Cryptocurrencies are a lot more accepted today. That said, most investors do not treat it as a core asset in their portfolio. Rather, cryptocurrencies remain as a speculative play at best.
The last thing one would expect is for a financial blogger put in a large sum of capital into cryptocurrencies because financial bloggers often get the stereotypical money-pinching-conservative investor image. Financial blogger KK invested S$200k into cryptocurrencies in 2020 and it had paid out big for him.
I did an interview with him to find out how he did it.
How did you start to realise the potential of cryptocurrencies?
Maybe I’ll start with a fundamental issue I have with the term “cryptocurrencies”. By painting all crypto as currencies, it makes it un-investible in the traditional sense as currencies can’t be easily valued. This is probably why traditional fundamental investors like Buffett still find issue with crypto.
The reality with crypto is that there are assets that are beyond currencies and have equity-like properties. This is why I tend to refer to crypto as crypto assets, rather than the commonly used term cryptocurrencies.
My initial exposure to crypto, like most traditional investors, was back in 2017 during the crypto bubble. Back then, while I agreed with most famous investors that they were not very investible from a valuation standpoint, I found it a cool concept and solves a real world need. I was also intrigued that financial blogger GMGH went full crypto around then. That was when I started keeping tabs on and off about developments in the crypto sector and reading GMGH’s blog.
What really triggered my interest into crypto assets was when I started using BlockFi, a custodial service that pays interest for your crypto deposits (much like how a bank does it), on GMGH’s blog referral. Up till that point, I’ve never heard of the concept of interest and cash flow generation on crypto assets.
Out of curiosity, I started my journey down the rabbit hole. I researched into how BlockFi made money and learnt of the term Decentralized Finance (DeFi) in the process. I read about DeFi protocols and started using them for fun.
I was mind blown by what these protocols could do without any financial intermediaries involved. For example, you could do basic banking functions like lending and borrowing. You could trade assets and derivatives 24/7. All this while not having to trust a financial intermediary like a bank or stock exchange with your assets.
How much capital did you allocate to cryptocurrencies?
About S$200,000. Do note this is not out of pocket capital but the proceeds from liquidating about 60% of my traditional portfolio then.
How much has that 200k grown to?
It was $1.26m at my last portfolio update on 30 Jan.
Did you leverage on the 200k and/or lending out your crypto to boost returns?
No. Just buy and hold.
What are the cryptocurrencies which you allocated the most capital to and why?
Generally, I’ve allocated all my capital into tokens in the decentralized finance (DeFi) space, especially those built on Ethereum. This is because DeFi on Ethereum is the most mature and has the strongest network effects.
Sub-sectors that have broader appeal and acceptance like lending & borrowing, fixed income and asset trading will probably move first and have more rich valuations. Complex sectors like derivatives, synthetic assets and options trading will probably follow after that.
I’m not sure about the insurance sub-sector yet as current protocols still require a lot of human intervention.
Do you think DeFi would eventually disrupt the finance industry?
The disruption is happening as we speak. Increased acceptance of Bitcoin (BTC) by institutional investors will only drive usage demand for DeFi as these investors realise that they can put their BTC to work in DeFi. As for mainstream users, as more people realise that they can earn 8% on stablecoins in custodial services like BlockFi and Celsius instead of leaving their cash in traditional banks earning <1%, the flight of capital will only accelerate.
Add the issues with centralization in traditional finance (liberal printing of money by central banks, the long history of financial intermediaries exploiting their customers, etc), demand for decentralized financial services will only grow.
Do you think the government would intervene if they start to believe DeFi is a threat to the system? Or what risks do you see for DeFi?
Regulation is probably the biggest question mark in crypto / DeFi in general as there is little to no clarity on this. The Chinese has always maintained an iron fist on crypto by not recognizing it as legal tender and actively shutting down bank accounts related to crypto services. The US has had some conflicting regulatory signals recently with the OCC giving banks the all-clear to use stablecoins for payments while the Trump Treasury department wanted to introduce regulation that targets self-custody of wallets. Singapore takes a more open minded approach, having generally welcomed crypto start-ups while closely regulating fund flows into crypto.
The challenge governments face is having to find the balance between encouraging innovation while trying to not put the existing system at risk. There is also the risk of being left behind by the rest of the world if you take a too heavy handed approach towards crypto regulation.
My personal expectation is that governments will eventually engage DeFi with sensible regulation and those DeFi start-ups that choose to engage regulators early along the development process will probably be more in the clear. Some examples of these start-ups include Circle, the company behind the stablecoin USDC and AAVE, a lending protocol that actually has an electronic money institution license with the UK FCA.
Would you be allocating more capital to cryptocurrencies, and less to stocks?
Part of the reason why I transitioned to DeFi was due to the more attractive risk-vs-reward and valuations. Until stock valuations come down, I don’t expect to allocate more money to stocks for now.
My views
This may look like financial pornography and some of you might think that it was a risky move to put a substantial capital into crypto. I am not here to comment what is right or wrong as risk is subjective and we can argue and not arrive at an agreement.
The more important lesson is about conviction. An investor will only dare to put in a large capital if he is very sure about something. The conviction comes from careful study of the investment opportunity and that requires work and effort. The competency grows and one would have a good sense if it is a good bet. If yes, make a significant investment. This is akin to Buffett’s fat pitch analogy.
But I would also warn you that it is risky if you bet big without first making the effort to study or building up the competency. That is gambling so you need to know the difference.