Getting Rich Quick: Cryptocurrency Insights

Executive summary:

This blog explores the allure and risks of cryptocurrency investments amidst their recent surge in popularity. It emphasizes the importance of a cautious and informed approach to investing, highlighting uncertainties surrounding factors like future value, government intervention, and practical utility. Custom Wealth Planners advocates for evidence-based, long-term investment strategies over speculative pursuits, stressing the significance of disciplined saving and moderate speculation if desired. While acknowledging the potential of cryptocurrencies, this blog underscores the need for patience, realistic expectations, and a diversified investment portfolio for long-term financial success.

Introduction:

There are few things as captivating as watching the price of something accelerate higher
with promises of unlimited potential in the future. Add in elements of watching others make
fortunes overnight, the appeal of new cutting-edge technology, and growing accessibility via newly
approved investment vehicles (and the slick marketing pitches that accompany them). This tempts
many to join the crowd and chase after the returns of yesterday with hopes of seeing similar results
in the future. We continue to see this dynamic play out and have noticed an uptick in client
questions with the recent run-up in Bitcoin and other crypto endeavors.

I’m not interested in discouraging the fanatics or emboldening the critics of the
cryptocurrency space. What I do find worthwhile is providing a framework for how we think about
why/when you should choose to invest in something in the first place. This applies to all
investments, whether that be cryptocurrencies, individual stocks, US vs. International, or other
more speculative options out there

Let’s start with a few things I don’t know:

What the Price of Bitcoin will be in the Future:

Will it be worth $1,000,000 or $0? Frankly, no one knows the answer to this question. Some of the brightest minds in the world are busy arguing with each other that either outcome is destined to become reality. It’s nearly impossible to outwit and out-resource either side in gaining an informational edge to correctly predict who will prove correct.

Future Use Cases:

There’s a massive amount of capital pouring into the crypto space. To date, I’ve
not noticed much utility to the simple act of holding cryptocurrency itself (beyond entertainment
and speculation). I’m sure with time that more practical uses will present themselves. Even so, I
remain skeptical that it will mean instant riches for everyone who has invested capital in it.

How the Government Will Intervene:

There’s a fair amount of fraud and questionable practices in the space. Mining and infrastructure also require a tremendous amount of energy and other resources. This has already caught the eye of governments around the world and will likely be further scrutinized/regulated as things progress in the future.

How My Thinking Will Evolve:

I don’t own crypto myself and have never advised clients to do so.
That doesn’t mean I’m close-minded to any new developments and have written it off forever.
Should more productive and time-tested opportunities present themselves (or an improved
understanding of existing opportunities), I’m more than happy to change my viewpoints on this
front.

Now, some things I do know:

Holding any Currency is not an “Investment”:

The chart below highlights the purchasing power of 1,000 US dollars over time from 1970-2024. We can make similar charts of other currencies around the world (some showing far worse results). I don’t see this as proof of a failure in traditional currencies. The primary role of currency is to transact goods and services in an economy. If the goal is to maintain or grow the purchasing power of dollars, you must put that cash to productive use (buying or investing in something). It’s the act of putting that cash to use that represents an “investment”. I’m certain that as the mania surrounding crypto settles out, the real wealth will be created in how the currency is used (i.e., Smart contracts; Blockchain), and less about simply holding them

Source: BLS

Time-tested, Evidence-Based Investing Typically Produces the Best Results:

Buying something just because it’s gone up in value recently is a terrible rationale for investing. When we decide to invest client assets in a particular investment or strategy, we seek proof of success over a multidecade timespan (along with solid economic and financial underpinning). While lesser proven strategies may provide great returns over shorter time frames, they’re often accompanied by far less dependability and consistency of results. Until we find those more productive use cases that are proven over longer periods, we simply can’t operate with the conviction needed to advise clients to own crypto as part of their investment strategy.

Lottery Ticket-Type Returns are Not Necessary for Financial Success:

The key to building and preserving wealth is rarely about generating quick, outsized returns. While a few have found overnight riches, far more have achieved their success through the compounding of wealth over time. Their focus is on disciplined saving and generating more modest returns capable of enduring over much longer time frames. This requires patience and an ability to ignore the short-term thinking involved with get-rich-quick offers. If you can be successful with that, you’ll find far greater likelihood of achieving success than those with a more short-term focus.

If You Must Speculate, do so Modestly and with Discipline:

It’s completely normal and fine to scratch the itch of speculation from time to time. This can be with individual stocks, timing moves in financial markets, or investing in new or unproven areas of the market. We rarely squelch the hopes of someone who wants to do this at some level. What we do require is that it’s done in moderation (a smaller percentage of their overall balance sheet), has fully informed and realistic expectations, and carries rules around any purchases or sales. This provides discipline and removes emotion from the overall process, something we think is vital for long-term investment success.

Conclusion

The promise of fast money often overshadows the inherent risks and uncertainties. While
some may be enticed by the allure of rapid wealth accumulation, it’s essential to approach such
ventures with caution and skepticism. The pursuit of overnight fortunes may lead to
disappointment and financial loss, highlighting the importance of diligent research and sound
investment principles. Rather than succumbing to the temptation of get-rich-quick schemes,
investors are urged to prioritize long-term financial sustainability and prudent decision-making. By
adhering to disciplined investment strategies and avoiding speculative fervor, individuals can
navigate forward with greater confidence and resilience.

To learn more about financial planning and Custom Wealth Planner’s services visit How We Work.

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