Is Now the Time to Buy Crypto?

To be fully transparent, my crypto portfolio is down 83% from all time highs. My overall net worth is down 40% from all time highs. However, I started seriously investing in crypto in 2018 and my crypto portfolio is up about 700% from then.

Now that 2022 is coming to an end, I have found that this year is the first year when my net worth has declined. In fact, from the start of this year to today, my net worth has declined by 23%, but the peak of my net worth was back in November 2021 and from then my net worth, as mentioned, has declined by 40%.

Focusing on how much your net worth has declined against the all time high is an example of the achoring bias. There are many ways to measure how much you have made or lost from an investment. For example, if you purchased dogecoin for $0.007 back in 2018 and held it until today when it is $0.07, it seems like you have made 10x off your investment. However, dogecoin reached a peak of around $0.70 back in November 2021. If you had sold all the dogecoin back when it was $0.70, you would have made 100x, but because you waited, you only made 10x. Or did you lose 10x because you could have sold back in November 2021 but did not? Did you make 10x or lose 10x? I have thought about this and my view now, after listening to Dave Ramsey, is that it doesn’t matter. According to Dave Ramsey, when you have purchased an asset in the past is a sunk cost. What matters is when you sell it and if you’re comfortable with the volatility when you sell the asset.

Although 2022 has been a hard year, it is important to remember that downturns happen, especially in the stock and crypto markets. In fact, looking at history, none of this is new. The crypto market especially has seen a spectacular decline, especially with the collapse of crypto exchange FTX. However, in my opinion, the collapse of FTX is not as bad as many make it out to be. FTX is merely an exchange, and staff in this exchange stole funds. It doesn’t necessarily mean that there is anything wrong with the actual crypto. To use an analogy, if a bank is corrupt and the staff siphon off money for themselves, it doesn’t mean that there is anything wrong with the currency they stole. If a robber breaks into a vault and steals gold, it doesn’t mean there is anything wrong with gold as an investment.

I have recently started allocated more of my salary into to dollar cost averaging into various cryptos. In my view, there is a real use case for crypto. It is not just imaginary money. The use case for crypto is much clearer in developing countries. For example, if I were an expat or migrant working in Zimbabwe, I would convert my pay into crypto rather than deal with having to send it back to Australia or convert it into Australian Dollars. Look at the recent war in Ukraine. Crypto has been used by many Ukrainians and even Russian who have had to use crypto because their banking system does not work as well during war. Crypto has been used to send money to help the Ukrainian war effort. Crypto is useful when there are problems with the banking system in your country. According to Bitcoin Cash (BCH) user Roger Ver, there is a Russian man who now lives in Saint Kitts and Nevis and spends in Bitcoin Cash because his bank accounts have been frozen.

Although the use case of crypto is clear in developing countries, what about developed countries? Quite simply, there is no telling when a developed country may become a developing country due to a collapse of civilisation. In fact, due to political polarisation and extremism, I think it is becoming more and more likely that developing countries could collapse. And although I currently support the sanctions and asset seizures of Russian oligarchs currently, who is to say that another political party may get into power later and rather than target Russian oligarchs they come after me? Or you?

As such, I view crypto as a safe haven similar to gold. Some people argue that if there is a collapse of civilisation then the internet will not work and therefore crypto will not work. However, just because there is a collapse of civilisation it doesn’t mean that the internet everywhere will stop working. Crypto is useful when there is a situation where there is a collapse where you are but not in other areas. A good example, as I mentioned, is Ukraine.

Which cryptos as best?

After the recent crypto downturn, I have learned again that it is best to diversify across multiple cryptos and to stick to the ones that have been around for a long time. In my opinion, bitcoin, ethereum, and dogecoin are all good cryptos and make up the majority of my crypto portfolio. If you invest in some of the newer cryptos, I recommend investing only a small amount (e.g. PancakeSwap has not done well). If in doubt, diversify. Also I do not recommend staking or investing in stablecoins. If you want exposure to USD, just get actual USD.

As I said, if in doubt, diversify. All good investors are humble enough to understand they don’t know everything, and diversification is the antidote to ignorance. With that being said, I don’t recommend going all in crypto. It is important to not only diversify your crypto but also to diversify into other asset classes such as equities or bonds using ETFs.

How do you hold crypto in a safe way?

As the FTX collapse has shown us (and the Mt Gox collapse before that), holding crypto on any exchange is dangerous. It is much better to hold crypto yourself (self-custody) rather than let an exchange hold it for you. This is one of the reasons why I do not recommend staking crypto anymore because you typically give up self-custody when you stake crypto.

Of course, when you say “self-custody” to the average person, it is very difficult to explain the concept to them, and self-custody is very hard to do correctly. This I think is one of the main barriers to mass crypto adoption. To make self-custody easier, many in the crypto community recommend buying a Ledger hardware wallet directly from the official Ledger website (do not buy a Ledger via eBay).

An alternative to buying a Ledger, in my opinion, is to buy an ETF that invests in crypto companies. An example of one on the ASX is the CRYP ETF from Betashares. For those who are familiar with ETFs but unfamilar with crypto and self-custody, CRYP is a good way to gain exposure to crypto without any of the issues with self-custody. Many people who look at the CRYP price will be stocked to see that has been trending down since inception. However, CRYP was introduced right at the peak of the crypto market, so it makes sense that it will go down with the market. In fact, if we compare CRYP to the prices of bitcoin and ether then we notice that CRYP roughly tracks these major crypto (see below).

CRYP ETF (blue) vs BTC (orange) vs ETH (cyan) throughout 2022

It s worth noting that although CRYP gives you exposure to crypto, it doesn’t actually invest in crypto. Rather, it invests in companies that work in crypto such as exchanges like Coinbase or bitcoin miners. This is analogous to holding a gold mining ETF such as GDX or MNRS rather than a physical gold ETF itself such as PMGOLD. It is like buying Woodside Energy (WDS) rather than storing coal and natural gas in your garage. Exposure to companies rather than commodities means that there is risk associated with company scandals, corruption etc but the advantage is that you don’t need to worry about self-custody of gas, coal, gold, or crypto.

Which crypto am I most bullish about?

Of all the cryptos I invest in, I believe ethereum is the most promising. I would not be surprised if, in the future, companies and even governments are run on the ethereum blockchain. Below is a recent video I watched that captures the many achievements of ethereum in 2022 including the monumental transition from proof of work to proof of stake. Of all the cryptos, ethereum seems to be the most open to innovation.

Are Discounts and Sales Worth It?

During the Christmas and New Year holiday period, there would be many retailers offering discounts, and on the surface it makes sense to buy something when it is discounted. However, there are many times when I go into the shop with the intention to buy something and end up buying something else as well because it is discounted. Discounts create a sense of urgency and exploit FOMO.

This is purely anecdotal, but based on my observation, those who tend to buy products on discount also tend to end up buying a lot, which makes sense because sales are used as a marketing tool to attract customers and boost sales.

Avoiding FOMO using deliberate ignorance

At the train station, there is a display that provides the times when certain trains would come. This display details which train comes at what time, when the next train comes, and which platform to go to. I have seen many people look at this display, notice that their train is coming in a few minutes, and then proceed to run to the platform because they feel stressed that they may miss their train. Even if they miss their train, the next one will likely come in ten minutes, so is it even that harmful if they miss the train? Clearly FOMO is impacting them and creating a sense of stress and anxiety.

After realising this phenomenon, my technique now when I go to the train station is to never look at the display. I’d rather not know when the next train is coming. I’ll go to the train and catch whichever train comes next. If I end up at the train station and miss a train that came a few minutes beforehand, because I never knew that train came, I don’t feel any worse off, and even if I am ten minutes late, it doesn’t really matter.

The same anti-FOMO concept can be applied to discounts and sales. Rather than shop around for the best discounts and sales, it is better to just ignore everything and only buy when you really need to buy.

Buy discount and stock up vs buy only when necessary

I have a friend who is obsessive about sales and discounts. He would collect petrol coupons and bulk buy goods when they are discounted. He has two children and needs to cook for them. Once when I went over to his house, he showed me his stash of vegetable oil. When vegetable oil was on sale, he bought an enormous amount and stockpiled it in the garage.

From experience, I know that when you have a huge amount of a certain product at home, you tend to use it up more. For example, if you see food on sale and buy it and leave it at home, the food is likely to be eaten very quickly. So stocking up on more will just make you consume more. It is like keeping cash in your wallet. The cash will just end up being spent because it is so easy to access. Money that is harder to access, e.g. because it is locked up in an illiquid asset such as your home or your retirement account, is harder to spend. The same concept applies to consumer goods. If you need to get dressed and go to the grocery store in order to buy something, it adds layers of friction, which means you are less likely to consume it. Food in the supermarket is less likely to be consumed than food in your refrigerator.

As such, rather than hunt for discounts on food, bulk buy them, and then leave them at home where you overeat them, I believe it is better to leave as little food as possible at home and just consume what you have. Once you run out, then you buy a small amount and do a quick search to see where it is cheapest.

In other words, frugality is about reducing quantity by suppressing desire rather than bulk buying in order to get a discount only to encourage overconsumption.

Avoiding commitment

When you think about it, buying something on discount is a form of commitment. You are committed to consuming that product. For example, if you purchase ten bottles of vegetable oil, you have committed yourself to consuming all that vegetable oil before the expiry date. However, over time you may get sick of the vegetable oil. The problem with commitment is that you cannot reduce consumption once your desire wanes. If you purchased vegetable oil as you need it, if you suddenly get sick of vegetable oil, you can just stop buying it.

The Formula for Working Out if You Should Buy an Electric Car

I have created what I think is a formula for working out if it makes economic sense to buy an electric vehicle. You can find it below:

r_E = \dfrac{k}{100p} \left( f_I e_I - f_E e_E - \tau - \beta \right)

r_E = return \; on \; EV \\ k= kilometres \; travelled \; per \; year\; (km) \\ p= EV \;premium \; (\$) \\ f_I= ICE \;fuel \;cost \;(\$ \;per \;L) \\ e_I = ICE \;fuel \;efficiency\; (L \;per\; 100km) \\ f_E = EV \;energy \;cost \;(\$\; per\; KWh) \\ e_E = EV \;energy \;efficiency \;(KWh \;per \;100km) \\ \tau = EV \;tax \;(\$ \;per \;100km) \\ \beta= \;battery \;depreciation \;(\$ \;per \;100km)

Explanation of the formula

The way to think about whether an EV is worth it or not is to consider the EV premium, which is the difference between the higher cost of the EV and the cheaper internal combustion engine (ICE) car. So for example, as of December 2023, the MG ZS EV costs $42,990 whereas the petrol version MG ZS is $21,990, so there is an EV premium of p = $21,000. When you pay for this EV premium, you are effectively putting this $21k into an investment that has a return (r_E) which needs to be compared to the return of other investments. For example, suppose you buy an EV and spend and extra $21k and from the fuel savings etc you make 3% per annum returns (r_E = 0.03). If you believe that an alternative investment such as DHHF or VDHG has an after-tax return of over 3% then you would be better off buying the petrol MG ZS and putting the EV premium of $21k into DHHF or VDHG.

Another key consideration is battery depreciation. The EV premium is mostly a battery premium. The investment you are making is mostly in the battery. This battery has a return that you get from having access to energy in the form of electricity. Energy in the form of electricity is much cheaper than from petroleum. However, the EV tax and battery depreciation needs to be considered as well.

Looking at the MG ZS vs the MG ZS EV, the fuel economy of the MG ZS is 7.1 L per 100km and the petrol price is assumed to be $1.75 per litre. This means that every 100km you drive you are spending $12.43 in petrol.

However, for the MG ZS EV, the energy efficiency is 17.1 KWh per 100km and the cost of electricity under the Powershop EV Plan is $0.18 per KWh, which means that every 100km you only pay $3.11 in electricity costs. However, add in the EV tax of $2.50 per 100km (only applies in Victoria, Australia) and battery depreciation of $4.29 per 100km assuming battery life of 350,000 km and battery replacement cost of $15,000 and the EV cost is $9.89 per 100km, which is still cheaper than the $12.43 per 100km from the petrol car.

Because costs depend on the distance you drive, whether it makes sense economically to drive an EV strongly depends on how much you drive. The more you drive (especially over 25,000 km per year) the more it makes sense to get an EV whereas if you drive under 25,000 per year, it starts to make more sense to drive a petrol car.

Something else to consider is that when you pay for petrol, you pay for it using after-tax money whereas if you put the EV premium into getting an electric car, the lower cost per 100km you get is tax free. You need to compare the return from paying the EV premium against the after-tax returns from an alternative investment e.g. the after-tax returns of DHHF or VDHG.

If we assume that you drive 25,000 km per year then the MG ZS EV costs $2,473 per year whereas the MG ZS costs $3,106 per year. Given the EV premium of $21k this means the return on the EV premium r_E = 0.0301 \; or \; 3.01 \% .

A major uncertainty is the battery depreciation as it is difficult to know the battery life and battery replacement cost. In fact, most of the costs of driving an electric car seems to come from battery depreciation alone.

Reddit comments

I shared this formula on Reddit and received mixed reviews. Some people raised very good points that I have missed in the formula, but I think overall the formula above is useful to know whether it makes sense financially to purchase an EV or not. Below are some other considerations:

  • EVs have lower servicing costs.
  • EVs are heavier and so tire costs are higher.
  • Charging from solar energy is ignored as this would add extra complication due to the capital costs of installing solar panels and/or home batteries. Charging using solar energy is not necessarily free as some claim as there is opportunity cost associated with locking capital up and not earning returns elsewhere such as DHHF or VDHG.
  • The EV tax in Australia currently only applies to Victorians. Laws may change in the future amending the EV tax.
  • A recent FBT exemption provides an incentive to get an EV using salary packaging.
  • Battery depreciation is considered but the depreciation of the ICE vehicles is not considered because it is assumed that depreciation for the EV and ICE vehicles are the same except for the additional EV battery depreciation. The assumption here is that when you buy an EV, you are buying something similar to an ICE car with a battery, so basically it is assumed that EV = ICE + Battery. However, the EV may depreciate more or less than the ICE vehicle depending on e.g. if governments increase or decrease EV taxes or subsidies. Some suggest that EVs depreciate faster than ICE vehicles, but this may change e.g. if the government introduces an additional carbon tax that applies to petroleum. If government is very aggressive in providing tax benefits for EV use, there is a risk that an ICE vehicle could become a stranded asset.
  • The formula above ignores power or acceleration differences between cars. The MG ZS EV is supposedly more powerful than the MG ZS. It is claimed that EVs are very quick to accelerate. However, this is ignored in the formula as we only want to focus on cost minimisation.
  • The formula ignores the environmental benefits of owning an EV as well as national security considerations (e.g. energy supply and price not being at the mercy of Russian or Saudi leaders).
  • Batteries stored at the bottom of an EV lower the centre of gravity thereby making them safer. Furthermore, because EVs are heavier, they fare better in vehicle collisions.

Other thoughts and considerations

The decision to get an EV or an ICE vehicle is very similar to whether you buy or rent a home. When you buy a home, you lock up a considerable amount of capital into the home. The benefit you get from living in your own home is that you don’t need to pay rent. If you buy your own home and then rent goes up significantly, you are better off. Similarly, when you buy an EV, you lock up capital because of the added cost of the batteries. However, the benefit you get from EV ownership is that you pay significantly lower energy costs. If you buy an EV and petrol prices go up, you are better off.

We also need to think about the future. Currently the break-even point is about 25,000 km. If you drive more than 25,000 km per year, it is highly likely you should buy an EV. However, if battery technology improves, petrol prices go up, and electricity prices go down, the break-even point will go down. There is also huge risk that an ICE vehicle you own may become a stranded asset if government policy aggressively addresses climate change. In my opinion, it is more likely that electricity prices will go down and petrol prices go up rather than the other way around. Electricity comes from multiple sources e.g. solar, wind, nuclear, and even gas, oil and coal. However, petrol only comes from oil. As such the supply of energy sources that can create electricity is much higher than the supply of energy sources than can create petrol, so higher supply should result in lower prices for electricity as an energy source.

Based on these considerations, in my view, even if you only drive 15,000 km to 20,000 km per year, if you’re in the market for a new car, it is better to buy an EV. It is better to drive an ICE vehicle if that is what you currently own and if you don’t drive too much (less than 25,000 km per year).