I have never in my life seen a boom like the one we are now seeing in Litecoin. As of this writing, it is up 111 percent today, 279 percent this week, 546 percent this month and 10,000 percent this year. To give you some perspective on this, Bitcoin has only grown around 2100% over the past year. I say only with a bit of sarcasm in my voice, but these are the sorts of returns we have come to expect from major digital currencies such as Bitcoin, Litecoin and Etherium. But what I’m most excited about is how well this phenomenon illustrates my cornerstone investment strategy: little bets/ big upside.
Little Bets/Big Upside
My principal investment strategy is to put down small amounts of money on investments with a disproportionately large upside. Litecoin is a perfect example. About ten days ago, bought about 18 Litecoins at $101 per share for a total of around $1900. Today, that investment is worth almost $7000. My investment more than tripled in just ten days. It certainly could have gone the other way, but if it had, I would have been out less than $2000. My upside so far has been triple my potential downside. Even if I had worked on a smaller scale, a $180 investment would have gotten me a nearly $700 return in the same time period. That’s not quite as impressive, but still a big upside.
I do this with all of my investments that I actively manage, whether options, digital currencies, or stocks. I specifically look for investments I think are going to grow rapidly, say by more than 50% over a two-week period, and then I place bets of no more than 10% of the whole pool on any one. I also invest for exponential growth, so, for example, lets say I make a gain of 100% on a $1000 investment. I add 50% of my return into the principal and then put $1500 into my next investment. This way, my money grows quickly.
How I Decide What to Buy
The short answer is, I look for value. I try to find securities that appear to be trading at a low price compared to their companies’ fundamentals including the ratio of price to earnings, cash reserves, asset value and debt. I also look for potential upside in the market for the product or service.
For example, I based my decision to invest in Litecoin on four principal factors. First, the fact that Coinbase, the most popular digital currency exchange, which sells Bitcoin, Litecoin and Etherium, has been increasing by nearly 100,000 members a day. Second, the fact that Bitcoin, of which Litecoin is a spin-off, is currently very expensive (I don’t think its overpriced, but I think it has less potential upside because it has already risen so high), and Litecoin is a cheaper, viable alternative. Third, the broad market for digital currencies has a lot of room for growth. For example, for all of its success as the largest digital currency, Bitcoin still only has a market capitalization of about $300 billion. That sounds like a lot, but the global money supply is currently around $37 trillion. That’s a lot of money that can be potentially converted into digital currencies.
But why would anybody want to convert perfectly good money into digital currencies when we have perfectly good national currencies. There are a few reasons. First, not everybody in the world has a perfectly good national currency to rely on. Those of us who have the luxury of living with dollars, pounds or euros take the stability of our money for granted. But what about those of us whose wealth is denominated in Russian rubles or Argentine pesos? If you live under a government with runaway inflation, or corrupt officials who can tax your bank account with no warning, digital currencies, which are largely anonymous and not regulated by governments, could be a very attractive alternative. This is not small potatoes. It’s the majority of the world. Moreover, even those of us who live in hard currency countries might do well to use digital currencies as a part of our portfolio, as a hedge against inflation, to promote the ease of large purchases, and as a store of value.
There is no question that digital currencies are “speculative”. Options are speculative, and even individual stocks are speculative to a certain extent. However, to gain any meaningful upside, you have to be able to tolerate some speculation. That’s the beauty of my system. My bets are speculative, but they are relatively small. I only invest money I can easily afford to lose, and then only if I have a great deal potentially to gain. I like to go for base hits, not swing for the fences. Tempting though it is, I will not invest $100K or even $10K in anyone trade, because I’m not looking to stake my wellbeing on the odd home run. I’d rather score a whole bunch of singles.