What makes a good investor

Last year, those of us in the crypto-sphere were on top of the world. Crypto investors literally couldn’t lose. Throw a dart at the top 100 coin list, buy some of that coin, watch it rise 10x, rinse, repeat. We were geniuses and you made sure that all your friends and family knew that you were smart enough to buy into crypto. Fast forward to 2018, people ask, “weren’t you in to crypto?”. You reply, “Um, yeah, just a bit, it’s nothing really, haven’t checked it in a while.”

So reality has set in. I like reading personal finance blogs and learning about how the average person can manage their money effectively and reach financial goals. In particular, there are the FIRE blogger. FIRE stands for Financial Independence, Retire Early. By early retirement, this isn’t just retiring at 55 or 60. This is retiring by 40 or even 30. They can reach their goals because of disciplined savings and investing strategies. Their strategies are not rocket science. It simply involves savings large percentages of their incomes, upwards of 70% or more, and investing their savings into index funds. Index funds are just low-cost mutual funds which follow the overall market. Kind of the slow and steady approach.

However when these FIRE bloggers discuss the topic of bitcoin, they all discourage people from investing in bitcoin. They share the same old arguments that bitcoin is too volatile, too speculative, that it doesn’t have any inherent value, yada yada.

So, is it possible to be a good investor and still buy bitcoin? And as I alluded to in my last post, I would say yes. Now that bitcoin has come down, I think now’s the time to separate the gamblers from the investors. It’s important to remember that just because you lose money on an investment does not mean that you’re a bad investor or even that you’re decision to invest was bad. Is bitcoin speculative and volatile? Yes. Does anyone know if bitcoin is going to reach its all-time high again or tank to zero? No. But one could also say this about a lot of investments, particularly riskier investments like futures, alternatives, options, marijuana stocks. I think the qualities of a good investor include:

  1. Diversification. I’ve talked about diversifying your crypto portfolio. But this also applies to all your assets as a whole. Cryptocurrency can’t be the only thing you invest in, and it shouldn’t even be where most of your money lies. Stocks, mutual funds, bonds, CD’s, real estate, heck, even baseball cards are all other places that you should consider diversifying your money. Unfortunately, there are a lot of people whose put a majority of their money into bitcoin.
  2. Patience. Why is patience difficult? Because humans are emotional people. When we see bitcoin soaring, we want to buy. When it sinks, we want to sell. That is a surefire way to lose money, not just in bitcoin but in any investment. Investing is about the long-term. Sure, some people made a boatload of money in 2017 from the crypto surge. But for most people that was more lucky than good investing. Although you can argue that it’s better to be lucky than good.
  3. Knowledge – If whatever you invested in drops in price, think about the reasons that you bought it in the first place. If those things still hold true, then there’s no rational reason to sell. If those things don’t hold true any more, then go ahead and sell. That’s why it’s important to research and learn about coins. What’s the problem it’s trying to solve? What’s the background of the founders? Who are its competitors? What’s the technology behind it?

I have a lot to learn about investing. As I’ve read about both personal finance and bitcoin, I believe there’s an overlapping space where both circles can intersect, and where the principles of disciplined personal financial management are applied to crypto investing.

 

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What goes up must come down … down… down

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I’m back on the blog after a 4 month hiatus. I had some not-so-minor damage to my home, which perhaps I’ll detail in a future post. So that served as a distraction from the implosion of bitcoin this year. I remember back when I would receive monthly investment statements during the 2008 financial crisis and each statement would be covered with negative numbers and red marks. It wasn’t long where I just stopped opening the statements. Nevertheless, I still continued to invest money knowing intellectually that that was what I was supposed to do.

And so it goes with crypto. Since the beginning of the year, this is how the top 10 currencies have faired:

# Name Symbol Week 1 Week 22 % Change
1 Bitcoin BTC $17,131.27 $6,400.32 -62.64%
2 Ripple XRP $3.19 $0.33 -89.66%
3 Ethereum ETH $1,097.65 $295.90 -73.04%
4 Bitcoin Cash BCH $2,881.03 $553.01 -80.81%
5 Cardano ADA $1.01 $0.0997 -90.12%
6 Litecoin LTC $300.10 $57.08 -80.98%
7 NEM XEM $1.67 $0.1064 -93.63%
8  Stellar XLM $0.71 $0.2242 -68.36%
9 TRON TRX $0.17 $0.0215 -87.37%
10 IOTA MIOTA $4.01 $0.4960 -87.63%

And this doesn’t even fully capture the highs at the end of 2017 when Bitcoin was at $20,000. Bitcoin has been the “best” performer with only a 62% loss. This makes the 2008 financial crisis sound like a bad day at the office.

What are lessons to be learned here? When people talk about investing in bitcoin 101, they always say “don’t invest what you can’t afford to lose”. That’s easier said than done when returns are going to the moon. The NY Times had a sad article about folks losing their life savings. So how much have I lost? Based on CoinTracking, I’m down about 70% of my initial investment. There’s no way to sugarcoat it, it’s a pretty bad investment. But taking a step back, my original investment was less than 1% of my net worth. I wouldn’t recommend putting more than 5% of one’s net worth into something as speculative as bitcoin, and probably closer to 1%. Fortunately, the other 99% of my investments has increased about 6% so far this year, so overall my year has been doing fine. So my crypto investment will serve as a good reminder to myself of the volatility that is bitcoin.

Does that mean I’m going to sell what’s left of my crypto? Maybe I should. But at this point, I’m just going to let it ride. I still have a small chunk of change so I could call it quits, but this the technology is still fascinating and having some money invested into crypto will help me continue following the news. And I still believe that the crypto markets will come back up. Maybe not to their all-time highs of Dec 2017-Jan 2018, but there is still money to be made.