Until now, we discussed what Bitcoin and Ethereum are and what their function is. Today, we're going to talk about where cryptocurrency might belong in your personal financial strategy. Since people are all different, there is no one correct allocation that is right for everybody. Instead, people construct their own financial architecture in a way that fits their age and personality. Since we like to see things in an organized way, we like to have separate "bins" or accounts, when we manage our capital. Your bins might look a bit different, but for us, we have:

Daily Expenses—This is our checking account. We do not put this money at risk, or into anything other than the currency that we conduct our affairs in, which for us is the USD. Its balance fluctuates significantly depending on whether it is the day before, or the day after pay day—whatever that might mean to you.

Emergency Funds—This is a separate savings account that we link to our checking account and keep enough capital on hand to support us through unforeseen emergencies. How much one should keep will depend on the circumstances of the individual, but for most people, 1-6 months of living expenses is appropriate. We do not put this money at risk and do not attempt to earn a capital gain. This money is typically in money market funds earning very low interest.

Savings—Savings is money that is invested in liquid assets above and beyond our immediate cash needs and our emergency fund. Assets that belong in this category would be liquid assets like the Euro, dollar, money market funds, and gold. In this place, there is some room to buy-and-hold cryptocurrency. Of course, we wouldn’t want to put all of our hard earned savings at risk in just one asset, but putting a small percentage into a few different cryptocurrencies is reasonable diversification. In a perfect world, everyone would hold a portion of their net worth in crypto, but we are far from that point. Many people haven’t even heard of crypto, and most people don’t own any. Like any disruptive technology, that will change with time. Possibly, the thing that will cause crypto to become mainstream doesn’t yet exist. But, the technology is here to stay and it will only become more widespread with time.

Investment funds—This is where we attempt to profit from the risk that we accept when placing a trade. In this bin, there is a real risk of capital loss. This is where we would hold investment real estate, stocks, bonds, and the majority of our crypto holdings. This is where we think the sweet spot for cryptocurrency is. This is the money we use to speculate on capital gains. Speculation is different than savings. With savings, we tend to buy and accumulate, but we don't trade into and out of a position unless it is to re-balance our portfolio for risk management purposes. But with our speculative funds, that all changes. Speculating is attempting to buy low and sell high, which requires both buying and selling. So rather than accumulate, we attempt to buy weakness and sell strength.

Cryptocurrencies are ideal vehicles for speculation for a few reasons. One is that they trade 24-hours per day, seven days per week. Another, is that because most cryptocurrencies have little to no value beyond that which is assigned to it by other investors and speculators, there isn't much utility that can be valued. Because there is no "base" value to begin with, it tends to respond very well to the whims of other traders, which is visible to anyone adept at reading a price chart.

So if you already have your checking and emergency funds safely stored in liquid currency, then you likely have some room in your portfolio to begin acquiring cryptocurrency. Remember though, that crypto is quite new. Nobody knows quite what it should be worth, and the price fluctuates a lot. This extreme volatility can be taken advantage of (at least in its short history) by buying during the inevitable down turns.

Finally, because crypto is as new and volatile as it is, we only hold a small portion of our wealth in crypto. What small means depends on the individual, but do keep in mind that its price can fluctuate wildly, and if you have too large a position, it can have an outsized impact on your net worth. A general rule when starting out investing in anything new is to think, "What amount can I invest today, so that if this were to go to zero tomorrow it would have little to no effect on my lifestyle." Over time, as you profit and get more comfortable, you can increase your risk.

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