Last month, I made my first ever cryptocurrency purchase. You might think I’m late to the party, and possibly a bit reckless, but I haven’t just bought crypto, I’ve ‘staked’ it.
Here I’m sharing a couple of things that I’ve learnt with this first purchase.
Up until recently, cryptocurrency has been a commodity rather than an asset that can work for you in the same way that dividend paying investments, or rental properties can generate income. In its basic form it is like gold or antiques. You buy crypto and hope that over time it increases in value, but it doesn’t generate wealth on its way.
This has changed with the introduction of staking. Rather than cryptocurrency being assured through ‘proof of work’ (this is the energy hungry algorithm solving conducted by miners), a ‘proof of stake’ concept has been introduced. Currency is validated when owners ‘stake’ their already owned currency, in return for which they can earn interest.
Staking opens up the opportunity for cryptocurrency to ‘work’ for you, rather than just changing in value, which has changed my attitude to investing in it.
Researching cryptocurrency has been harder than I thought
Never invest in anything you don’t understand. When I first began investing in the stock market and ETFs, it took months and months of research before I became familiar enough with the system to make my first trade.
Cryptocurrency is completely different to the share market, and again it has taken me a couple of months of reading about the risks to become comfortable enough to put money in. Staking crypto is even more complex, and even though I have spent a lot of time researching it I’m still not 100% across all the details.
Even so, I think I’m satisfied enough to make a small investment.
My crypto investment is about 2% of my total investments
Crypto is not as stable as the share market and I’m not as comfortable with the risks, therefore the proportion of my investment reflects that. At the moment it only makes up 2% of my total investments (and much less of my total net worth), and this will only decrease as I don’t plan to invest any further in crypto.
I made a mistake not calculating the transfer fees
The biggest mistake I’ve made with staking crypto, is not being fully aware of the fees that were involved.
I decided to use the Binance platform to make my purchase, as their model was much more clearly explained and felt more transparent than others. I found their website much easier to navigate than others, and the complex rules surrounding cryptocurrency and staking were laid out in a way I could get comfortable with. This was especially true with the staking component, which is not straightforward. I’m not going to go through them here as I’m no expert, and it’s something you should read up on yourself if you want to do the same.
If you are setting up an Australian Binance account, you can use this link to receive a 10% discount on trade fees (Disclaimer: I will also receive a 10% commission on trade fees).
The lowest fee transfer method was to use PayID. As my bank doesn’t yet have this enabled, I had to do an ordinary bank transfer which ended up costing me a fair bit in fees.
In my impatience, I didn’t do the full calculation of how much this would cost, and in addition I got charged a small fee from my bank. If I had waited a bit, I probably would not have made the investment and waited either until my bank could facilitate PayID, or done a bit more research into an alternative platform with other payment options.
Another effect of this was that I could only stake half of amount I had originally intended. You can only stake minimum ‘blocks’ and the fees brought the second ‘block’ just below this minimum.
Be prepared for volatility!
As soon as I purchased and staked my crypto, the value dropped by about 20%. I was somewhat prepared for this, as I know the values of all crypto can vary wildly, but it is still not that pleasant.
I know from experience that my personal psychology around investing is pretty resilient. When I made my first investment into the Australian ASX 200, that same week the Australian Prime Minister was challenged for leadership and resigned, which caused markets to drop. My cautiously made $1,000 investment tumbled, and although I hadn’t expected to learn the lesson about long term gains and short term fluctuations so quickly, I didn’t panic. This was my same attitude during the Covid-19 market crash.
Since staking, the value has returned to what it was and I can begin to see how returns will start to compound.
Have you dabbled in the cryptocurrency market? I’d love to hear about your experience!
Please note: This blog is not personal financial advice and only anecdotes my own experience. Do your own research before making any financial decisions.