A small amount of exposure to alternative investments are always a good idea in any well-diversified portfolio, but I have more specific reasons for believing in the crypto revolution, which I will explain below. Full disclosure, I recently put about 4% of my portfolio into 3 crypto currencies and while I'm kicking myself for not doing it a year ago when I first became interested in the idea, it's still quite "early" in the development of the crypto markets. If, after reading this, anybody would like to discuss the merits of specific currencies and mechanisms for purchasing them, I'm not that hard to find.
Yes, it could in theory all go to 0, which is why I have set myself a "ceiling" of 5% of my portfolio, for the time being. Basically, I'm willing to have skin in the game, and I'm willing to risk losing up to 5% of my portfolio based on my belief in this new market. If that's not for you, perhaps 1% is doable. Everybody needs to find their own level with this. For the true crypto evangelists, holding your wealth in crypto is far safer than dollars, pounds or government bonds, for the very simple reason that crypto currencies built on the public blockchain can't easily be manipulated by politicians and powerful, centralized organizations in the ways that fiat currencies can be. Understanding this one, simple, fact is the key to understanding the tremendous allure of cryptocurrencies.
Because of this allure, there's reason to believe that the leading cryptocurrencies won't go to 0, and that they eventually come to form an important parallel economy that will rival, although probably never supplant, government issued currencies in the West (albeit not in Russia or China, for reasons I'll discuss in a different post). Yes, it's theoretically possible that these currencies could be hacked, destroying their value overnight, but the consensus-models in the public blockchain are specifically designed to resist that kind of hacking, and are battle tested at this point.
Recently, the value of leading cryptocurrencies have been going parabolic and it's amazing to watch. Depending on who you talk to, we're witnessing a bubble, or one of the largest wealth transfers in history, or both. Yes, this has all the classic symptoms of a bubble, but the current bubble is backed by a truly revolutionary technology and so, even after it "bursts" there's reason to believe that the overall crypto market will stabilize and settle well above the current market price, at least, for the cryptocurrencies that make it all the way through this wild-west period.
The most appealing feature of cryptocurrencies is that they lie 100% outside of the direct control of any one government (or group) and therefore can't be "de-based" by those governments when it needs to make (i.e take) more money away from their citizens than they can through 'ordinary' taxation (typically to pay back government debt, once that debt grows beyond a government's ability to pay it back via "normal" means).
A great example of this is "Pound Sterling", the British currency. Originally, "Pound Sterling" meant 1lb of Sterling Silver, hence the statement on the note "I promise to pay the bearer, on demand, one pound sterling". As of this writing, one lb of sterling silver cost GBP £172.23. So this currency has been "debased" to the tune of approximately 1/172 of it's original value when it was first introduced.
The most significant "de-basing" event in modern history was when western governments "came off" the gold standard which was the dawning of the era of "fiat currency". Of course, debasing happened even before then with the practice of "shaving" coins in the treasury even in ancient times. Put simply, a government would issue a 1oz coin, say, that only weighed 0.8oz. Hey presto they'd just "created" money.
Since the Clinton / Bush era deregulation of financial markets, this debasing has accelerated, with the creation of financial capital out of thin air, through complex debt derivative markets that most financial professionals (let alone ordinary citizens) don't fully understand. In recent times, this has created a surreal situation in which the ratio of synthetically created "financial capital" to the "real economy" has shifted significantly, with debt capital growth far outstripping the growth of capital via other means. The simplest way of understanding this is to say that most of growth in the world's total money supply is currently coming about via "conjuring". The mechanism for this conjuring is not cauldrons but the debt markets and debt derivatives markets. This conjured wealth tends to pool in asset bubbles, of course. Is crypto just another example of one of these bubbles forming? Or is it something else entirely?
Here's the reason for believing the answer is "both". Yes, inflows of excess financial capital are having an impact on Crypto markets as they did previously with real estate markets, the stock market and just about every other asset class. But that's not all that's going on. What's also going on, is that the world is slowly creating a new asset class for storing value outside the fiat currency system, and this system has all kinds of cool features that traditional means of storing value simply don't have.
#1 in that list of features is that, within any given cryptocurrency, nobody can make more of it. The total number of Bitcoin, Bitcoin Cash and Litecoin in circulation cannot be changed by anyone after the founding moment of each currency EXCEPT via consensus of the community, (typically via events such as forking). So while a speculator might experience "adoption volatility" driving volatility in the exchange rate between cryptos and government issued fiat currencies, in the long term, you won't experience the volatility and steady debasing that fiat currencies experience due to debt "conjuring" and their associated financial crises. As adoption of specific cryptocurrencies grows into daily transactions, those exchange rates to USD, GBP etc. should stabilize significantly due to much higher levels of market liquidity and adoption. In other words, the current volatility is a growing pain, not a permanent fact of life. One big issue that needs to be worked out is which cryptocurrencies will actually get adopted in daily life. Bitcoin is the most famous, but rival systems like Ethereum and others have their backers too.
Once vendors start accepting cryptocurrencies as a means of payment for goods and services, a lot of good things will start happening. Transaction costs will fall and centralized "authority based" processing networks like Visa and MasterCard will become redundant as much cheaper "distributed" ways of verifying transactions and contracts between buyers and sellers emerge. At that point, the public will have the option not only of holding a currency that their own government can't devalue through irresponsible debt issuance, but of being able to USE that currency at significantly reduced transaction costs in their daily lives.
For these reasons, I'm bullish on crypto, and you should be too. A great place to get started with trading is at CoinBase.