Packaging Cryptocurrency Investments

If you have a clear investment horizon it becomes possible to limit the potential losses for even the riskiest investments, while still having a chance at a high long run rate of return. This can be done by taking advantage of the time value of money, a central concept in finance theory. In general, it states that one dollar today is worth more than one dollar tomorrow. This is due to the impact of interest. For simplicity, it is assumed inflation is neutral.

Present and future value

Consider the following example. $100 is invested for one year, earning 3 percent interest. After one year, the investment will return $103. Therefore, $100 paid now and $103 paid in one year have the same value if you expect 3 percent interest. In other words, the present value of $100, at 3 percent interest, has a future value of $103. On the other hand, the present value (or discounted value) of a future value of $100 is $97.09. This concept is generally applied in structured products to offer protection of the principle if held to maturity.

If an investor wants to invest $1,000 for five years, without risking any loss, then the $1,000 should be considered as the desired future value. A certificate of deposit (CD) currently pays 2.30 percent interest annually on a five year term. Using this rate as the discount rate, the present value can be determined at $892.53. This amount is put in the CD, and the remaining $107.47 can be used to construct a packaged investment strategy based on derivatives. The only risk remaining would then be not receiving a return at all.

Packaging

In cryptocurrencies, financial derivatives that can be used to this purpose are not yet available. Given the volatility of cryptocurrencies this could, however, still result in a sizeable return. At today’s rate, $107.47 would buy you about 300,000 Dogecoins. Bitcoin has a market capitalization of over $8 billion. If Dogecoin would get anywhere near that in the next five years, then 300,000 DOGE will return about $19,000 – around 80 percent annualized compounded return on the principle of $1,000. If there is “only” a tenfold increase in prices, this would still result in roughly 16 percent return annually. If DOGE falls or remains equal in value, the investor will receive the principle guarantee of $1,000 in five years. The previous therefore offers a solution for those believing in the future of cryptocurrencies, but not willing to risk any losses. Please consult your personal financial advisor for questions on the appropriateness of any of these ideas discussed.

Leave a Reply