March 18th 2021

Before you go into any Crypto Investment (especially risky ones) you need to run some numbers and calculate your crypto opportunity costs. For instance, how much are you willing to lose, how much are you expecting to get in return, what are you giving up to make that investment, what is your exit strategy, what does the market portfolio offer, and many other questions like these should come to mind.

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In this post, I want to dive into important factors investors need to consider before investing and discuss how you can determine your best investment for yourself!

Nothing should be considered investment or financial advice. Enjoy the ride.

Crypto Investment Expectations

The crypto market is… well crazy. Things go 10x over night and then drop 85% a week later. It really is quite the thrill, quite the rush for novice and experienced investors.

With all of the craze, it is extremely easy to get caught up in it all. In addition, the crypto market is loaded of extremely biased investors waiting to shill their coins. New comers generally get sucked up into the propaganda and fairy land of promises by at least one project they put their money in. This happened all over the place in the 2017-2018 crash where people lost all millions, but still exists heavily in the market we have today.

If people take a step back though, they can start to think about what their end goal is. That end goal generally for most people is to get a profit or a return for your investment. Not to lose money chasing a fairy tale.

Therefore, lets go over the first thing to consider before ever investing in anything – opportunity cost.

Opportunity Cost

Have you ever gone out to eat, ordered something, but then immediately regretted it once you saw what someone else ordered? This is sort of like a round about way of discussing opportunity cost.

By ordering a burger, you have forgone your opportunity to have a steak. Most people might not be with that.

What if you did not know the other options on the menu? What if you did not “do your own research” and see that there was a back to the menu with steaks, seafood, and pasta? You just simply glanced at the menu, saw “burger” and said that sounds good.

You might not enjoy your meal once you see a steak walk by sizzling.

Opportunity cost is all around us. And in investing, it goes a bit deeper than the simple ordering illustration above.

Lets consider an investment in Bitcoin.

If you purchase $10,000 worth of Bitcoin, what are you doing? Well, for starters you are giving up your $10,000, but it is really more than that.

For example, most banks can give you 1%-2% return on your cash. So, in reality you are already forgoing that interest of potentially receiving 2% return on your capital.

Therefore, you should already at a minimum expect a 2% return on your Bitcoin yearly to make the investment worthwhile.

Luckily, Bitcoin returns are much larger on average. But this is all hypothetical anyways.

Compounding and Cashflow

Clearly, 2% is miniscule to the returns you could receive from grandfather Bitcoin.

Well, that is because Bitcoin has high volatility. Any asset with high volatility poses itself to give potentially higher returns.

But we are getting off topic. If you would have put your $10,000 into USDC stablecoin and put that into Blockfi, you could be getting an 8.6% annual return on your capital which would compound year over year.

Now as you see, your Bitcoin needs to return a minimum of 8.6% annually in order for your investment to be worth while. Now as you see, the expected return to of your Bitcoin is growing the more you know and dig deeper.

Although, what about compounding your Bitcoin in a interest account?

What if you invested your Bitcoin into an interest account, gaining more Bitcoin all while it was also growing in value? Well, now you are thinking. By doing this, you reduce your risk of investment, reduce your required return necessary to make your investment worthwhile, and improve your potential capital gains on your investment. Cool huh?

Market Return and Market Portfolio

Another thing to consider when investing is the market return. What is the average return on the market? Is your investment going to beat that, or is it better to “follow the crowd”?

Warren Buffet (who ironically dislikes crypto) actually has some wisdom here. He recommends investors to only invest in the things they know a lot about, and bet big on only a few assets, instead of a portfolio of 10 or more assets. This was actually Mark Cuban’s strategy as well. He made his money investing in the things he knew. Bet big on a few things you know A LOT about.

Therefore, it is almost never advisable to “follow the crowd” unless you know very little about the market.

Cash Flow

The last thing to consider before investing is cash flow.

There is a reason buying businesses and the private equity markets are so large. That is because they can provide cash flow. Or at least they are supposed to.

By investing your money into the market, you could be removing this option from your portfolio. This is why some people will only invest in dividend paying stocks, or crypto with proof of stake that will return small profits over time. Sort of like interest accounts once you think about it.

If you can make money off of your money, then that is also an “opportunity” that needs to be considered before investing.

Cash flow is king in the eyes of the rich, but only if you can KEEP your assets. The rich will leverage equity, post collateral, finance through securities, or do whatever they have to in order to keep their assets. Keep this in mind before you give away your capital or your assets for something that does not give a little bit back overtime guaranteed.