes sense to self-custody at this point unless you actually think the government is going to come for your Bitcoin. I realize this is a legitimate concern in many countries, so when you end up with a sizable stack of coins, you might want to invest in a hardware wallet.

So go buy your coins while they’re cheap!

At some point, you’ll be using central bank digital currencies, and your target date fund will contain a variety of blended crypto assets. For now though we live in a world where crypto hasn’t yet been fully integrated into our financial system. So while crypto is the biggest investment opportunity we’ve seen in our life, and it’s safe enough that institutions are coming in to buy it. I think that if a pension fund thinks that it can securely diversify into crypto, it’s probably time for you to do it too.

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Zane Blanton

data scientist, expat, climate change worrier, and cryptocurrency enthusiast.