Wouter Klijn, Director of Content at the Investment Innovation Institute [i3]

Wouter Klijn, Director of Content at the Investment Innovation Institute [i3]

Adventures in Crypto Land

Testing Cryptocurrency Investments

Opinions on the sense of investing in cryptocurrencies are divided, so we decided to run a live experiment and see what a small crypto investment would involve.

This editorial is for educational purposes only. It does not constitute financial advice.

When visiting Fred Schebesta, serial entrepreneur and co-founder of comparison website finder.com.au, it is hard not to get caught up in his enthusiasm.

He speaks with great conviction about the rosy future of cryptocurrencies, adamant the technology is going to change the world as radically as the internet has.

At the same time, he is just as willing to discuss the current problems of existing cryptocurrencies and often laughs at his own wildly optimistic predictions, indicating we should take everything that happens in this space with a grain of salt.

But what has really stayed with me is when Schebesta showed me the Ethereum miners that were happily zooming away in the Sydney office of HiveEx, his cryptocurrency brokerage company.

Asked why he installed them, he answers that he was curious about how it worked and what better way to find out than to dive right in.

It sparked the idea to document the process of buying some cryptocurrencies to see what all the fuss is about.

Is it secure? Is it difficult? Would I become a millionaire?

Crypto Podcast - Investment Innovation Institute

From an institutional investor’s perspective, buying cryptocurrencies is probably the worst thing you can do since there seems to be no consensus as how to value a currency.

True, some of the newer coins have physical assets backing their initial coin offerings, but this is not the case for the most popular coins, including Bitcoin, Ethereum and Ripple.

So there doesn’t seem to be a straightforward way to determine the value of a coin, which makes it a speculative asset – kind of like gold, but less shiny.

In addition, many institutional investors have issued concerns over the unregulated nature of the industry, as well as some of the recent security breaches and the resulting theft of coins.

We can also legitimately ask what type of asset a cryptocurrency actually is. For example, there are good arguments for the idea that Bitcoin is not a currency at all. Since there is a finite amount of coins to be issued (sometime in 2140), there are constraints to its liquidity. So in contrast to central bank currencies, quantitative easing is not an option with Bitcoin.

Is it an investment, a store of value, a bubble? At this stage, we don’t know.

Yet there is evidence institutional investors are taking note of the developments in this space.

Recent research by Fidelity Investments shows 22 per cent of the more than 400 institutional investors it surveyed had purchased cryptocurrencies either directly or gained exposure to them through companies related to the crypto industry.

Perhaps they see it as a black swan investment or a hedge on the future: it is highly unlikely it will produce any significant return, but if it does, the potential upside could be quite large.

We don’t know the future of cryptocurrencies, but the industry has grown rapidly to now encompass more than US$200 billion. That seems too large to disappear overnight.

Whether they are here to stay and, if so, which currency will become a dominant form of payment is unclear, but investing a marginal amount in them as a form of protection against the odd chance they will become a leading technology might make sense.

But how does one invest in cryptocurrencies and how much does it cost? To get a better understanding of this emergent asset class, I decide to invest the princely sum of A$60 in cryptocurrencies.

The Process

Cryptocurrencies need to held in a vehicle that can be electronic or an encrypted hardware device, so first you’ll need to figure out what wallet to hold.

Hardware is the most secure, but since the wallet costs more than I’m planning to spend, I opt for an online wallet at an Australian exchange called Coinspot.

Why Coinspot? Well, mainly because it is quite user-friendly for Australian-based customers and at 1 per cent its fees are in the middle of the range.

One online review says Coinspot isn’t a real exchange and simply puts bulk orders on Chinese exchange Binance, which charges 0.1 per cent in fees. I don’t know if that’s true, but Binance only accepts US dollars and is based in China, so it doesn’t fall under Australian jurisdiction. I’ll stick with Coinspot.

You will need to register for an account and your identity will be verified. You need to upload a photo of an identification document and then a copy of a document that proves your address.

My account is verified the same day as I finish registration, so now I have to put money into my account, for which I’m using Bpay.

Coinspot says it charges 0.9 per cent in fees. I’m assuming that is on top of its 1 per cent brokerage fee. So far, fees are starting to add up, at 1.9 per cent, but I presume these are one-off costs.

Four days after registration, Coinspot calls me on my mobile to check that I am me. It also wants to ensure I have two-factor authentication switched on and have a strong password, and it tells me I can only deposit money from an account with my name on it.

So far security seems thorough and I assume money laundering this way would be very difficult indeed.

Crypto Coin Allocation

Now, the real question: What coins to choose?

I’m thinking Ethereum and IOTA. Ethereum seems to be a cleverer iteration of Bitcoin. It allows for smart contracts (contracts that self-execute) and has some major support behind it.

There have even been rumours big companies such as Amazon are planning on jumping on the crypto bandwagon, since the retail giant has purchased several related domain names, including AmazonEthereum.com.

IOTA catches my attention because it has been named as one of the currencies under consideration by the Swedish central bank to function as an e-Krona. I like Sweden. Swedish people are well-educated and seem thoughtful and down to earth. Besides, the country makes great Scandinavian noir television.

But what makes IOTA even more interesting is its technology is not based on blockchain, but a system called Tangle and it solves two major issues Bitcoin has.

One, you can issue unlimited coins, so unlike with Bitcoin you could theoretically use quantitative easing with IOTA. The other advantage is that as more people adopt the system, it gets more efficient, rather than less.

Finally, I decide to also add in Bitcoin. It is not the best technology out there, but it is the most widely accepted and it seems there are ways to increase the efficiency of it.

Since I have no way to value these things, I’m going to equal weight them.

The Crypto Experience

In September 2018, I transfer $60 through Bpay. The 0.9 per cent fee means I’ve now got $59.46 to play with. I buy $20 worth of Bitcoin and I am now the proud owner of 0.002 Bitcoins.

Initially, I think I can only buy other cryptocurrencies by buying Bitcoin first, but that isn’t necessary. Instead, I’ve got three individual crypto wallets.

After all transactions – 1.97 per cent in transaction and deposit fees – my combined cryptocurrency wallet is worth $58.82.

I have to say there is a behavioural aspect to this transaction. It feels strangely exciting to have acquired these coins, as though I’m part of some futuristic movement.

For institutional investors, this won’t be an issue since they have tight mandate restrictions in place, but already I get a glimpse of why so many people have bought into cryptocurrencies. And so far, I have only lost money.

Two days later and my wallet is now worth $59.43, an increase of 1.03 per cent. Going strong. Just 57 more cents and I’ve got my fees back.

Another three days later and IOTA is taking off, increasing 5 per cent today, while Ethereum is on fire, up 13.75 per cent in a day! This pushes my portfolio up to $62.17, an increase of more than 5 per cent against my starting capital. I’ve made my fees back.

One day later, my portfolio is now worth $66.62, an increase of 13.2 per cent in a week.

That is both exciting and ridiculous. It shows the incredible volatility of cryptocurrencies, which doesn’t make for a good nest egg investment.

Then, my wallet slowly starts to dwindle back to where I started.

About a month and a half after I first put money into cryptocurrencies I check my balance again to find out I have lost 3.9 per cent compared to the initial value of the wallet and 5.75 per cent against my original $60 expenditure.

I check my wallet again on 21 November 2018 after reading about Bitcoin falling below US$5000. My portfolio of cryptocurrencies is worth A$38.27 and continues to fall to somewhere around $30. Half my capital is gone.

But wait, here is another rally! It is now May 2019 and we are in the middle of yet another crypto surge. On 16 May, my portfolio recovers and then some: it is just shy of $70! Twelve days later it has gone up to $73.39 and I’ve made 22 per cent since I started.

So what have I learned from this experiment?

Firstly, the process of buying coins is not too difficult and seems relatively secure, at least not less secure than most other e-commerce platforms.

Secondly, cryptocurrencies are hugely volatile and don’t seem to follow any logical path in terms of their valuations. So they are unlikely to form part of a well-constructed, risk controlled, multi-asset portfolio.

Finally, my illusion of being a cool-headed, rational investor has been well and truly shattered. But with only $60 at risk, this has been a cheap lesson and certainly an interesting ride.


[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.