Bitcoin Is Not A Good Way To Get Started With Investing

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"I don't trust investing," a friend said once. I asked her why. "Isn't it kind of like playing the lottery?" she asked. Investing is intimidating enough for people as it is. Toss in something as unpredictable as cryptocurrency, and people give up on it altogether. It reinforces the notion that investing is like buying a bunch of scratchcards.

Whatever you think about cryptocurrency - it's a Ponzi scheme, it's the next big thing - one thing is certain: Bitcoin is sure as hell not a retirement plan.

"I certainly would never ever recommend Bitcoin," said Norm Mindel, a Certified Financial Planner, co-managing partner of Forum Financial Management, and author of Wealth Management in the New Economy. "When something bizarre like this comes out, if a client came in and said, 'I want to buy this,' I would say OK, if you want to do it, take a small amount of your portfolio and go buy it. But leave me out of it."

The Difference Between Bitcoin and Long-Term Investing

There's a big difference between the kind of passive, long-term investing that's required to build a nest egg so you can retire someday and investing in something like cryptocurrency, which is well, cryptic. The thing about cryptocurrency, Mindel says, is that we don't understand it. While there's risk involved with any kind of investment, that risk is much greater when there isn't much data to draw from.

The other issue is that unlike investing in a company that turns a profit, or a rental property that turns a profit, or anything else that turns a profit, commodities such as cryptocurrency have no inherent value.

"The way I describe investment is when you invest in the stock market, what are you really buying? You're buying the present value of the dividends of the earning of capital gains," Mindel explained. "So when people say, 'I don't understand the stock market, the stock market is a gamble.' Well, it's got risk associated with it but there's something to quantify."

Cryptocurrency, on the other hand, is more of a gamble because there is no value to draw from except what someone else is willing to pay for it.

"When you deal with commodities, with cryptocurrencies maybe, you're relying on someone else to pay you a higher price. There's no inherent value in the commodity itself. There's no inherent value unless someone's willing to pay you more," Mindel said. Yes, maybe someone will be willing to pay you much, much more, but the trouble is, we just don't know. And that's dangerous.

How Bubbles Are Made

Of course, someone will inevitably pop in and say, "But hey, it worked for me," which keeps the bubble inflating. Guessing games and get rich quick schemes work sometimes, but more often than not, they're just a good way to lose all of your money. As boring as it may be, you generally can't go wrong with diversifying your investments in the broad stock market with the right mix of stocks and bonds. That's worked a hell of a lot better for most people in the long term than making a bet and getting lucky.

"You need something with data points and recommendations," Mindel explains. "That's what happens when you own a company. If you own all of Bitcoin there is no cash flow, there's only money based on whatever you do to create the new currency, which is beyond my understanding."

Passive investing might not be mysterious and sexy (like, not at all), but it's good enough for Warren Buffett, the world's greatest investor. Beyond the mystery of cryptocurrency, though, it's especially dangerous to bet on something that becomes a trend. That trend begins to inflate like a bubble, and bubbles are prone to burst (look at what happened with the Dotcom bubble for reference). And for what it's worth, Buffett has warned that Bitcoin is a bubble, too.

But what is a bubble, exactly?

"A bubble is when values get what you would call irrational," Mindel says. "The problem is, you don't know it's irrational, so the prices fall. What's in most people's recent memory is the housing bubble, prices just kept climbing and everyone was telling you a house is a great investment, you never lose money owning our home, you can't get this deal anymore, if everyone's buying into the feverish moment and it's only in retrospect, then we would say: there's no way those houses were worth that kind of money," Mindel explained.

Slow and Steady Wins the Race

While some people are already calling cryptocurrency a bubble, people eschew the warnings for the lure of getting rich quickly. I asked Mindel if it made sense to get it on the bubble right before it burst.

"I'm a horrible market timer. If you're making a decision because of timing, you're either very smart or very lucky," he said. "There's very few of those out there."

It's sort of the tortoise and the hare argument. Like any get rich quick scheme, you might get lucky, but it was that easy, we'd all be rich. When it comes to building wealth, slow and steady almost always wins the race. So if you hired a professional in charge of managing your wealth and they put your portfolio in Bitcoin, you should probably find a new professional.

Trends such as Bitcoin often enough scare people away from investing altogether. Many people already believe investing is like playing the lottery and so they never save beyond a traditional one per cent savings account. By the time retirement rolls around, there's just not enough. Bubbles like cryptocurrency confirm their fears.

"Look, if I had a client say, 'I'm either going to take my money to Vegas or invest in Bitcoin', I'd say go with cryptocurrency because you'll probably have better odds than Vegas," Mindel said. "But you have to approach it with that mentality."

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Comments

    Is this a nod to Battlefront 2:
    "It reinforces the notion that investing is like buying a bunch of scratchcards."

    Like any investment, the trick is getting in when its cheap, and getting out when its not. When is that though?

    I'm sure there are a lot of people that where most happy to sell their $10 bitcoins when the market hit $1000, and cash that 100:1 return, but less than a year later, not so much.

    Bitcoins ARE an investment, they're just a vastly different sort of investment. Think of them as the property equivalent to house flipping - get in and out quickly, move on to something else.

    People looking at them need to consider them on a weekly or monthly basis, not a yearly basis. And on that level, they're a far better option than shares right now.

    The thing with bitcoin and altcoins is you can spend very little and make a lot of money. One of my first altcoin buys was a coin called ADEX at around 20c a week later it went gang busters and I sold 100 of them for around $150.

    Since then I have tripled my original investment (approx $1,000 to $3,000) but it has been luck.

    Anyone interested in investing in the crypto currency wait for the next downturn, I have done very well when I bought quite a few coins in the China FUD (When China banned ICOs) I bought iota at 53c now it is sitting at $4.8!

    My problem is I do not know when to leave, I have made good returns on my original investment and bitcoin is now around 19K.

    Such a huge bubble, but I have learnt so much about investing in the cryptocurrency.

      A few friends of mine were in IOTA and yesterday it peaked at about AUD$8.30. It's right now AUD$6.47. A couple of them sold out around the AUD$7 mark while a few have stuck with it.

      Right now (EST3:30pm) 1 BTC = AUD$22790.29. At about 12:10pm today it peaked at AUD$24,198

      **based off CoinSpot market figures**

      As I mention below a friend of mine in 1 month turned $1000 into $11,000. He's since cashed out his initial $1000 investment and plans on seeing where it goes. He is a bit of a gambler and had a crack at some volatile tokens. To his credit he didn't get greedy and got out sooner than later moving onto the next token.

        Wow! That's crazy, the less you know the better. I have invested quite a bit in ripple and the price is not really volatile.

        My overall strategy is to buy coins that are backed by large corporations or well connected, like XRP, IOTA, XEM, NEO, XLM and LINK.

        A part from IOTA, my investments have been pretty boring this quarter.

        Your friend must have bought Monaco before it skyrocketed or some other coins that went crazy.

        Bitcoin hasn't hit the AU $20,000, according to coinbase.

          Yeah, not sure how CoinSpot's figures are so different to others. Found that out a couple of weeks ago when comparing USD bitcoin prices to CoinSpot's AUD prices. Doesn't seem to really matter as long as I keep trading on CoinSpot as their sell price is the same as the buy.

          He had a punt on Bitcoin Gold. Bought at $150, sold at $800. It then crashed down to like $90 so he bought back in (he was a little slow so bought back at about $110) It shot back up to $400 range so he sold out there. I think it went higher but he was more than happy with the returns. Since that punt his 'portfolio' has been pretty stagnant. He hasn't had a crack at anything really so it's just been going up and down with the market.

    A not particularly smart friend of mine got started in crypto trading a little over 1 month ago (Nov 3rd) and spread a $1000 investment over a few tokens he liked the look of.

    Today his $1000 investment has an $11,000 value. I personally think he got lucky on a couple of calls over the month but the bottom line really was he didn't get greedy with any specific token. He would get in at a point he felt was low, watch it rise to a point he thought was reasonable and got out.

    Greed is generally what ends up catching people. There's so much "pump and dump" in crypto you gotta get in early and get out early to avoid getting burnt.

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