By Josh Arnold for Sure Dividend
Investors looking to compound their wealth have generally been relegated to using blue-chip stocks and bonds to accomplish this goal. For hundreds of years, stocks and debt instruments were the only financial instruments one could acquire and fairly easily trade. Of course, today there are thousands of stocks and thousands more debt instruments to choose from, and access for investors is better than it has ever been.
In an interesting twist for those looking to invest their capital, a brand-new asset class appeared several years ago and has become very popular: cryptocurrencies. These are “coins” that trade on exchanges, similar to stocks, but there is no underlying business backing them. In this way, they’re similar to fiat currencies such as the US Dollar or the British Pound. However, much of the point of the bigger coins is to be the anti-fiat choice in currency. That is, they use publicly-available blockchains to register transactions, which aren’t subject to regulation in the vast majority of most cases.
Cryptocurrencies have become a very popular asset class in part for that reason, but also because stories of crypto millionaires (and even billionaires) crop up from time to time. Long-term holders of Bitcoin, the largest cryptocurrency by market cap, have likely done extremely well, even though the coin is more than 50% off of its all-time high. While cryptocurrencies have a reputation for being attractive to the “get rick quick” crowd, we believe that long-term holders of certain coins could apply stock investing lessons to the world of cryptocurrency now that the asset class is in the process of maturing.
The case for long-term crypto investing
The goal of any investor is to create additional wealth over and above the capital invested. That is something everyone agrees on, but the methods used to attain that goal vary wildly across the spectrum of investors.
We do not believe there is a path to getting rich quickly. Rather, we focus on buying high-quality assets that distribute cash over time, which we believe is the best way to compound wealth over time. Trying to get rich quickly means excessive risk must be taken, and that, by definition, means the investor is statistically likely to see poor returns.
This is a tried and proven method to investing in stocks, but in the world of cryptos, we believe it applies all the same. Cryptos do not pay dividends like some stocks do, but given the extremely volatile price action many of them exhibit, investors can do well waiting for a big rally to see their wealth accumulate. In other words, the odds of success are increased greatly if one has a longer horizon. This principal is true in investing in stocks, as it is in investing in cryptos.
Seth Klarman, who is a self-made billionaire and hedge fund manager, said that “the single greatest edge an investor can have is a long-term orientation.” In that quote, Klarman is basically stating that there is no get-rich-quick scheme; it is methodical compounding of wealth through prudent capital allocation that wins in the end. We believe wholeheartedly in this principal in dividend investing, and we believe it can apply to the world of cryptocurrencies as well.
Investing in stocks for the long-term requires patience, and investing in cryptocurrency for the long-term requires even more patience. The reason is because spells of volatility, which generally means big drawdowns, are hard to manage emotionally. Seeing big chunks of one’s portfolio’s value erode is never easy, and with cryptocurrencies, the drawdowns are more frequent, and they tend to be quite large in magnitude.
However, there’s some efficacy to riding out these storms. Warren Buffet once said that investors should only buy a stock they would be comfortable holding for 10 years, as if the stock market completely shut down. In other words, buy something you have no interest in selling for a very long time. That requires the investor to be very selective, and choose only the best of the best investment options.
In the world of cryptos, most coins have not been around anywhere near 10 years, but Bitcoin has. In the past nine years, for instance, total returns to someone that bought near the end of 2013 are over 15,000%. That is also after the coin has lost more than half its value since its 2021 peak. So while there has been – and likely will continue to be – a lot of volatility, holding Bitcoin long-term has been tremendously successful.
Long-term investing has another benefit with cryptos, in that many cryptos are available only on special exchanges that charge high fees for transactions. Constantly trading in and out can be quite expensive for that reason, but buying and holding would avoid that potential pitfall, keeping more money in the pocket of the investor. In addition, taxes are only due on profits when the investment is sold, so if one holds cryptos for a long time, wealth can be accumulated without constant reductions from taxes.
Finally, holding cryptos for the long-term can free the investor to focus on other things in their life, rather than stressing about the price of one coin or another today, tomorrow, next week, etc. The inherent volatility of cryptocurrencies in particular lends itself to a long-term mindset, and the investor spending the free time they have on something other than watching a trading screen.
While cryptocurrency investing and dividend stock investing are quite different, we can apply some of the same principles to both. We favor dividend stocks with long histories of raising their dividends, and that we believe will still be here years from now doing the same thing. While crypto coins do not pay dividends, by finding the best ones, we can apply this principle and select the highest quality coins that have staying power.
Cryptocurrencies have a reputation of being a get-rich-quick scheme, but as the asset class has matured, it’s become clear it is here to stay. That means we can apply traditional investing principals to what is still a very new asset class for long-term wealth compounding.
Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.