In our last post, we dove deep into what people living abroad need to know about crypto.
(If you’re unfamiliar with cryptocurrency or are just curious, check it out!).
We’re covering what crypto can (and can’t) do in your investment portfolio in part two.
We’re also answering the million bitcoin question:
Should people living abroad invest in crypto?
Let’s jump in.
What crypto can do (in your portfolio)
And just like their older, more established cousins, cryptocurrencies can play a positive role in your portfolio.
You’ve probably heard it before, but the #01 way to risk-proof your investment portfolio is through diversification.
By placing your eggs in many different baskets, you eliminate the risk of being dependent on one single investment.
The easiest way to do so is by investing in as many different investments as possible.
For example, you might invest in both healthcare and automotive stocks. That way, if car sales go down, your investments keep growing if healthcare companies perform well.
The more diversification you have, the better since you spread your risks out even more.
Cryptos like Bitcoin, Etherum, and others are excellent tools in this regard since they have no connection with stocks and bonds.
For many investors, crypto can help reduce risk.
Grow at a phenomenal rate
Most cryptocurrencies have no underlying (or “intrinsic”) value.
That means that the price doesn’t depend on sales or some sort of business activity.
Instead, a crypto’s price depends on whatever investors think it’s worth.
In other words, cryptocurrencies are speculative.
Yet, that’s not such a bad trait.
Speculative assets can grow much faster than other, less sexy investments.
Combined with the powers of diversification, this sort of ‘to the moon’ growth can add protection to your portfolio.
Potentially provide additional revenue.
Depending on what cryptocurrency and how you use it, you might generate revenue with your crypto.
Making money with your investments opens new opportunities since you can either:
- reinvest the profits and compound your growth or
- supplement your primary income and up your lifestyle.
As of this writing (late 2021), some crypto exchanges and apps offer 10%+ monthly returns.
Obviously, it’s impossible to tell if these rates are sustainable or how long they will last.
For now, though, including revenue-generating crypto in a portfolio can give you more options.
Other uses of crypto
Aside from investment diversification, high growth, and revenue, crypto has other uses for people living abroad.
Validate your belief an exciting proof of the future of money
Cryptocurrencies are exciting and, for me, represent the future of money.
By investing in crypto, you can use your money to affirm your belief in the technology’s promise.
Gives you anonymity
Cryptocurrencies run on decentralized ledgers, making it easy to hide your identity.
If your goal is to keep (part of) your wealth anonymous, crypto might be what you’re looking for.
That said, tax and law enforcement authorities are constantly working to unveil this dark side of crypto.
Skirt the law at your own risk.
What crypto can’t do
Cryptos can do a lot of things.
Despite what their ardent evangelicals tell you, though, the asset has its boundaries.
Provide compound returns (at least not directly).
Cryptocurrencies are, at their core, currencies.
A currency, like a commodity, does not pay a dividend or income.
Instead, its value to an investor is only what it’s worth on the market.
Savvy investors know that compound returns are the fuel to massive wealth-building.
That’s why so many advisers and professionals recommend stocks and bonds for a portfolio.
The profits (stock dividends) and debt repayments (coupons)can return to work through reinvestment.
When that happens, growth accelerates like a hockey stick. (Seriously. It’s how Warren Buffet got his billions).
Cryptos don’t do that, at least not on their own.
While there are ways to get returns by lending out your crypto holdings, it’s not built-in.
On their own, cryptos only provide one form of financial gain, which can limit overall returns.
Act as an inflation hedge (at least as of yet)
One of the appeals of cryptocurrencies is that there’s a finite amount of each one.
When bitcoin’s creator(s) released their manifesto, they set a max limit of coins for release.
Their reasoning was that, unlike a central bank that can print and devalue a currency, bitcoin will always preserve its value.
Unfortunately, the track record doesn’t support the hypothesis.
Coins like Bitcoin and Ethereum grow wildly. They also lose value faster than many other assets.
Further, these price changes don’t follow a pattern with inflation.
(If the coins offered a hedge, we’d expect their value to go up when inflation is high and drop when it’s low).
This volatility combined with a lack of correlation pretty much destroys their ability to hedge out inflation.
As it turns out, diversified investors do have another proven inflation beater in their toolkit: stocks.
Time and time again, stock market returns beat inflation.
If you’re concerned about protecting your long-term wealth from price increases, broad market ETFs are what you need.
Beat the exchange rates
Fewer folks know more about exchange rates than people living abroad.
If you’re like us, you probably got your currency market education from first-hand experience.
It’s extraordinarily tempting to think that cryptocurrency can help you ‘beat’ the FX rate and even fees.
Sadly, that’s not the case.
For one, cryptocurrencies are way too volatile to eliminate exchange rate risks.
Second, cryptocurrencies use the USD as their main reference point.
That means the value of a Bitcoin in EUR is equal to the price of Bitcoin in USD * the USD EUR exchange rate.
Further, suppose you don’t time your trades exactly right. In that case, Bitcoin could drop in value, meaning you’d lose even more money than if you did the conversion directly.
As we’ve written, no one can beat the exchange rates.
Cryptos are no exception.
I live abroad: should I invest in crypto?
Now we get to the part of the article that you probably scrolled down to:
Should people living abroad invest in cryptos?
Unfortunately, we don’t know you, so we can’t tell you that.
(I know that’s not the answer you’re looking for, but it’s the truth. Anyone who gives definitive financial advice on a blog post is asking for a regulatory smackdown).
What we can tell you are some points that will make your investment decisions much more informed and awesome.
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There are no international standards on crypto regulations and taxation.
As far as financial assets go, crypto is still a baby.
Regulators aren’t sure what to make of it, meaning the rules vary from country to country.
Tax authorities are mainly in the same boat.
This lack of standards can create enormous headaches for people living abroad and moving countries periodically.
Suppose you invest in Bitcoin in Spain but move to the UK later next year.
Depending on what exchange you use, you might lose access once you become a British resident.
You could also face an issue where you pay value-added tax (VAT) on your crypto purchases.
When you move and eventually sell your coins, you might have to pay higher taxes than the country you left.
The higher capital gains combined with the VAT at purchase can seriously impact your actual return.
When it finally happens (if ever), investing in cryptos inside the EU will become far more efficient for expats and remote workers.
Until then, be prepared for extra complications when investing in cryptos while living abroad.
Some exchanges are better than others. Some are flat-out scams. Do your homework!
Following up on our last point, a lack of regulation means there are some shitty actors out there operating exchanges.
There are definitely some legit crypto marketplaces. However, once you get through the top 10 or so, the quality falls off fast.
At this level, it’s difficult to sort out the legit from the seedy.
In addition to having bad user interfaces, some ‘exchanges’ are fronts for scammers.
As an investor, you’re already taking tons of risks.
Putting your money with someone who puts their gains over yours only adds to that risk equation.
Other traditional brokerages are also getting in on the crypto action.
For them, they’re more concerned about keeping your business than providing low-cost coin trading.
Many crypto exchanges only let users trade using Stablecoins and not fiat.
That means that if you wanted to buy bitcoin, you would first have to purchase tether or another pegged crypto.
We’d recommend searching for top-10 exchanges for cryptocurrencies and then researching each one. (We mentioned a few in our previous article if you haven’t seen it yet).
Cryptos aren’t “Green.”
Protecting our planet and fighting climate changes are goals close to heart for people living abroad.
It’s no surprise then that green investing is incredibly popular (and extraordinarily powerful) right now.
If protecting the environment while growing your wealth is your goal, cryptos probably aren’t for you.
Running a blockchain is energy-intensive as it requires an array of powerful computers to solve math problems.
Keep in mind, that’s only for Bitcoin; there are thousands of cryptocurrencies out there.
The industry is well aware of this impact, so companies are devising more energy-efficient ways to operate.
If you’re a green-focused investor, you should ensure your crypto holdings are as energy-efficient as possible.
Cryptos are an exciting investment, but they should never be your main one.
The evidence is clear that cryptos can provide a substantial return.
(Never forget that past performance is not an indicator of future results!).
As tempting as it is to throw all of your money into one or two coins and YOLO yourself to the moon, doing so will end in disaster more often than not.
Diversification is once again your friend.
Cryptos can play a positive role in your portfolio, assuming you have the stomach for it and spread out your risk.
The current thinking is keeping between 1-5% of your investments in coins if you’re interested in the asset.
We think that’s a fair recommendation as it finds the balance between return and protecting risks.
Do your homework
Yeah, we know. Homework kind of sucks (although this guy seems to be enjoying it).
However, like any other investment, you need to research before jumping on the crypto roller coaster.
- What are my goals for investing in crypto?
- Where will I be when I reach this goal, and will I be in any other country between then?
- How much risk am I willing to take?
- Am I comfortable with losing all of the money I put into it?
- What’s the best exchange or platform for me to invest in?
Once you have that information, you’re going to make a much better financial decision: one that will help you sleep at night.