5 Smart Reasons Why The Rich Should Buy Crypto And NFTs And 3 Major Drawbacks

I work in the financial services industry. I was chatting with some junior associates one day about building a financial nest egg for the future and I mentioned that I have some crypto and NFT investments.

This conversation happened in early 2021 before the crypto market crashed this year.

One of the junior associates mentioned that he also has crypto investments. Then he followed up with a question to me. “How much of my savings should I put into crypto?”

I responded with a cop-out answer – it all depends.

What is your risk tolerance? Do you have the stomach to see your investments go down by 80%?

I don’t believe crypto belongs in everybody’s investment portfolio. In my opinion, a young professional starting with little savings should limit his exposure to such a volatile asset class.

However, I feel strongly that someone who is financially well-off and rich should allocate some money in the investment portfolio for crypto and NFTs.

In this post, I discuss several logical reasons why the rich should invest in crypto and NFTs. To also be balanced, I list out some drawbacks with crypto investments as well for you to consider.

Crypto And NFTs Are Part Of My Investment Portfolio

I’ve spent over 20 years building my investment portfolio.

It is made up of real estate rental properties, index funds and ETFs, individual public stocks, private equity investments, fixed-income instruments (although a very small percentage), and crypto investments.

I focused the majority of my investment portfolio on what I consider to be tried and true investments that have stood the test of time.

Not surprisingly then, the majority of my investment portfolio is in real estate rentals and mutual funds, with some nice big cap individual stock winners such as Apple.

However, as my investment portfolio grew in size along with my rental cash flow, I started to take more risks with my investments. Nowadays, I can afford to gamble a bit more and take some strikeouts if I have to for that home run.

No one bats 1000 and I’m okay with that.

I have some spare capital to splash in investments. My thought now is let’s take some homerun swings and see if I can get a few balls over the fence.

Recently, I’ve added crypto and NFT investments to my portfolio.

With the recent downturn in the crypto and NFT markets, I’ve taken a bath on my crypto and NFT investments. No wonder Warren Buffet once referred to Bitcoin, the mother of all crypto assets, as “probably rat poison squared”.

However, I still hold a high conviction that crypto should be a part of your investment portfolio if you are financially free or financially well off (a.k.a rich).

Here are the 5 reasons why, if you have the money, I believe investing in crypto is the smart thing to do. I’m going to use the term crypto to represent both cryptocurrencies and NFTs in the remainder of this post.

Reason #1: I View Crypto As One Way To Hedge Against Tail Risk

I own some bitcoins. It doesn’t make up a significant part of my portfolio.

Why do I own bitcoin? It is no different than why I pay for home or car insurance.

Bitcoin provides me a hedge against a very small, insignificant chance that there might be an upheaval in the United States. Bitcoin is an insurance policy on something going horribly wrong in the US and I can no longer live here.

What happens if I need to leave the US quickly because of a civil revolution? There is no way I can take my rental properties with me.

What happens if the US decides to freeze or confiscate all assets and redistribute them without the consent of asset owners? My cash, stocks, ETFs, and fixed-income investments are all custodied by US-based companies.

Those banks and brokerage firms need to comply with directives from the US government.

Bitcoin is portable, regardless of dollar amounts. If you commit your private key to memory, you have access to bitcoin wherever you go.

It is also decentralized, and not controlled by the US government.

In a tail-risk event where I need to start anew somewhere else without the ability to bring any of my US assets, I can fall back on Bitcoin to provide me with a financial cushion no matter where I am in the world.

Is this paranoia? Maybe, but I only recommend this reason for those who are financially well off and can set aside an amount to invest in Bitcoin to have this insurance policy against a tail risk event in the US.

Reason #2: Diversification Into Another Asset Class

I believe strongly in having a diversified investment portfolio, especially if you are already financially set.

That is the reason why I am such a big fan of index funds such as the S&P 500. The S&P 500 index is made up of 500 companies and not just a handful.

It might make sense to be highly concentrated when you are starting out in building your financial wealth.

For the rich, capital preservation is the most important, even above capital appreciation.

Why risk having significant losses in a concentrated position when you have enough assets to last a lifetime?

To me, crypto provides another investment asset class to further diversify my investment portfolio.

Even within the crypto space, there are “blue chip” investments, middle tier, and really speculative.

Bitcoin and Ether are the current blue chips that make up over 50% of the cryptocurrency market. CryptoPunks and Bored Ape Yacht Club are the current blue chips in the NFT space.

This is where I have most of my crypto investments.

I take the dumbbell approach to my investment in crypto. A significant portion of my portfolio is in blue chips, and then I have a few investments in very small, speculative projects.

Reason #3: Blue Chip Crypto Assets Are Highly Liquid

Another reason why I like investing in crypto is that the blue chips are highly liquid. The daily trade volume is robust.

You can sell millions of Bitcoin in a given day and not move the market.

I can also trade Bitcoin 24 hours a day, 365 days a year. And I can do that basically from anywhere in the world.

The current crypto market is over $1 trillion in market capitalization.

While it isn’t a big market, there is still a lot of money invested in it.

Some of the biggest cryptocurrencies have trade volumes in the billions to tens of billions in a given day.

That trading volume rivals or beats out some of the biggest stocks out there.

Take the comparison between the past 24-hour trade volume for Bitcoin and Apple.

There was $13 billion of trade volume in Apple (ticker: AAPL) yesterday versus close to $46 billion in trade volume for Bitcoin. The trade activities around Bitcoin were over 3 times that of Apple.

Now, that is a liquid asset.

Reason #4: Investing In Crypto Allows Me To Follow New Technology

The world is constantly evolving, and it is important we continue to change with it.

Unless you want to be a programmer or engineer in the crypto space, you don’t need to dig too deep into the technical aspects of crypto.

But given crypto is a trillion-dollar asset class, it makes sense to have a working knowledge of some of the basic technical terms and concepts.

What is Bitcoin? Ether?

What is a non-fungible token?

What is blockchain and how does it work?

What is proof of work vs. proof of stake?

What is Web 3.0?

As the crypto market continues to grow and expand, those terms are becoming more and more prevalent.

The best motivation to want to learn about and follow new technology is to have a financial vested interest.

Investing in crypto allows me to experience firsthand how the new technology works.

Reason #5: Wealth Is Relative And I Don’t Want To Fall Behind

I’ve been guilty of FOMO before in my investment activities. Unsurprisingly, it did not end well.

Buying an asset at a ridiculous price, regardless of value, because of the fear of missing out is one of the surest ways to lose money.

And I hate to lose money.

But, at the same time, I know wealth is relative. I am only rich if my wealth is higher than the next person.

Crypto produced so many millionaires in such a short period. It feels like the gold rush.

Recently, the crypto market crashed from its all-time high.

I believe over the next 5 years the crypto market will not only recover but hit an all-time high.

There will be newly minted crypto millionaires. I don’t want to fall behind them.

To keep up with the next batch of millionaires, I want to make sure I have some exposure to the crypto market as well.

Maybe in a good scenario when crypto takes off again, I can move up on the wealth scale myself over some of the more conservative non-crypto holding investors.

The Three Major Drawbacks In Crypto Investing

However, it isn’t all sunshine investing in crypto. There are 3 major drawbacks as well.

Drawback #1: Need To Get Educated

Regardless if you are investing in real estate, fixed income, or Apple, getting educated on the asset is one of the first things you need to do to be a successful investor.

This is no different for crypto. There is definitely a lot to learn here.

You will need to spend time to better educate yourself on the crypto market, how to trade crypto, and the various crypto options available.

Also, outside of price appreciation, there are other ways to make money in cryptos such as staking, being a liquidity pool provider, airdrops, and mining.

It takes time and effort to get familiar with this new space.

Additionally, there are a lot of scams in the space. Education is very important to keep yourself safe from falling victim to a scam.

Drawback #2: Need To Be Very Self-Sufficient

One of the benefits of crypto is the ability to hedge against tail risk.

To take full advantage of the decentralized nature of crypto, you need to self-custody the assets.

That means you need to be very self-sufficient. You are now serving as your own bank and banker.

Crypto can be easily lost or stolen if you are not careful.

There is basically no recourse if you make a mistake and send crypto to the wrong wallet. Everything done in crypto needs to be extra careful.

One of the benefits of crypto is that you don’t need a bank or brokerage firm to trade or hold crypto assets. That gives you a new level of freedom. But it also means there is no protection offered by those institutions.

Education is the best form of protection here. Also, being very careful with your actions is another form of protection.

Drawback #3: Pass Down Risk Or Inheritance Risk

Another drawback is I worry about the ability to easily pass down my crypto assets if I am not accessible given the self-custody of the assets.

Assets held in a financial institution are held under a name. Those assets can be transferred or passed down to one’s heir in the event of incapacitation or death. There is a legal process to govern such a transfer.

The heir will inherit the assets held in a financial institution regardless if the heir knows about the assets or where the assets are held.

But what happens to assets that are self-custodied by the owner and ownership is not linked to anyone one individual through government-issued ID?

How do those self-custodied assets transfer in the case of incapacitation or death?

Basically, they don’t unless there is someone else who knows how to access those assets.

There is a real risk of your heir not receiving your crypto assets if you don’t at least let someone you trust know how to access your crypto assets.

How To Determine How Much To Put Into Crypto

Even knowing the 3 major drawbacks, you still think the benefits outweigh the negatives and you want to invest in crypto.

Going back to the junior associate’s question – how much should you invest in crypto?

My answer remains the same…it depends.

But as a general rule of thumb, I would say don’t put more than 10% of your assets into crypto.

If you are worth $10 million, I would say keep the cost basis of your crypto investments to no more than $1 million.

Crypto is still very speculative and a developing market in the early stage.

I believe tremendous wealth will come in the next decade from crypto. But the hard part is identifying the winners at such an early stage.

AltaVista, Excite, and Ask Jeeves were all search engines that came before Google. I doubt anyone under the age of 30 even heard of the first 3.

Have some crypto exposure but keep it under an amount you would be okay with losing 80% in a given month.

To The Audience: Do you hold any crypto investments? If yes, what are the reasons why you decided to invest in crypto? Have you wanted to invest in crypto but decided against it? If yes, then what are the reasons that kept you away?

2 thoughts on “5 Smart Reasons Why The Rich Should Buy Crypto And NFTs And 3 Major Drawbacks”

charlie @ doginvestor.comx
November 1, 2022 at 6:27 am
One of your ending paragraphs is the key to me – have you heard of previous search engines – you need to treat crypto investments as if you are acquiring the AltaVista/Yahoos/ and eventually Googles of the world.
Most will go to 0, a fraction will not, and you have no way of knowing. This is really taking small VC bets, if you’re so inclined, mixed with the liquidity/volatility of penny stocks. What is exciting is that you don’t need to wait for an IPO to realise value, like VC, but could already have a massive run up prior to market adoption. I just don’t know if there is a profitable method, other than getting lucky. Bit like buying random tickers in the Dotcom bubble all over again, but some real winners will eventually emerge.
- SoM @ SportofMoney.com
  November 1, 2022 at 9:12 am
  I agree with your comment. That’s why I like the dumbbell approach. I ground my portfolio in BTC and ETH, and just take a flyer on the smaller ones.
  The investment risk might be that we are too early in investing in crypto (as opposed to too late). The next Google or Amazon might not have emerged yet and people now are just investing in tokens that have no future.