Should I 'invest' in cryptocurrencies and tokens?

With the astronomical rise in bitcoin over the past few years, the recent surge in Ethereum and other alts and the eye-watering gains in some of the crypto-tokens; everyone wants to know if they should 'invest' in cryptocurrency and tokens. Now, I am no expert in IT or the technology behind these coins, but I do know a little about investing so I will attempt to answer this question from the viewpoint of an investor.

Investment vs. Speculation
An important distinction that investors will make is whether they are investing or speculating. Warren Buffett provides a great distinction between the two:

"…An investment operation in my view is one where you look at the asset itself to determine your decision to lay out some money now to get some more money back later on. So you look to the apartment, house, you look to the stock, you look to the farm in terms of what that will produce. And you don’t really care whether there’s a quote under it at all. You are basically committing some funds now to get more funds later on through the operation of the asset.

Speculation, I would define, as much more focused on the price action of the stock... you are counting on, whatever factors.. could be that quarterly earnings could be up or it’s going to split or whatever, it may be an increase in the dividend, but you are not looking to the asset itself.

And I say the real test of how you define what you’re doing is whether you care whether the markets are open. When I buy a stock, I don’t care whether they close the stock market tomorrow or for a couple of years… Now if I care whether the stock market is open tomorrow then I say to some extent I’m speculating because I’m thinking about whether the price is going to go up tomorrow or not."

Cryptocurrencies
By definition, the buying and selling of any currency in anticipation of price movements is by definition speculating and not investing. The only exception may be for hedging purposes, but this is a strategy that generally only applies to very sophisticated investors and businesses.

Tokens
Tokens are a little trickier to define; if you buy a token which gives you a stake in a specific protocol or technology and that specific technology enjoys widespread adoption in the future, and it is profitable, then the token may be able to produce an income stream in the future that is independent from the expectation that someone may just pay you more for it at some point in time (the 'greater sucker theory').

There are a few issues here, such as the lack of regulation and oversight: for example, I have seen tokens with conditions written in to their whitepapers and TOC’s that basically allow them to be written off as worthless at any point in the future by management teams. The other issue is the actual value of the tokens (many are in the billions) vs. the cash that holders may or may not receive at some point down the track.

All this put together leads me to the conclusion that all of the tokens I have seen so far are also speculations and not investment grade.

What's the problem with speculation?
Nothing. In my opinion, the only problem with speculation is when you don't know you're doing it and think you are investing.

What precautions should I take?
Generally, most conservative authorities would recommend against risking any more than 5-10% of your overall investment portfolio in speculations, and you probably should not put all your speculation eggs in the crypto basket. I would personally err on the side of caution and not risk any more than 1-3% of total net wealth in cryptocurrencies and tokens at this point in time, particularly if you do not have a solid understanding of the technologies and are not staying constantly abreast of developments. Speculating in tokens and coins that you do not have a solid understanding of, especially if you are not using risk-management strategies is no different to gambling. Most commentators agree that most of the protocols will fail and only very few will survive.

How do I become a real investor?
Firstly, you need to decide if you actually want to put in the time to be an investor, most people don't and may be much better off just buying a few ETF's that track major markets and adding to the them over time.

If you do decide that you want to make a lifelong commitment to investing, start by building a solid foundation, firstly in knowledge: read Peter Lynch, Warren Buffett and Charlie Munger (there are many other great investment books by other authors too). Listen to podcasts from David Gardner and Jim Cramer, watch YouTube videos, listen to audiobooks on the way to work- arm yourself with as much investing knowledge as possible and stay up to date with developments, both in companies and markets. Secondly, build the foundation of your portfolio on strong businesses with good management and long term prospects that are likely to produce a growing stream of future cash flows completely independent of movements in the quoted price, and try not to overpay for them.

"Intelligent investing is not complex, thought that is far from saying it is easy. What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
To invest successfully, you need not understand beta, efficient markets, modern portfolio theory, option pricing, or emerging markets. You may, in fact, be better off knowing nothing of these. That, of course, is not the prevailing view at most business schools, whose finance curriculum tends to be dominated by such subjects. In our view, though, investment students need only two well-taught courses—How to Value a Business, and How to Think About Market Prices.
Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher 5, 10, and 20 years from now. Over time, you will find only a few companies that meet these standards—so when you see one that qualifies, you should buy a meaningful amount of stock. You must resist the temptation to stray from your guidelines: If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upwards over the years, and so will the portfolio's market value"
– Warren Buffett

"I try to find excellence, buy excellence and add to excellence over time. I sell mediocrity. That's how I invest."
– David Gardner

Please note that this post is not financial advice, it is my opinion only and is not tailored to your personal financial circumstances. Please seek professional financial advice before acting upon any of the information presented here.