When to Switch Investing Strategies

The crypto market is notorious for its volatility.

Even in a bull market, profits based on capital gains still carry higher risk exposure. Your unharvested gains are still subject to market movements.

And in a bear market, that volatility explodes.

Does that mean you should get out of the crypto markets before the bear market hits? Not a chance!

Instead, Chris Coney suggests hedging your investments with a crypto income strategy.

When should you start?

That’s what he discusses in the latest Weiss Crypto Sunday Special. You can watch the video here, or continue reading for the full transcript ...

Chris Coney:

Hi there, guys, and welcome to this week's edition of the Weiss Crypto Sunday Special with me, your host, Chris Coney. The crypto analysts at Weiss are all away this week filming content for an upcoming video series on decentralized finance (DeFi), so I'm going to present another idea to you today.

I've been thinking about the question of when to switch to a crypto income strategy. Bull markets are great and all, but profits in those market conditions are based on capital gains, i.e., you buy low and sell high.

Now that strategy works absolutely fine as long as …

A) The bull market continues, and asset prices continue to rise, and ...

B) You accept that there’s a higher risk associated with those higher rewards.

But what's the risk, though?

Well, like any market, the risk is that the bull market ends and turns into a bear market. And at that point, the market turns against you and asset prices start going in reverse, removing value from your portfolio.

That's true whether you account for your returns in a fiat currency like the U.S. dollar or if you account for it in a crypto asset like Bitcoin (BTC, Tech/Adoption Grade “A-”).

Now, what I mean by that is, many crypto investors operate on a Bitcoin standard, where they measure their returns and even their net worth in BTC. Since the supply of BTC is fixed, if your portfolio holds 1% of the Bitcoin supply, it will always hold 1% of the Bitcoin supply. How you denominate your returns is an individual choice.

It's not really the point of today's episode, but I will say one more thing on this before we move on: If you do denominate your portfolio in BTC, the percentage of your portfolio that is held in Bitcoin would be considered your cash position since that's the default asset in your portfolio. Just something to think about.

Okay, back to the point, then.

I think right now, most investors are going to continue to denominate their portfolios in U.S. dollars. So in this episode, I'll continue to speak in those terms. There's this phrase I use quite often, which is "never eat your seed crop." That means you have to leave some of your harvest left over in order to plant for the next season. If you eat all of your crops, well, you have no yield for the following year and you’ll starve, metaphorically speaking.

Now, I personally thought about this most recently when I wanted to buy a car. My first thought was, “Well, just realize some of the capital gains in your portfolio, pay the tax on those profits and then use the remainder to buy the car.”

The trouble is that a car is typically a depreciating asset, unless it's a classic. And I wasn't looking to buy a classic. So, I would've exchanged an asset that was gaining capital for an asset that would be losing capital. And that's basically the difference between an appreciating asset and a depreciating asset.

Let's put some real figures on this. Let's say I was holding a position in Ethereum (ETH, Tech/Adoption Grade “A”), and let's say right now that position was worth $50,000. And let's say I bought into that position at $10,000. So, I could sell it, take out the $50,000 and pay the tax on the gain — which, in the U.K. right now, would be about $8,000. Then I'd be left with the $42,000 in cash to buy the car.

Now, that car would depreciate in value by, say, 10% a year, so I'd be losing $4,200 per year in capital value in depreciation. But not only that; there's an opportunity cost to factor in. So not only am I losing $4,200 a year in depreciation, but I’m also losing out — or missing out — on any income or capital gains I would've enjoyed if I’d continued to hold my Ethereum.

There you might say, “Chris, well, you're making it sound like a no-brainer.” But you're forgetting what I said earlier about cryptos [being able to] experience bear markets. And that's absolutely true.

Ethereum, in this case, isn't always going to be an appreciating asset. In fact, between January of 2018 and December of 2018, Ethereum depreciated by 94%. Yep. You heard that, right. It went down from $1,400 to $80.

Now that 10% depreciation on the car doesn't sound so bad, does it?

So, what to do? To my mind, this goes back to the most fundamental question of investing: It's the balance between how much money you want to make and how much risk you're willing to take.

So, there typically comes a point where you've accumulated enough capital through investment gains that it makes sense to shift gears in this way — to reduce risk and switch to an income strategy.

With crypto, specifically, if you'd managed to accumulate, say, $1 million worth of crypto and you wanted to de-risk by switching to an income strategy, then one approach you could take is to split it 50/50. That would mean converting $500,000 of your capital into U.S. dollar-leveraged stablecoins, and then leaving the other $500,000 in crypto assets.

Then you could place those $500,000 in stablecoins into a lending scheme and earn anywhere from a 10% to 20% annual yield. At 10%, that would produce a monthly income of $4,166 before tax. And a 20% yield would produce a monthly income of $8,333.

That's $100,000 a year, and you'd still have your $500,000 of capital.

Meanwhile, that's just the fiat aspect of it, right? The stablecoins. Meanwhile, over here, the other half of your portfolio, was still in Ethereum. While the dollar-denominated value of that Ethereum will fluctuate with bull and bear markets, you could also place that Ethereum on deposit with a lending service as well and earn interest on that.

So that's a 50/50 illustration because it's the perfect hedge. Straight down the middle. But those splits are obviously arbitrary, totally flexible. You can go 50/50, 60/40, 40/60 or whatever. Doesn't matter. It's your choice. I just like the 50/50 because it allows you to straddle both the fiat and the crypto financial systems equally. Doing it that way also offers you the opportunity to rebalance every so often, like when crypto is in a bear market. You can move some of your capital from stablecoins into crypto when crypto is in a bull market, then you can move some of the capital from the crypto to the stablecoins [in a bear market].

That kind of hedging, that strategy, reduces a lot of the anxiety associated with timing the markets. When you're straddling both markets equally like that, you have a hedge no matter what happens in either.

So those are my basic thoughts on when to switch to a crypto income strategy. The answer is when you've accumulated enough capital and found an interest rate high enough to generate the kind of income that you want.

And as luck would have it, Weiss Ratings is about to launch a brand-new service called Crypto Yield Hunter, which will make sure you're always earning the very best, highest yields that are available across the entire crypto space. If you're interested in that, [you can watch] this video to learn more.

That is going to do it for this week's edition of the Weiss Crypto Sunday Special. Keep a close, close eye on your inbox for next week's episode. And until then, it's me — Chris Coney — saying bye for now.

See All »
BTC $56,017.70
ETH $4,419.50
SOL $224.68
BNB $607.53
XRP $0.968031
LUNA $67.84
DOGE $0.204751
UNI $21.20
SAND $6.27
XLM $0.349187
LTC $196.66
TRX $0.098893
Crypto Ratings
Weiss Ratings