Investing in Cryptocurrency

Famous investor Warren Buffett said “bitcoin will end badly” and “bitcoin is rat poison squared.” This is his general view of all cryptocurrency.

Warren’s a smart guy. I value his opinion, and so should you. Is he right?

I doubt it, but you never know. It’s all a matter of opinion. Whose opinion carries more weight? Mine or his?

Consider:

  • He’s a self-proclaimed “value investor” who built his fortune by finding well-established, undervalued companies and making big bets on their future success. Most of my wealth comes from equity in real estate.
  • He’s famous. I’m not.
  • He’s had eight decades to build his wealth. I’ve been doing it for less than one.
  • His investments have done really well this decade. Over the same time frame, my investments have done better (without including cryptocurrency).
  • He’s the son of a wealthy Congressman and a homemaker. I’m the son of a public attorney and an ESOL teacher.
  • He’s worth $40 billion. I’m worth…a lot less.
  • He’s from the silent generation. I’m a millennial.
  • He has his own family office to manage his wealth. I let Personal Capital manage my wealth (try them at Personal Capital and get $50 when you sign up).

To summarize:

Chart summarizing the differences between Warren Buffett and Mark Helfman.
Warren B. vs Mark H.

He’s the Oracle of Omaha, I’m a Bitmoji. To say we have a different philosophy about investing would be…

Wrong.

Warren Buffett and I share the same general philosophy around investing. I’ve even read some of his books. Our shared viewpoint: find “things” that seem undervalued, buy them when they’re undervalued, and hold them for a long time.

While we share the same philosophy, we have different perspectives. I see new technology as exciting and I like to spread my bets among novel competing projects to see who wins. He sees established businesses as exciting and he likes to spread his bets among businesses that have economic moats preventing meaningful competition.

Who’s the more credible source of investment opinions?

Shrug-Emoji
Shrug.

I consider myself as credible as any other random person posting information on the internet. While I’m not qualified to give financial advice and I can’t help you trade cryptocurrency, I can offer my perspective below.

(If you’re interested in learning how crypto will change the way you live, read my book, Consensusland. This post is solely for people who want to make money selling cryptocurrency for more than they bought it for.)

Perspective is not expertise

At first I hesitated to publish this. What expertise do I have? What makes me think I’m qualified to offer this information?

But people asked me to write about it. You may disagree with what I say, which is fine. I don’t profess to have some great, deep knowledge. I have something more persuasive than that:

An informed opinion.

I hope you enjoy reading it.

Before You Read More

If you have no money, the last thing you should do is buy cryptocurrency as an investment. You have no expectation of profit and no way to recover your losses. Either buy cryptocurrency with the intent to use it or just stay away.

Build a little wealth with something safe, like a cash savings account or a properly-financed rental property, then come back to cryptocurrency. Lock up some money in something that will preserve or grow your purchasing power, like the investments in this Bankrate article.

While you may miss out on some gains, you benefit from having something of value in case cryptocurrency fails. Crypto is a very speculative investment.

Also, please keep in mind, I am actively invested in private equity and real estate—long-term commitments with tax advantages and legal protections for investors. Basically the opposite of cryptocurrency. I tend to have more patience, tolerance for risk, and long-term expectations than most crypto people.

I also own stocks, bonds, cash, and commodities but I don’t know how to invest in those assets so I give that job to my awesome financial advisor, Keith Jones. You should, too. Sign up with Personal Capital and ask for him. You can use Personal Capital’s investment tools for free and I believe there’s no minimum if you decide to open an account. Use this button to try it for free:

Why Everybody Needs to Own Some Speculative Assets

Many researchers have compared cryptocurrency to other types of assets like cash, gold, real estate, stocks, and bonds. They’ve all concluded that price movements in cryptocurrency markets do not correlate to price movements in those other markets. Morgan Stanley confirmed this in its summary of the investment industry’s view of cryptocurrency and I think the most readable explanation comes from Yale, summarized in an interview with one of its researchers.

As a result, cryptocurrency makes a perfect addition to any investment portfolio that’s built around Modern Portfolio Theory, which demands you spread your wealth among assets that don’t move up or down at the same time. This means putting some money into risky investments others may consider “gambling.”

When you spread your investments this way and rebalance over time, you get better returns with less overall volatility than simply buying stocks and bonds or keeping your money in a savings account. Harry Markowitz won a Nobel Prize for discovering this phenomenon and it’s now a standard approach to building wealth.

Why high-risk investments aren’t always risky

Cryptocurrency is also an asymmetric bet. When you lose, you lose a little. When you win, you win a lot.

As long as you keep your investment small and sell when the price goes up, you can make money even if you lose most of the time. Your wins will far outpace your losses.

In other words, if you buy a little bitcoin—maybe 1 percent of your total wealth—you can sell some the next time it booms to book an easy profit.

If bitcoin goes to zero, you don’t worry about losing 1 percent of your wealth. You can lose that much in the stock market any given week, sometimes in a day.

Yes, the chance of crypto going to zero is higher than the stock market going to zero. But unlike the stock market, cryptocurrency has virtually unlimited upside.

This earth has at least $200 trillion to $1 quadrillion worth of “things” that can get recorded on a blockchain and bought or sold at any time. All cryptocurrency combined captures slightly more than $200 billion of that market, less than a fraction of a percent. If cryptocurrency is even modestly successful, the potential returns are astounding.

Why you shouldn’t take recommendations from Twitter

A twitter scam.
A Twitter scam.

Yes, scams abound but that’s not why you need to avoid “Crypto Twitter.”

You should always be careful when taking advice from books or blogs or Reddit, but Twitter is the absolute worst place to get advice. You don’t know who’s getting paid to shill and the tweet format makes it almost impossible to get any depth of analysis or perspective.

Social media tends to amplify tweets from people with large followings or clever comments, not sound thinking, sober assessments, or demonstrated history of success. Accounts are anonymous, sometimes fraudulent, and often self-serving. There is no worse source of information than Twitter.

Always heed a bit of advice I learned from a person who used to work on Wall Street: “if they talk about buying, they’ve already bought.”

Why you can’t compare the prices of different cryptocurrencies

You might see a crypto like XLM priced at $.05 and another crypto like WAVES at $1.00 and conclude XLM is cheaper than WAVES.

Truth is, nobody knows. It’s hard to know what’s cheap or not when you’re dealing with a speculative asset like cryptocurrency. That would be like paying $15 for a Big Mac instead of paying $30 for a filet mignon because you thought the Big Mac was a better deal. In reality, the steak is a fair price and the Big Mac costs $10 more than you would spend if you went to McDonald’s.

Yet many people apply this flawed logic to cryptocurrency.

WAVES has a tiny, growing network with small partnerships. XLM has a big, stagnant network with a huge partner (IBM).

XLM has 20 billion tokens in circulation and its development team releases another 1 billion each year.

WAVES has only 100 million tokens and its development team will never create more tokens.

Their technology is different, their products are different, their teams operate in different markets, and their features are different. Everything’s different, but you can’t know that simply from looking at price.

Price means nothing. You need to learn about projects and tokens before you can judge them.

Why Cryptocurrency Can Boost Your Purchasing Power

Did you know you can use your cryptocurrency instead of selling it?

It’s true. As a result, you need to consider purchasing power. It’s hard to understand how purchasing power works because you can’t see it happen, but I’ll oversimplify:

You gain purchasing power when your money buys more things than it did before without having to make any more money.

In other words, your money goes further.

For example, if bitcoin succeeds, 1 bitcoin today may buy 10 bitcoin’s worth of things in five years…even though you still have only 1 bitcoin. Everything else got cheaper compared to bitcoin.

You will not have to sell your bitcoin to get this benefit. You simply buy things with bitcoin. In fact, you will not even notice your gains until you look back and realize how much more you can buy than you could before.

Most people would not consider this a feature of investing, because it doesn’t actually produce new wealth. I consider it a very overlooked and under-appreciated benefit of buying cryptocurrency as an investment.

Imagine your $1 bill can one day buy a $100 dinner. Wouldn’t you consider holding onto that dollar?

You can never expect that result from your local currency. Haven’t you noticed that you always need to make more money each year simply to keep up your lifestyle, even though you get tax cuts and pay raises?

It’s because your money loses purchasing power. All modern government-issued currencies are designed to lose purchasing power over time. The U.S. Federal Reserve uses inflation to intentionally reduce the dollar’s purchasing power slowly over time and it’s quite open about this. A little bit of inflation is healthy for your country—it keeps the economy growing and encourages investment—but it’s bad for the value of your money and it’s something you need to consider as an investor.

Any cryptocurrency that succeeds will let you buy more things in the future when you use it for its intended purpose.

For example, if you buy Steem Power now and the Steem blockchain fulfills its potential as a social networking platform, you will gain influence on that platform without lifting a finger. Your Steem Power will buy more things than it does now.

Likewise, if you buy Basic Attention Tokens now and BAT fulfills its potential as an advertising platform, you will gain advertising power over time, simply by holding BAT.

Even if nothing else changes.

Why HODL Isn’t the Best Strategy

Have you heard people use the word “HODL” to describe their cryptocurrency investment strategy?

It means “don’t sell when the price goes down.”

This is not bad advice. Any cryptocurrency that succeeds will be worth so much in 10 years, you won’t be able to comprehend how it was ever possible. You don’t want to sell and miss out on all that growth.

I would encourage a different approach. I call it HODL-plus.

Ship sinking.
Don’t HODL.

Ride the ups and downs. Keep money in the market even when the prices collapse. But whenever you see any cryptocurrency go up a lot, sell some. Take profits. You can even set a formula for yourself, e.g., sell 10 percent each time the price goes up 300 percent. Buy something for yourself or stash your profits in a bank account.

When your $100 worth of Ethereum grows to $300, sell $30 and keep the rest. If the whole thing goes to zero, at least you have $30. If the value of your Ethereum goes to $1,000, sell another $100. Hedge your bets. You need to protect yourself in case cryptocurrency fails as a technology.

You can set a predetermined “sell” price in advance using any cryptocurrency exchange and some wallets.

Maybe you think cryptocurrency prices will keep going up and you don’t want to sell early. That’s a risk. I look at it this way: you bought cryptocurrency to sell it for more than you bought it for. Now you can sell it for more than you bought it for. You got what you wanted. Accept your good fortune and make sure you come away with something of value in case the whole market collapses.

Maybe you think it’s silly to sell such small amounts. I get it, but $30 is $30, it doesn’t matter where it came from. If $30 fell from the sky, would you feel bad about spending it? Would you wait for the sky to drop more money into your lap? Don’t do that! You still have $270 worth of Ethereum off of a $100 investment. That’s an insane return. Unsustainable. Take some profits. The price could drop at any moment.

Why you need to know about taxes

In Switzerland, cryptocurrency is taxed the same way as cash. In the U.S., cryptocurrency is taxed the same way as property. Where you live, it might be taxed differently.

Learn about your local laws and use those laws to your advantage.

While you might think it’s bad that the U.S. taxes crypto like property, it’s not. Complicated? Expensive? Nonsensical? Sure. But not bad. If you’re willing to keep track of your cryptocurrency activities, U.S. tax code gives you ways to lower your taxes when your crypto loses value and protect some of your gains from taxation when the price goes up. You couldn’t do that if the government treated cryptocurrency like cash. Talk to an accountant.

Why you need to know what you value as an investor

People forget sometimes that the value of investments is not to see their prices go up. The value of investments is to build wealth. Price exists on paper. Wealth is real.

Sometimes, you can build wealth even if your investments go down in price. My property values might go down every year until I die, yet I may still build wealth because of the way I structured my investments. My Sega Genesis may lose value every minute it sits on my shelf, until many years from now, when almost all other Sega Genesis consoles are gone and I am one of a few who have a coveted working system with working games, at which point it may be worth quite a bit.

Or not.

My point: know what you value and invest accordingly.

I personally buy cryptocurrency because I believe successful tokens will gain a tremendous amount of purchasing power in a decade or two, once cryptocurrency has broad usage. I also expect the U.S. will pass a law allowing people to use some cryptocurrency tax-free and exchange cryptocurrency with each other without creating a taxable event. I also worry about a financial or political crisis that will destroy the value of my dollars and my other investments.

What do you value? Do you only care about making money? Do you want to contribute to building the networks of the future? Are you trying to build generational wealth you can share with your children? Trading the markets? Trying to get rich quick?

Create a plan that gets you the result you want. Buying bitcoin because “price will go up” may fit you perfectly. If not, you can find many other ways to benefit from cryptocurrency. Find what works for you.

Once you find that, relax and enjoy the ride.

Suggested Links

Personal Capital—free investing tools

Rich Dad Poor Dad: What The Rich Teach Their Kids About Money—book about building wealth

The Intelligent Investor—book about value investing

All About Asset Allocation—book about asset allocation

Bullish on Bitcoin—book about how to profit from cryptocurrency