Bitcoin, Ethereum, Dogecoin: What to know before investing in crypto
From Dogecoin to Bitcoin to Coinbase, cryptocurrency is the hottest trend in investing right now. Here’s what you need to know before buying in.
I’m one of the lucky ones. I invested very little money, and now own cryptocurrency worth more than $350,000. I’m 30 years old, I rent, and I don’t have much in savings or retirement investments other than my crypto. I’m really struggling as to what to do next. I don’t know whether to keep going, or to take the $350,000 and do something more practical with it. Am I foolish to just let it ride?
– Mason, Chicago
You do realize “let it ride” is a gambling term, right? While you might think I’ve unfairly targeted one throwaway phrase in your email, it’s the blurred line between gambling and investing which makes cryptocurrency so confounding.
Too many people believe investing is gambling. As it turns out, investing is not gambling. Is risk involved? Yes. Is reward involved? Yes. Is investing a game of chance? Well, that depends on your investing strategy.
The primary difference between gambling and investing is an investor will use tools of diversification to mitigate risks and decrease the chance for loss. A gambler is typically all-in with a singular lever dictating whether they win or lose. And even if you hold different types of cryptocurrency, the use of a single asset class means you aren’t mitigating risk through asset allocation and diversification.
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Investors have very specific goals around rate of return, time horizon, and risk tolerance itself. Additionally, investors generally have specific goals for specific accounts whether the money is meant for retirement, college, or some other time-determined event. Gamblers primary goals revolve around winning the bet, without any additional structural elements or constraint.
The strangest reality about the intersection of investing and gambling is the same asset can theoretically be either an investment or a gamble. It’s the strategy and planning behind the asset which decide whether or not you’re gambling.
Gambling is exciting. Investing, when done well, is really boring. I, too, am tired of reading/hearing quotes from the great investing gurus of our time, but Warren Buffett wasn’t wrong when he warned, “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Don’t make your decision so binary. There is no inherent “all or nothing” moment here. You can take money off the table and do something less speculative with it.
I’ve always believed a person can earn the right to take additional investing risks by creating underlying financial stability in their life. For instance, a healthy emergency fund, a properly funded retirement strategy, and the absence of consumer debt make investing excess funds in speculative vehicles much more tolerable. It’s tough to accomplish this level of stability when your entire net worth is tied-up in something as volatile as crypto.
Consider using some of the value of your crypto holdings to create more conventional stability. By doing that, you allow the rest of your crypto holdings to become less of a gamble and more of a specific investing strategy. You’ll still have the theoretical upside of crypto, but you’ll also have a more reliable base to your financial planning strategy.
Bitcoin drops as Elon Musk says Tesla won’t take it
The price of bitcoin fell below $50,000 Thursday morning after Tesla CEO Elon Musk tweeted a day earlier that the electric car maker would stop accepting the digital currency as payment for its vehicles. (May 13)
You need to come to terms with the FOMO (fear of missing out) which inevitably comes with switching from a speculative investing strategy to a more prudent investing strategy. You can’t forever measure your decision to diversify with an open-ended timeline that would otherwise allow your previous speculative investments to swing wildly, if not higher. That will be the temptation in all of this. If you were to diversify and then your previous investments shot up like a rocket, you’ll feel like you failed. You didn’t fail. That’s FOMO, and it’s as old as investing itself.
One additional note: If you do sell any cryptocurrency, be sure to account for taxes. Unfortunately, a gaggle of crypto investors are going to learn an incredibly harsh lesson when they don’t consider the tax obligations they hold to the IRS.
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Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question for Pete the Planner? Email him at AskPete@petetheplanner.com. The views and opinions expressed in this column are the author’s and do not necessarily reflect those of USA TODAY.