Cryptocurrencies are all the rage and gold remains time tested. Over the last few years cryptocurrencies like Bitcoin have been extremely volatile (mainly to the upside) while gold has been fairly stable and moved mostly sideways. Growing and protecting my wealth through alternative investments has been my focus for the last four years so I watch both the precious metals and cryptocurrency markets with great interest.
Bitcoin has risen exponentially in 2017. Clearly buying Bitcoin at $900 and riding it up to $20,000 was a fantastic trade in which the initial capital would have appreciated over 2,000% in less than a year.
How anyone besides a time traveller would have known to do that other than faith or luck is beyond me. I still think there are problems with cryptocurrencies. Even though there are several aspects of cryptocurrencies that I do like and a number of tokens and coins I choose to own.
Gold on the other hand has been slow and boring. As I wrote about in April this year, 2016 looks like it was the start of a new bull market in gold. Prior to 2016 gold had steadily declined since it’s $1,900 highs in 2010.
Since 2016 gold has steadily risen in price
A Place for Gold
I believe that now as much as any time in history gold (and silver) remains an important part of a diversified portfolio.
Dorian Nakamoto was accused by Newsweek of being Bitcoin founder Satoshi Nakamoto
I don’t know how high Bitcoin will go. However, in 50 years I believe that Bitcoin will be worth less than a few dollars and gold will have at a minimum retained it’s value in terms of purchasing power if not appreciated beyond that.
I think it’s entirely possible that some other cryptocurrency will be commonly used as a medium of exchange fifty years from now but it won’t be Bitcoin.
I could be wrong about that so I do own some Bitcoin but I’m not willing to take out a mortgage in order to buy Bitcoin on margin, as some people are doing.
Litecoin founder Charlie Lee announced 20 December 2017 he sold all his Litecoin
If you want to speculate and trade I think Bitcoin and other cryptos are great for that.
I buy Bitcoin on Coinbase and move it to other exchanges to diversify into my “Group of Six” and it has worked out well so far.
If you have some money you can afford to lose then trade and speculate away.
However, I think that gold remains the gold standard in wealth preservation.
23 year old Ethereum Founder Vitalik Buterin
I don’t think there is any substitute for buying physical gold and silver from a reputable dealer.
Physical bullion you have in your possession is the ultimate way of removing yourself from an out of control wall-street/banking system. I don’t want to go down the path of radical Cartesian skepticism but with precious metals you aren’t betting on the Janet Yellens and Jamie Dimons of the world having everything under control and are looking out for the little guy.
With gold you don’t have to worry about Satoshi Nakamoto, Charlie Lee or Vitalik Buterin making a bad decision and tanking cryptocurrencies.
Geopolitical Risks Remain
The risks haven’t gone anywhere. The stock market continues to climb but this is one of the longest periods in the history of the stock market without a correction. Meanwhile the fundamentals are not strong.
Debt at the governmental, municipal and personal level continue to grow with no end in sight.
Central banks throughout the world have printed trillions in fiat currency. One of the most important alternative investments to hedge against these risks are precious metals. Blockchain technology, while revolutionary and disruptive to the status quo do not replace gold and silver as the ultimate insurance policy against central bank insanity.
If Bitcoin were to crash and lose 95% of it’s value would it result in your own financial armageddon? If so you need to keep reading. Even if a Bitcoin crash wouldn’t cause your financial downfall you should keep reading.
I understand it’s tough to stay rational when Bitcoin up by 100% in a matter of months or weeks. I could continue to be wrong and Bitcoin could double in weeks, months or years ahead and go to $40,000 or $100,000 or the moon.
But before you take out a second mortgage on your house, cash out your retirement, and put all your life savings plus money you’ve borrowed into buying Bitcoin at 50% leverage (all of which I think are horrible ideas)–consider the following six guidelines that will help prevent a Bitcoin crash from causing your own person financial armageddon.
- Don’t Buy Because You’re Afraid of Missing Out
- Only buy what you can Afford to Lose
- Commit a certain amount of Bitcoin your are simply going to Hold
- Take Some Profits off the Table
- Be Content with the Gains you Have
1) Don’t Buy Because You’re Afraid of Missing Out
Fear of Missing Out (FOMO) can strike us all. But buying something simply because it is going up, has gone up or because you fear missing out on future gains is a horrible approach.
I dislike missing out when something is going up too. I struggle with that like many people. But I have to reign myself in and remind myself not to buy simply out of fear of missing out.
There are always more opportunities out there and if you make a bad decision out of fear of missing out you will have less capital to put towards the next opportunity.
2) Only buy what you can Afford to Lose
When an asset like Bitcoin goes up so dramatically people start to think much less rationally. They get greedy and less cautious. They start to think that Bitcoin will always go up–so they start to buy more than they can afford to lose.
This is bad for two main reasons:
1) If your life savings is in Bitcoin and it drops by 20%, 30%, 40% or more the natural human instinct is to sell and stop the pain.
Markets never go up or down in a straight line. Bitcoin is particularly volatile and it has dropped by several thousand dollars before rallying back to new highs. Limiting your speculation to an amount you can afford to lose will better enable you to stomach the inevitable drops and corrections and weather the downturns.
2) Assets like Bitcoin could lose 95% or more of it’s value and never recover. Bitcoin could drop 50% and never make a new high. Even if you hold through a large drop, you may never recover your principle and if you’ve lost more than you can afford to lose you’ll be in a world of hurt.
3) Commit a certain amount of Bitcoin your are simply going to Hold
I bought into Bitcoin when it was trading under $100. I bought and sold it as it went up and down and made some money. But I wish I had held onto some portion of the Bitcoins I had bought (maybe 1 or 2) and just held them to see how high Bitcoin could go. I now have the benefit of hindsight–but it’s better to make that decision up front.
Perhaps you are going to hold (“HODL” in crypto-speak) Bitcoin you buy until you reach age 65. Maybe you are going to hold Bitcoin until it reaches $20,000. Maybe you are going to hold until you can use Bitcoin to pay your rent or your luddite Uncle Ned starts using Bitcoin and it’s reached widespread adoption.
Whatever the criteria you choose–stick to it. I wish I had set aside a percent of the Bitcoins I first bought and decided I was going to hold them based on a rule.
4) Take Some Profits off the Table
I think it is good to have a percent of Bitcoin that you can afford to lose that you are going to hold based on criteria of your choosing. But I also think it is good to take some profits off the table. Lets say you have 6 Bitcoins you bought at $5,000, Bitcoin is trading at $17,000 and you are sitting on $72,000 in profits with a $30,000 cost basis. Consider selling 2 Bitcoins and taking $35,000 in profits. That way you are guaranteed to have made money on Bitcoin and you’re effectively playing with the houses’ money (to use a gambling analogy).
5) Be Content with the Gains you Have
I wish I kept more of the Bitcoins I bought when it was trading under $100. But instead of feeling regret I am focused on the fact that I have made a few thousand on Bitcoin and other cryptocurrencies and I’m grateful for those gains. If you are fortunate enough to have made some gains in Bitcoin be content with those gains and don’t let greed or FOMO get the better of you.
Being grateful for the gains I have made helps prevent me from getting greedy and unwisely putting an amount of money towards the crypto-space that I cannot afford to lose and/or doesn’t make sense given my asset allocation goals.
I think it is important to diversify across asset classes: stocks, precious metals, cryptocurrencies, I would like to diversity into real estate and into other areas as well.
Part of that diversification includes diversifying within each asset class. I own multiple value stocks in different industries–I own different precious metals and I own different cryptocurrencies besides just Bitcoin.
If you recognize diversification is important don’t just buy Bitcoin. Consider some of the other cryptocurrencies out there. I’ve shared with my newsletter subscribers my own “Group of Six” cryptocurrencies that I’ve chosen to speculate on. Research some of the other tokens or coins out and there if you think they are right for you perhaps you buy those in addition to Bitcoin.
I think it is possible that Bitcoin is the future of cryptocurrencies. But I personally think it is more likely that some other newer and better coin replaces it.
If You Do Want to Buy Bitcoins Here is an Easy Way to Do It
If you’ve decided you want to speculate on Bitcoin here is a way to buy Bitcoins.
I can’t emphasize enough the importance of educating yourself on blockchain technology and the risks of owning cryptocurrencies. Bitcoin could lose 95% of it’s value or more. It could also go to $100,000. I don’t know what the future holds.
Not Speculating in the Cryptocurrency Space is a Perfectly Valid Approach
Don’t let anyone convince you that you NEED to buy Bitcoin or any other cryptocurrency.
It’s a perfectly valid approach to simply refrain from speculating on cryptocurrencies like Bitcoin. It’s a new frontier–it’s very risky and speculating on cryptocurrencies isn’t right for everyone.
But if you have decided to speculate on cryptocurrencies and Bitcoin then consider the above guidelines. They could help you avoid losing your life savings and ending up living in a van down by the river if it turns out Bitcoin is a speculative bubble and crashes.
The stock market is overvalued, gold markets could very well be manipulated, bonds are a bug in search of a windshield and central banks have done little more than give lip service to unwinding their balance sheet.
So I turn to alternative investments.
Some of those alternatives are value stocks precious metals but I’m always looking for additional alternative investments.
One such alternative investment (really more of a speculation) is cryptocurrencies. While I remain somewhat skeptical of cryptocurrencies, particularly bitcoin, they continue to go up in price. Early adoptors of cryptocurrencies like Bitcoin have made millions. While I think trying to make millions in cryptocurrencies is incredibly risky, I do think having some money in cryptocurrencies isn’t the worst idea ever.
To that end I do own some of the cryptocurrencies that I think are more promising. I’ll be sharing which cryptocurrencies I own exclusively with my Newsletter Subscribers.
There are specifically six cryptocurrencies that I’ve chosen to own. I only purchase what I can afford to lose. Given the extreme volatility of cryptocurrencies and the difficulty in valuing them I can’t emphasize enough how risky it is to own cryptocurrencies.
But for those willing to take the risk a cryptocurrency going to zero for the potential of large return, cryptocurrencies are a great way to speculate. I’ve put together a summary of the group of six cryptocurrencies I own.
I’ll be sending it out to my newsletter subscribers this Wednesday the 6th.