Bitcoin Bug

Hey, if you haven't caught it yet, this story isn't going away anytime fast. Make loads of cash a million times faster than any mutual fund out there and get your retirement nest egg on lock.  It IS an exhilarating prospect, no doubt and everyone (including my wife’s 88 year-old grandfather) will continue to captivated by the story.  

However the other side of the coin, is the incredible amount misinformation, insanity and poor decision making that surrounds such a new and volatile asset. For example, earlier this year while watching basketball at our local sports bar, I managed to overhear one individual confidently claim about their bitcoin investment:

“I make about 1% per day”

Said differently, he expected his investment to grow 38-fold, over the course of a year. This is obviously quite impressive and could have turned out to be true. But that was back in January and we know what would happen next.

Especially for younger people venturing into investing for the first time, observing the bitcoin story from 2017 through 2018 is an amazing lesson that highlights everything wrong with how we translate financial media into poor investing decisions, even for “pro” investors )

The hype, the predictions, big gains and the millionaires that look kinda like you, the FOMO, the collapse, regret, hope, predict, repeat.

By no means would I discourage anyone from investing in bitcoin or any other volatile asset, quite the opposite. Bitcoin and cryptocurrencies in general can have a MODEST place in a rational, well thought out investment plan.  But for starters, a few guildelines

First off, Never rely on forecasts. Ever. As I’m writing this, a quick google search of “Bitcoin price prediction 2018” returns the following:

Search result 1: “Bitcoin price could hit ‘near-zero”

Search result 3: “Bitcoin headed to $100,000 in 2018" 

Add to that whatever appears in your social media feed and it’s clear the expert forecasts vary.

Ignore them.

While everyone sounds equally confident (and equally thoughtful) in their predictions, trying to determine who is going to be right is a straight up gamble and if you feel like gambling, your local Casino is will be much more entertaining. 

Second rule, only invest money you’re prepared to lose.  A $1000 investment in bitcoin could be worth 8 times that amount in a year, or could be worth $200. Don’t try to bet big and win big when you aren’t prepared to lose big. This shouldn't be the cash you have set aside for a short term target such as a downpayment on a house. (In otherwords, Don’t be this guy

Third, remember that prices don’t go up (or down) in a straight line. That individual I mentioned above who expected to make “1% per day”, might actually see his money increase 38-fold but not without periods of extreme volatility which could see their investment decline by 40%, 60% or more between now and then (as witnessed by the early 2018 price collapse). 

Lastly, never allow the amount you have invested in cryptocurrency or a similar volatile asset to exceed 5% of your investable assets.  The more nervous you are about market volatility, (usually tied to age), the lower that limit should be. For example at 35, my personal limits might be to have 3% of my investable assets in cryptocurrencies, up to a max of 5% and a minimum of 2%, but for my retired parents drawing on their investments for income, that limit might a starting allocation of 2% in cryptocurrencies with a max of 3% and lower limit of 1%.

If you started off with a modest amount invested in bitcoin which has grown substantially, setting hard limits to know when to sell and take some money off the table is the type of tactic  professionals use to focus their investing decisions.  For example, if luck goes your way and your initial investment grows substantially, you should know in advance when you should sell part of that investment to capture those profits and reset your relative exposure to bitcoin to an appropriate level.  A $1000 investment which grows to say, $3000, doesn’t mean you have to lose sleep trying to predict what might happen next. Instead, take a look at what percent of your investable assets that $3,000 now represents. If it’s now only 3% of your assets, then you might be perfectly fine with that.  If all of your other investments have tanked and your bitcoin investment is now represents 20% or more of your investment portfolio, then that to me, is a signal to reduce SOME of your bitcoin holding to a more appropriate level

Conversely, you may initially make an investment in bitcoin, only to see it decline to say 1% of your investments.  If you’ve targeted bitcoin to be 3% of your overall assets, then the decision to buy more when the price declines and the rationale for doing so is in place.  This type of discipline of setting targets and thresholds for your holdings takes the emotion out of your decisions and will help you avoid the insanity of any financial media disrupting your game plan.

Bitcoin and other more volatile assets DO have their place in a balanced portfolio and can make for a profitable and personally rewarding experience, but do not be enticed by over investing in the hopes of striking it rich and definitely don't take on debt to do so. As with everything, moderation is key and keeping sight of your broader financial plans and objectives is what successful investing is all about.