If you’re asking yourself this question, the answer is probably “no”. There is an old investing adage that whenever an investment becomes news-worthy or you get that feeling that you are missing out on a great opportunity, it’s probably time to run! Said another way, when everyone is buying you should be selling and when everyone is selling you should be buying. That’s easier said than done. Unfortunately, our brain tricks us into acting the opposite – we get excited, we feel we are missing out and we don’t want to be left behind. It creates euphoria and we always end up buying on emotion rather than logic. As we’ve said before, emotions and investing don’t mix.
Recently, we started getting more calls on what we think about these cyrptocurrencies like Bitcoin. Whenever clients start calling us and asking if they should buy something, it’s almost always a red flag that the investment may be getting a little too expensive. With that said, let’s talk about what Bitcoin is and if it makes sense for you to buy it.
What Is Bitcoin?
Bitcoin or similar cryptocurrencies like Litecoin, Ethereum are what are known as digital currencies. They don’t involve traditional banks, their value is not determined by governments, and they provide for anonymous transactions (for the most part). They aren’t printed or minted like the traditional dollars or coins we think of, instead they exist in a digital format (think 0s and 1s) and are traded electronically.
Recently, speculators who believe that cryptocurrencies may have profound implications for business and commerce have driven the price of Bitcoin to over $2,200. The technology that drives Bitcoin, known as the Blockchain, is already starting to show signs of having an impact on all kind of things on the global exchange, besides currency. For example, there are signs that it will impact how we identify ourselves – social security numbers, passports, and even bank account numbers may seem pretty archaic in a few decades.
Does It Have A Place In Your Portfolio
Whenever you are buying something with the thought or feeling that “I could make a lot of money on this quickly,” it’s a good idea to take a step back and realize that you are not making an investment. You are making a bet. No different than going to Vegas and putting it all on red – you should gamble accordingly – ONLY with what you are prepared to lose.
Currently, Bitcoin has over five times more risk than the S&P 500. Despite it being digital, the currency is not very liquid – it’s hard to buy and sell quickly. Meaning, when the price starts to go down, watch out! Everyone will be trying to sell their Bitcoins and there won’t be enough buyers. This will lead to further decline in the price. The average investor (not an institution) will have a hard time getting their sell order to go through as the price will continue to drop. Recently, the price dropped $300 in 1 hour!
How Much To Invest
With that said, if you want to gamble with the potential of striking it big on Bitcoin, we suggest doing it in a way that doesn’t affect your overall financial picture. For our clients, we normally evaluate this on a case by case basis and at most, allow them to use no more than 3% of their total portfolio on these speculative “gambling” trades. There are also safer a.k.a. more diversified ways to invest into the digital currency theme. For example there is an ETF (Exchange Traded Fund) Symbol: ARKK that has around a 7% position in Bitcoin along with a lot of other companies in the fund, too. If your hell bent on being invested in Bitcoin, this might be a good way to get exposure but if things go the wrong way, at least you have exposure to a lot of other companies that will help to diversify your position and mitigate your losses.
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