Should I invest in bitcoin?
Today’s question comes from Scott. He asks:
First, I’d like to say thank you for having the guts to start this site, putting yourself out there, and for putting so much of your personal time into helping others, like me. I also applaud you for, as it seems over this internet thing, living the life you dreamed of.
The purpose of this email is to ask your opinion and thoughts on cryptocurrencies.
A few months ago, a great friend of mine kept sending me photos of his cryptocurrency accounts, telling me all about his investments. I already had fomo based on the recent hype and blowup of bitcoin, so I started researching.
A month later, I decided to take $1k, knowing I could lose it all, and buy some damn crypto. I called my friend, he walked me through purchasing them, and here I am. It has kind of been fun, and I actually ended up dumping another $1k after I started.
What are your thoughts?
I think it’s perfectly okay if you want to set aside some money for cryptocurrency — like 1% to 5% of your net worth — knowing that you’re not investing, you’re speculating.
There will always be the lucky few who get rich from speculating.
For example, take the California gold rush. Most people went home with little more than they started with.
That’s why Mark Twain said, “During the gold rush it’s a good time to be in the pick and shovel business.” Meaning, the best way to get rich was to mine the miners.
I was reading one bitcoin owner expected to “retire in 12 to 18 months” just with a small investment. This person is delusional.
Another said, “This is a once-in-a-lifetime opportunity to change my life.” The same thing people who play the lottery say.
Why does this happen? You see other people making fast money, like your friend, and it makes you feel like you’re missing out.
This “fear of missing out” is really powerful, because it’s part of our evolutionary instincts.
If you broke from the herd it was easier for predators to pick you off. Staying with the group meant you survived.
That’s why we’re always looking at what other people are doing.
So, if you’re not sure of the correct way to behave, you look at what everyone else is doing, and just do that.
This might seem safe because so many other people are involved, but it can actually be the most dangerous because it’s the most competitive.
And there’s a psychological term that describes this whole phenomenon called social proof.
It’s one of the four signs of a financial bubble noted by William Bernstein in The 4 Pillars of Investing:
- A major technological revolution or shift in financial practice
- Liquidity — i.e., easy credit
- Amnesia for the last bubble. This usually takes a generation.
- Abandonment of time-honored methods of security valuation, usually caused by the takeover of the market by inexperienced investors.
How many of these do you think fit cryptocurrency?
Now, you might not be old enough to remember the dot-com bubble, but you’re old enough to remember the housing bubble.
Most people have already forgotten about that and the financial crisis, and it wasn’t even that long ago.
So, for future reference, you can spot potential bubbles whenever a bunch of people start buying something simply because it’s been going up.
And if you’re still thinking that bitcoin is a way to get rich here’s a reality check. The likelihood you’re going to get rich is slim.
Your once-in-a-lifetime opportunity to get rich is to spend as little as possible while investing in something boring like low-cost index funds.
It takes discipline and time to get rich. Most people don’t want to hear that. They’d rather lose all their money chasing fast money.
Here’s how I think about cryptocurrency, or any speculative investment. If it takes off, a little is all you need. If it goes to zero, a little is all you want.