Crypto – don’t burn yourself

crypto

If you aren’t already insanely rich, please don’t dive into any kind of investment without a strategy. Crypto sounds exciting and it’s very easy to get involved, but it’s a much wilder ride than other investments and it’s extremely hard to keep emotion out of the equation.

I’m no investment expert. I’ve done well off some penny stocks, but I am also clinging to a company that is doing terribly because I genuinely believe that they will make a comeback. I also bought into a company that wasn’t a penny stock at what I thought was a low. It wasn’t, and I sold right before the share price doubled. That was a pretty brutal learning experience. That said, the amounts I put into our stocks are amounts we can afford to lose without being too upset.

I’m not really an investor at all, I’m a speculator. Investors (and here I really mean share-holders) perform analysis and make calculated decisions based on the intrinsic value of the stock. Speculators run wild through the streets. They are basically gambling. When I bought my first penny stock I tried to do what I thought was quality analysis, but since I didn’t know what I was doing I did a terrible job. I’m lucky that it turned out well.

Over the past few weeks I’ve talked to a few people who think their investments in Bitcoin will make them rich. No mention of altcoins (basically crypto other than Bitcoin) or exactly why they chose Bitcoin. It’s a hot tip, and everyone wants to make money so why not? Then we have those who are up to the neck in altcoins and are buying and selling every time the market twitches. Apparently it was Warren Buffet who said that “The stock market is a device for transferring money from the impatient to the patient”. The same applies when it comes to crypto.

If you can’t afford to lose the money you put in, then stay away. If you can’t emotionally handle some serious ups and downs, then stay away. People investing in crypto are mostly speculators. They don’t have a strategy outside of ‘buy low sell high’, or simply don’t sell at all.

This is not a plan. On reddit there are a heap of people asking for hot tips, or the next currency that is going to boom. Sometimes the tips are quality, but most of the time the person doing the suggesting has no idea what they are talking about. To the point that they couldn’t even explain the basics behind the coin or token that they are promoting.

Everyone has a different risk tolerance. Figuring out when to hold (the hodl meme desperately needs to fade out) and when to sell is something that should be worked out before the investor or speculator ever feels the pressure from a rise or drop in value.

Let’s say I have bought $2000 worth of the coin MOF (not real, so don’t bother). I bought in at 5 cents a coin, and there are no exchange fees. I have 40000 coins. I’ve done my research, and it’s unlikely that the price per coin will ever go beyond $5, but I believe it could hit $2, maybe $3.

Firstly, you should check out the tax situation in your country asap, and make moves to comply. Yes, it’s boring, but you could stand to lose a lot of money if you don’t take care of this, plus you’ll feel awful when the tax people chase you. Be smart, and minimise the tax you’ll be paying. Once you have a handle on this, then deal with the mental games. If you sell and it goes up by a huge amount, how will you feel? If your current debt can be wiped out by the after tax amount, how would you feel if you stay the course and the value drops?

Everyone has to deal with this. With my penny stocks I manage it by making a little grid and working out my exit points.

Value per share/coin My total Sell No. of shares/coins
$0.05 $2,000 40000
$0.10 $4,000 40000
$0.50 $20,000 -$2,000 36000
$1.00 $36,000 36000
$2.00 $80,000 -$20,000 26000

If we go back to our MOF coin, there would be no point in selling at 10 cents, but at 50 cents I would feel the need to get back my initial investment. This serves two purposes. I can reinvest my money somewhere else, but it also allows me to take further risks without worry. If, after that point, I lose everything, I actually don’t lose anything. I’ve done this with my best performing penny stock. I am staying in for the long haul with them because I made back every cent I put in.

But that doesn’t account for any further gains. After I get back my $2000, I’d still have 36000 coins left. So let’s say that my imaginary coin gets to $2. I have a hefty $72000 worth of coin. Do I take it out? Leave it?

Assuming I’ve held the 36000 coins for over a year, I’d sell 10000 coins and either pay down some debt, or throw that $20000 into something less volatile. It’s all about building a steady passive income, not crying whenever a stock/coin/token takes a tiny dive.

After that, I’d let them go up and down as they like until they are either worthless, they hit a price that I feel is getting a bit silly, or they hit an amount that would bring us to our FIRE target.

This isn’t going to work for everyone – it’s based entirely on my appetite for risk and my financial goals. It’s designed to mitigate the mistake of buying high and selling low. If you’re involved in any kind of speculation, you’re probably your own worst enemy. I know that I am constantly asking Mongrel Punt for his input and advice on my investments, and I think part of it is that he is unequivocally behind my efforts, and constantly reassures me that it’s OK if we take the gamble and lose.

That brings me to my next point. Be sure that the risks you take fit your situation. We have no debt. If we had debt, I’d be throwing every spare cent I had at it. I only speculate with a certain amount of money that we can afford to lose – and I work out how many months extra I would have to work to make it back.

Penny stocks, crypto, Uncle Dave’s burger van business – it doesn’t matter what the speculative investment is. You are either in it because you believe in the product/company, or you want significant returns. Maybe both. There’s nothing wrong with that. But make a plan. Know how much you can afford to put in, when to hold on through the dips, and of course when to get out. It’s better to hop off the train with a decent profit than it is to ride through the dizzying heights and straight into a crash. Everyone wants to be the one to make it big on a cheap investment and ride it all the way to owning a mansion, a yacht and a Lamborghini. The thing is, it’s also a pretty great feeling to own a Toyota outright too.


3 thoughts on “Crypto – don’t burn yourself

  1. Can I just say, I LOVE the lego pictures in all of your posts!

    Bitcoin and crypto currencies, however – not really for me (although have dabbled in the odd speculative stock or two over the years…)

    Liked by 1 person

    1. Thanks! Lego doesn’t really help me along the path to FIRE, but I do like it an awful lot.

      I often wonder what the next big asset class will be. I often think I should get serious about speculation, but like you, I’m a dabbler…

      Like

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