3 min read
Today is December 8, 2017. If you haven’t heard of bitcoin by now, you’re likely living off the grid with no connection to the outside world.
Bitcoin is a digital currency. It’s a form of money that only exists online, unlike a U.S. dollar which you can physically hold in your hand.
This month I have spent far more hours researching bitcoin and blockchain technology than I care to admit. I won’t attempt to explain how it works or why it’s important because there’s far more qualified individuals out there who understand it better than me and have already written in-depth articles on the topic.
But I would like to disclose that I bought $1,000 of bitcoin and $1,000 of ethereum earlier this week. Here’s why I’m dipping my toes in the cryptocurrency world and my general thoughts around this topic.
A Repeat of the Tech Bubble?
Bitcoin is one of many cryptocurrencies you can buy online. There are literally hundreds of other cryptocurrencies that have popped up in the last few months alone that have seen their prices increase 100x in a matter of weeks. This sounds eerily similar to the tech bubble of 2000…
In the late 90’s any company who put a “.com” at the end of their name saw their stock soar to the moon in under 18 months, with a subsequent crash that happened just as quickly.
The mania behind the tech bubble seemed well-founded: nobody had even seen something as powerful as the internet and everyone wanted in on the profits being made from internet-based companies.
And while the internet did revolutionize the way we live and the way companies operated, it took a little longer than most people expected. Most of the tech companies that were booming in the late 90’s no longer exist today. An investment in those companies became worth a big fat $0.
There’s a good chance something similar will happen with cryptocurrencies. The blockchain technology these currencies are based on will likely revolutionize the economy and fundamentally change the way companies do business. And there’s a chance that a few of the cryptocurrencies that exist today will go on to become behemoths in ten years.
But nobody knows for sure which cyptocurrencies will survive this mania long-term. Attempting to guess which ones will survive is equivalent to picking a red marble out of a hat filled with hundreds or thousands of blue marbles. Your odds of picking the red marble are not good.
Here are just a few of the most popular cryptocurrencies in circulation:
Which ones will still be around a decade from now? Nobody knows. Possibly none of them.
There is a very, very, very good chance that my investments in both bitcoin and ethereum will be worth zero dollars ten years from now.
That’s why I am only investing money I am completely comfortable with losing. My investments in these two cryptocurrencies represents less than 3% of my total net worth so I won’t lose sleep at night over them.
As I continue to save money over the coming months and years, bitcoin and ethereum will account for an even smaller portion of my total investments.
If by some act of god these cryptocurrencies become wildly successful over the next decade and actually become viable forms of currency people use, I will be sitting pretty financially. If instead they become nonexistent it will only have a tiny impact on my finances.
In general I consider myself a conservative person. I save a huge chunk of my income. I invest in index funds and reliable dividend-paying companies. I believe in a slow and steady path to wealth. That’s why I’m okay with sprinkling a small percentage of my money in highly speculative investments. The bulk of my money is in diversified assets and my money machine won’t take much of a hit if these cryptocurrencies go to zero.
Here is my advice for anyone looking to invest in cryptocurrency:
- Max out your retirement accounts for the year and build up an emergency fund before even considering these highly speculative investments.
- First attempt to understand how blockchain technology works and why it’s important.
- If you feel inclined, invest a very tiny portion of your net worth in a couple different cryptocurrencies with the full expectation that you will lose all your money.
- Let those investments sit untouched for many years. Go about your normal life saving a high percentage of your income and keep investing simple with index funds.
My favorite free financial tool I use is Personal Capital. I use it to track my net worth, manage my spending, and keep an eye on my monthly cash flow. It only takes a few minutes to set up and it makes tracking your finances simple and easy. I recommend trying it out.
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