Why Cryptocurrencies Are Not a Good Fit for My Clients

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Why Cryptocurrencies Are Not a Good Fit for My Clients

September 4, 2018 Financial Behavior Investing Life Planning 0

Cryptocurrency hype has finally calmed down and I am extremely thankful. I am less worried for those who have no idea of how these assets work accidentally shooting themselves in the foot gambling away any savings they may have accumulated. Sure plenty of people have made money and it’s possible that many still could. Other than worrying about the carnage that individuals and families put themselves in while chasing after the excitement of hitting it big, I find very little use for these types of assets in clients’ financial plans. A plan is better than a wish. That is really the only thing I would have to say to cut through all of the emotions, but’s, and what if’s. However, I know sharing my thought process provides greater value than just my recommendations. In that spirit, I will highlight my thoughts on this latest get rich quick scheme: do not invest in what you do not understand, those who seek my services rarely have the stomach for extreme levels of risk, what happens if a cryptocurrency actually became commonly used.

 

Before we dive in, it is always good practice to get a basic understanding of what a cryptocurrency even is. According to Investopedia.com, a cryptocurrency is a digital or virtual currency that uses cryptography for security. One popular feature of cryptocurrencies is that they are not issued by any central authority or government. By definition, cryptocurrencies sound awesome, but there is definitely way more to it than security and non-government issued.

 

Do Not Invest in What You Do Not Understand

 

I am not saying the stock market is simple to understand, but there are a lot more fundamentals in play that can be broken down and understood by most Americans. The same cannot be said for cryptocurrencies. Most people invest in something because they either hope or expect it to increase in value, but what drives the value. Demand definitely plays an important role in pricing any asset, but what happens when it is practically the only thing that drives value? With stocks you are a part owner of a company, a company that is either generating revenue or expecting to generate revenue, Amazon operated in the red for four years as they were busy gobbling up market share. If you own bonds, you essentially have lent funds to either a government or company and there is an agreement for them to pay you back with interest. Now for cryptocurrencies, if everyone decided to not want a certain currency how could you begin to anoint a value to that currency? Practically the same could be said for the US dollar, but the fact that it is backed by the US Government, that there is a longstanding history, and over that history, its’ value has been reliable. If you want to gamble on something new and cool that is one thing, but call it what it is, a fancy lottery ticket.

 

Those Who Seek My Services Rarely Have the Stomach for Extreme Levels of Risk

 

It is pretty obvious who I am a good fit for. Usually, when someone asks me for a hot tip on the top five cryptocurrency investments I do the sign of the cross and pray they do not have many financial responsibilities to support, then I say pretty much what I am covering in this post.

 

Who I am a good fit for are those that understand they are in a place financially that provides a significant opportunity. Not the opportunity to hit it big and cash out, but to live a pretty awesome life and still be confident about their long-term future possibilities. Typically these individuals or couples have experienced a major event or milestone and they are ready to gain clarity on where they are at financially, focus on improvements that can be made, and understand that they either do not have the time or the want to navigate their complex financial situation alone. When we get to the investment discussion, we review their investor profile, which is usually much more conservative than you’d think a 20-40 year-olds would be with long-term investments, but then it comes done to the education and approaching a level of understanding how best to balance their low-risk tolerance with what they fear about the stock market and what amount of risk is needed to put them on a path for the highest probability of success. The risk assessments typically project a balanced or conservative portfolio with a historical annual loss of 15-30%. Those types of losses could happen in a day with cryptocurrencies.

 

What Happens if a Cryptocurrency Becomes Commonly Used

 

This has always been a question I have had. What happens when there is a large enough adoption where a cryptocurrency is supported by the masses. Do the 100’s maybe 1000’s other cryptos just die off and become valueless? Would the value be significantly stabilized and reflect traditional currencies we know today? Would the biggest supporters of cryptocurrency today even want to own it? Where would all of the excitement go? I am not old enough to know how it felt during the dot-com stock market crash, which was a result of everyone freaking out about the power of the internet that was going to make everyone who owned a website an instant millionaire, but I am old enough to remember how crazy people got about beanie babies. When I brought mine to school, I had to limit the quantity so that I knew their exact location as I showed them off to classmates. Beanie babies have been sold for as much as $5,000 at the top of “The Great Beanie Baby Bubble”.

 

A Plan is Better than a Wish

 

Truth be told, I have a little bit of a gambler in me. I love playing Texas Hold “em, La Loteria, and heck I even started my own company. In all of those instances I knew the worst case scenario and so they were calculated risks based on a pretty in-depth knowledge of many of the possibilities that could have played out. When it comes to things that matter, like my family, our future, and all of the cool possibilities that await us, I’m not willing to risk my financial situation nor that of my clients to try and get fancy and act like I can predict the future. I know that with a solid plan, we have a high probability of reaching what we would consider success and it is not worth the risk of swinging for the fences if it could potentially derail a pretty great future.

 

If you are a cryptocurrency enthusiast, I wish you the best. I am not saying that it could only end badly as I do acknowledge that a great deal of wealth can be quickly created. I just do not know anyone that owns a magical globe that can pick the right times and cryptocurrency (how many even exist these days???) and as a result, I will stay in my lane and advise my clients to do the same unless their risk tolerance and goals suggest that I do otherwise.

 

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