Looking at our article production schedule, we have certainly been in the accounting tutorial writing mode. Accounting has been an area I’ve been keen to get back into, and I have enjoyed it. I am coming to grips with changes in accounting standards and brushing up on many rusty knowledge sets. Of course, one has to have some fun along the way of financial independence (notwithstanding the monthly budget). I wanted to touch on today with our move into the world of digital mining and cryptocurrency.
But an area I want to develop on this site is personal finance, helping/encouraging others in developing greater robustness to their finances and the many benefits this brings.
Of course, one has to have some fun along the way (notwithstanding how much fun the monthly budget is) of financial independence, and this is what I wanted to touch on today with our move into the world of cryptocurrency and, in particular,, a small project of crypto-mining.
What is Cryptocurrency?
Building on our definition used on our definitions and terms page, a cryptocurrency is a digital token that utilises cryptography to build not only a currency of value but a means of payment.
Let me use an example to explain better. When we talk about a means or channel of payment, think of Paypal or the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system. These are well-established systems to facilitate the movement of money from one person to another.
And when we speak of a currency, we are talking about tokens with value and usually regulated. The world’s current reserve currency of the US dollar is the best known. But remember, it’s not a payment system but rather a means of payment. The US dollar is a token we have assigned value.
So we then come to the example of the grandfather of cryptocurrency, Bitcoin (BTC). Bitcoin integrates both a means of payment through its blockchain technology and within this ledger system, bitcoins themselves (which can be broken down to eight decimal places).
Why Cryptocurrency and Asset Allocation
So why have we taken a rather traditional or conservative asset allocation and moved into riskier digital mining? I’ll take you through my thought process to help you understand my reasoning.
Cryptocurrencies, by their nature, are currently not mainstream and have not been around for that long (Bitcoin’s algorithm didn’t get released until 2009), and their prices are volatile. As I write this article in mid-September 2020, Bitcoin had broken through $12,000 not that long ago but as of today has a spot price of around £10,300 – and has traded under $10,000 many times.
I found this type of volatility uncomfortable; this was why I never looked into it more seriously in the past.
However, volatility depends on perspective. The period of holding and the reason for the holding make a big difference. I concluded that I had been looking at trading the coins instead of long term holding. And I think that change came about as to how these assets could form part of our portfolio.
Fiat Money
When I look around the world, particularly all that has been going on during 2020, one of the many financial issues that concern me is the supply of fiat money from many governments. The level of “printing” or increasing the supply of money in the economies is staggering – and history shows us this often does not end well. Even modest inflation over some time significantly eats away at the purchasing power of a currency.
So in effect, with the decreasing purchasing power of the currencies, Bitcoin is a hedge. The large swings in BTC’s value from month to month is of little concern to me. Just like the movements in shares aren’t, neither asset class are held to live-off (for the moment). But are relatively long term positions for growing our wealth. However, the closer we get to retirement, will mean price movements are much more critical.
Digital Mining – An Interesting Frontier
In addition to holding two per cent of our portfolio in cryptocurrency, we have started digital mining. Not BTC, as the hash rate and electricity are well beyond what I could put together. Hopefully, I’ll be writing more about this project, a series of articles documenting my learning along the way. I am bullish about its prospects but also cautious due to the risks I see around it.
We do have our first mining rig up and running. I’ll write up an article about that process, too, documenting the economics of crypto-mining at home.
Conclusion
I would be interested to hear your views on cryptocurrencies and whether they form part of your portfolio. Perhaps you are involved in the trading or mining side? What coins have you traded or mined? Please drop a comment below or get in touch through our Contact page.