Having a look at our recent article production on the site we have certainly been focused on accounting tutorial writing mode. This has been an area I’ve been keen to get back into and have enjoyed coming to grips with changes in accounting standards and brushing up on many areas I’ve become rusty in.
But an area I want to develop on this site is personal finance; helping/encouraging others in developing a greater robustness to their personal 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 better explain. 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 in fact speaking about tokens that have value, and normally regulated through legislation and regulations in a country. The world’s current reserve currency of the US dollar being the best known. But remember, it’s not a system of payment but rather is a means of payment; ie a token we have assigned value to.
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 in our personal finances and moved into what many consider high risk? I’ll take you through my thought process to help understand my reasoning.
Cryptocurrencies by their nature in they are currently not really mainstream and have not been around for that long (Bitcoin’s algorithm didn’t get released until 2009) these assets or financial instruments 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 a number of times.
This type of volatility I find uncomfortable and was probably the main reason I never looked into it more seriously in the past.
However, volatility depends on perspective; ie over what period of time is it being compared to and what would be the reason for holding the asset. I came to the conclusion that I had been looking at BTC and the alt-coins from a trading point of view rather than a holding point of view. And I think that change came about as to how these assets could form part of our portfolio.
When I look around the world, in particular all that has been going on during 2020, one of the many financial issues that concerns 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 a period of time significantly eats away at the purchasing power or a currency.
So in effect Bitcoin, which is the majority of our stake, is a hedge against the decreasing purchasing value the currencies the rest of our net worth is held in. The large swings in BTC’s value from month-to-month is of little concern to me; just like the movements in equities. As neither asset class are holding to be living off. But are rather long terms positions for growing our wealth.
Of course closer to retirement years and the need for these classes to generate income and be drawn upon will mean price movements are much more important to us.
Crypto-mining – An Interesting Frontier
In addition to now holding about 2% of our portfolio in cryptocurrency we have started another small side hustle of mining these coins. Not BTC as the hashrate and electricity are well beyond what I could put together. I’ll be writing more about this project, which will be more of a series of my learning along the way so I can document my journey. 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 and I’ll write up an auricle about that too; documenting the economics of cryptomining at home.
I would be really interested to hear your views on cryptocurrencies and whether they form part of your portfolio. Perhaps you involved in trading or mining side? What coins have you traded or mined in? Drop us comment below or get in touch through our Contact page.