Bitcoin & Cryptocurrency: It Will Change The World But Not My Portfolio

Bitcoin is all the rage these days. It’s up over 1000% this year. Everyone and their uncle, with no other assets, is hopping on the band wagon hoping to strike it rich (bubble much?).

I’m an investor and rather knowledgeable, so i get asked about it on a daily basis.  My response generally is not what most people want to hear.

bitcoin index

Crypto Currency / Blockchain Will Probably Change Many Things.

It could revolutionize the world.  It probably will.  It might cut the credit card premium out of transactions.  It could bring credit to the developing world.  Who knows exactly, but we could all agree the potential is endless.  The head of the IMF, Christine Lagarde, recently said “Instead, citizens may one day prefer virtual currencies (full remarks here).”  Fidelity is even mining Ethereum and many banks are looking at ways implementing / launching cryptos.

But will it be bitcoin?  Will it be Litecoin?  Will it be Ethereum?  Who knows.

Many folks compare it to the growth of the internet as that’s the most visible revolution to happen in the world in our lifetime.  Recall the internet in its infancy as it just started to catch on with the public in 1996.  Compuserve and AOL were the 2 biggest internet service providers.  For help you would Ask Jeeves or search on Lycos.  And if you wanted to make a shitty website you would go to Angelfire or Geocities.

None of those promising and thriving companies are around today.  Thousands of other internet startups disappeared and investors in them lost everything in the early 2000’s when the nasdaq lost 78% of its value between March 11 2000 and October 9 2002.

My point is the future of bitcoin or any particular crypto is uncertain and long term success is unlikely.  Yes the technology, ecosystem and concept my grow, but a single bet of any of the cryptos today is just plain crazy.  Go play roulette instead.

It’s A Gold Rush. A Bubble.

Everyone is afraid of missing out.  No one wants to tell their grand kids they could’ve put $100 in and been billionaires — but they did not.

And everyone is pouring their money in.  Kind of like the internet bubble.  Also like oil in the mid 2000s when there was talk about oil wells running dry (what ever happened to that?) and the price of a barrel of crude oil rose 389% between Jan 2001 and Jun 2008 only to then crash 70% in the nex 6 months… and never really recover.  Statistically speaking these growth trends exponential growth trends don’t last.

Yet, I can count more than 10 people I know personally, who have no invested assets other than cryptocurrency.  All the while the total 300 billion market cap of crypto’s  (that’s an older link when crypto market cap was lower but the visualization is cool) is about 0.1% of the total global market cap.

“But Corey, you don’t understand, the world is going to change.  The fiat currencies are going to crumble.  It will all be worthless”
.  Lol.  People have been saying that since fiat money was created hundreds of years ago.  Maybe one day, far far far in the future it will happen, but for now our currencies are backed up by serious military force and jail time that our society complies with.  When people stop paying their taxes without fear of repercussion, then I’ll consider that argument, but for now ‘compliance with the system’ is strong than ever, and changes from that happen over a long period of time.

Personally I believe crpyto currency will be worked into our daily life, and will just be another currency, and other currencies may devalue themselves against it.  Consider this, 1oz of gold, which has been an alternative store of wealth against the inflation of fiat currency, 2000 years ago would buy you a nice suit.  Today, it would also buy you a nice suit.  Its kept up with inflation, outpaced it at times, but never really beat it.

Some People Could Make A Ton Of Money On The Rise

Many more will also lose, but you won’t hear about them.

If you’re going to play the bitcoin game, don’t just play with Bitcoin.  Please.  Considering how the internet bubble went and the other introductions of revolutionary concepts/investments/products, the first ones don’t necessarily last.  So don’t bank on a Bitcoin windfall.  If you must, hold a handful of cryptocurrencies.  Keep it small.  Remember the market cap is a mere 0.1%.  Want to invest 1% of your net worth in crypto?  Be my guest.  But many people are going far beyond that.

If you’re well versed in quant investing, or have time to learn and are well disciplined, consider trend following.  I would do a momentum, and trend following approach with simple moving average crossovers… Invest in the top 3 crypto’s by 3 month return, and then trend follow. At an exit signal look to see if any other cryptos in the top 3 of 3m return.  That would limit your chances of losing everything and catch most of the upside on the markets.

Or hold an equal weighted portfolio of cryptos, and trend follow the entire portfolio.

But I’m not going to play either of those games.  It’s not worth it.  Trading costs and taxes would take a whack out of it.  Liquidity could be a problem.  It can’t be automated (at least not easily), so it would require time and attention, daily.   If I wanted to take on some high risk investments and volatility I would do that strategy using triple leveraged ETF, in which markets are established and beta is positive (aka statiscally it goes up over the long term).

That’s Not To Say I’ll Never Invest In Crypto / blockchain.

There’s a few scenarios In which I would:

  1. Market beta.  I guess I already am invested in crypto.  As entrepreneurs and business leaders launch startups and ventures in the crypto / block chain space, the premium will flow through to equities.
  2. A Multi Crypto ETF hits the market.  If an ETF which holds a a few cryptos is launched, I’ll probably invest and trend follow.  Just a little bit of money.  As it would be tradeable by anyone with a brokerage account, it would open the flood gates to a tsunami of retail investors, so likely a huge inflow of capital and surge in price.
  3. If a crypto ETF is launched and the crypto market cap as a % of global market cap meets the lowest of the 13 assets classes I trade (currently gold at 2.7%), and the volatility of such is comparable to the most volatile (currently emerging markets), I will add it to my global momentum strategy which means it could become ⅓ of my portfolio… but we are faaaar from that point.

Staying In The Black As A Contractor

Being a successful contractor (or any business owner)  is difficult.

Not only do you have to be a master of your trade, you are also responsible for every other aspect of your business – including your employees . Whether it’s marketing, budgeting, accounting, or managing clients, there’s always something that has to be done.

Unfortunately, all of these responsibilities often lead to contractors mismanaging their money.

There’s a saying among accountants that goes, “If you pay a contractor $10,000, they’ve already spent $15,000.”

While it’s great to joke about this kind of thing with accountants at a bar over some drinks, it’s a major concern both for contractors and for their clients.  We’ve all heard the stories of clients, who have lost thousands of dollars in deposits to a contractor, hell some of us might have even been a victim of it when sub-contracting work  (and hopefully you haven’t been one of those contractors).  While everyone is quick to label the contractor as a con-man, I usually don’t believe it is ill-intent on the part of the contractor, rather a series of poor financial decisions and lack of financial education.

That’s why I’ve put together some of the key points that I’ve learned over the years that keep my business working on a profit instead of a loss.


Learn the Difference Between Cash and Accrual Accounting

Although I’m somewhat lucky in that I have an academic background in accounting, not all contractors are well-versed in the different types of bookkeeping.

In my experience, it’s important for contractors to understand the difference between cash and accrual accounting.

In a cash accounting system, you report your revenue on the income statement in the period in which the customer pays cash (think deposit) to you. Expenses are then reported in the period in which cash is paid out.

However, in an accrual accounting system, you report revenue on the income statement in which it is earned. This means that you report your expenses on the income statement in which they occur.

In otherwords, just because you have cash in the bank, doesn’t mean its yours to disburse to yourself as a profit.  In the case of deposits, there is always expenses that will need to be incurred to physically ‘earn’ that money.

What has been most helpful to me is that I keep a separate bank account that I use strictly for deposits. When a customer pays a deposit to me, I put it directly into this separate account and only move that money into an operating account once I begin working on the project.  The cost of a second checking account is essentially free at most banks, and this gives you a clean cut picture of your working capital, and unearned revenue (a liability)


Be Aware of Your Labor Efficiency Rate

As a contractor, one of the best ways to maximize your profit is to create an efficient business. A big part of doing that is understanding your labor efficiency rate.  Labor, including payroll taxes, and workers comp, is usually the largest expense you will have and it is the quickest to get out of control.  Think of this, one day of day of lost productivity due to not having the right materials on hand, or scheduling errors can easily equate to a couple thousand dollars.  Having one untrained new guy can easily cost you $1,000+ per week.  Yet most business owners will focus on reducing trivial costs such as lowering the cell phone bill, which may result in saving $20 a month.  Keeping your labor costs in check is key to staying in the black

Your labor efficiency rate calculates the amount of labor that you’re using against the amount of revenue that you’re bringing in.

A good rate to aim for in trade contracting or home service operations would be to spend around $1 on labor for every $3 of revenue (ahem on an accrual basis) that your company brings in.  If your rate goes below $1 of labor for every $2 of revenue, you’re likely going to run into serious cash flow problems.


Avoid Debt at All Costs

I don’t say all debt is bad.  If you’re in the business of running chain stores and have the ability to scale up quickly and open multiple more, taking on debt to leverage your scalability is a sound Idea. In the contracting business, debt is bad.

That’s why I made it my mission to build my company from the ground up without taking on any debt. I stand by that goal to this day.

Here’s why.

As a contractor, you know that business can be quite cyclical and unpredictable, it is also difficult to scale successfully and/or quickly. For example, in Florida a string of hurricanes lingering around in the ocean, could detrimentally impact sales for a couple months.  If the economy starts to head south, home maintenance services are one of the first to go for many people. When dealing with a slow economy, most people just don’t want to spend the money on home improvements.

That’s why you don’t want to be too leveraged.

Businesses like restaurants can pull it off a little bit better because a good restaurant generally keeps steady business all throughout the year. However, that just isn’t the case for contractors.

Which brings me to my next point.


Keep Cash on Hand

Once you have yourself out of debt, it’s important that you build up a cash reserve to sustain your company in the event that business slows significantly.

If business dries up for whatever reason, you can’t just fire your employees. If you’re constantly firing and hiring workers, it costs you more money in the long run and word gets around that you aren’t reliable.

That’s why I recommend that you keep at least two months of cash on hand to cover all of your fixed expenses and staff.

That way, you don’t have to panic every time there’s a lull in business.


Put Money Aside for Savings and Investment

I see it all the time with contractors. Their money goes out as fast as it comes in, and they have nothing saved by the time that they retire. Too many think that they’ll be able to hand over the business to one of their kids or remain in the company as a sort of figurehead.

But you can’t count on that.

Since you’re in business for yourself, you don’t have anyone contributing money to an IRA or 401k. That’s all your responsibility.

No matter how old you are right now, you need to be putting money away into a low-cost, low-risk fund (at minimum) so that your money can grow and help you retire comfortably.

If you haven’t already started, the time to get started is today.  Fortunately investing is easier with companies like Betterment which offer a high quality portfolio, and financial advice made available to small time investors (like those with as little as $100)


Sign Up for Cash Back Credit Cards 

This is one of the most overlooked aspects of running a business. Think about all of the expenses that you do or could put on a credit card.

Now, think about the kind of money that you could get back just by signing up for a free credit card that gives you 2% cashback on all of your purchases.

If you’re company puts $200,000 worth of expenses on a credit card each year, that’s already $2,000 that you get back just for putting it on a certain card. For bigger companies, those cashback rewards add up fast.


Stop Being the Butt of a Joke

Although contractors as a whole have a bad reputation in terms of money management, you don’t have to be one of them.

All that it takes to become someone who is good with money is a little bit of planning and responsibility.

Let me know what problems you and your business face on a daily basis in the comments section below!