Bitcoin Investing: Golden Opportunity or Fool's Gold?
Money Technology

Bitcoin Investing: Golden Opportunity or Fool’s Gold?

(Image: iStock/noLimit46)

Bitcoin investing as a key to black wealth is a hot topic on social media. Thanks to skyrocketing valuation of the world’s first decentralized digital currency (there is no central bank or single administrator), interest in bitcoin and other cryptocurrency reached a fever pitch as last year drew to a close, and will likely continue into 2018 and beyond. As a result, bitcoin investing has spilled over into mainstream awareness, driving often breathless discussion and debate. There’s no doubt about it: bitcoin is hot. Is it foolish not to invest in it now? Or are you a fool if you do?

Much of the social media discourse around bitcoin investing, particularly among African Americans, falls into two distinct camps:

Bitcoin Investing Is A Golden Opportunity to Build Wealth

This is a once-in-a-lifetime chance to get in on the ground floor of the first major wealth-creation opportunity of the 21st century and to close America’s racial wealth gap. African Americans need to invest now or get left behind—again.

Bitcoin Investing Is Fool’s Gold—A Bubble Waiting To Pop

The rapidly escalating valuation of bitcoin has all of the markings of the past tech and real estate bubbles that burst, causing financial devastation for millions of Americans and leaving our economy in a shambles. Only fools would buy into bitcoin as a get-rich-quick investment opportunity.

Whether you’re in one camp or the other, or somewhere in between, before you consider engaging in bitcoin investing, you need to be clear about what, exactly, you’re investing in. The fastest way to lose your money—and to be ripped off by the many cryptocurrency scam artists crawling out of the woodwork and slithering across the internet—is to put your money into bitcoin (or any investment that you don’t thoroughly understand). Cryptocurrency multi-level marketing scams have already emerged. If you’re not willing to spend time and energy to become thoroughly educated about bitcoin or any potential investment opportunity, you shouldn’t be putting your money into it. If you don’t get it—really get it—don’t invest in it.

(My standard for my comprehension of just about anything is whether I can explain it to an average 12-year-old. I can’t seem to explain the term blockchain so far, so I’m far from an expert, and have no plans to add bitcoin to my portfolio at this time).

For now, here’s a very elementary explanation: A cryptocurrency is a digital asset designed to work as a medium of exchange, control the creation of additional units of currency (kind of how the U.S. Treasury Department and the Federal Reserve decide when to print new money and how much to keep in circulation), and verify the transfer of assets. Think of it as digital money. However, unlike U.S. tender (i.e., cash), buying and selling bitcoin and other cryptocurrency is far more complex. By the way, while bitcoin was the first, there are more than 1,300 digital currencies and counting. You can check out “How To Invest In Bitcoin” by Sequoia Blodgett to learn some of the basics. However, the question being addressed here is not ‘how to?’, but ‘should you?’

The answer? It depends, of course. The best investment options are different for each individual, depending on current lifestyle, future needs, and short- and long-term financial goals. However, building wealth is never about finding that hot, can’t-miss investment opportunity. It’s about considering every investment option within the context of a broad, diverse investment strategy and overall financial plan.

That’s why the first step to becoming an investor is not finding that can’t-miss investment. (Yesterday, it was that hot tech IPO; today, it’s bitcoin; tomorrow, who knows?) It’s about developing a financial plan, personalized specifically for you, and managing and adjusting it over time as your circumstances change, ideally with the help of a qualified financial planner.

The primary role of a good financial planner is planning, not just selling investment products, though they may do that, too. He or she should help you to set your financial goals, which will determine which types of investments and what asset allocations make sense for your particular circumstances. Think of them as your financial navigators, paid to help you create a roadmap and to keep you on course with your current savings, tax positions, investment returns, and future financial needs.

That way, when the chance to buy bitcoin or any investment opportunity comes up, you’ll have a way to tell if it’s right for you, and if so, exactly how much money you should put at risk. Just check it against your plan. On the other hand, if you don’t really have a financial plan—much less a financial planner—you have no way to judge whether or not bitcoin investing—or any investment opportunity—makes sense for you.

Yes, bitcoin is hot. It is also new, largely unregulated, difficult for the average person to trade and even banned or restricted in some countries. Therefore, it’s a speculative investment—there is a good chance that you will lose every penny you invest—which means you should not be raiding your emergency fund, taking out a second mortgage or 401(k) loan, borrowing against your credit card, or going to other extremes to pour money into bitcoin. And if you have no other investment assets, are carrying high-interest debt, have no emergency savings and/or haven’t fully funded your retirement, you have no business putting all of your money into bitcoin or any cryptocurrency—no matter how hot it is.

In any case, the total amount invested in bitcoin and other speculative, high-risk investments combined should not comprise any more than 3% to 5% of your total portfolio. The other 90-plus percent should be a diversified mix of mutual funds, index funds, stocks, bonds, insurance and other more traditional investments with predictable returns. The goal, as always, is to spread your risk. That way, if bitcoin continues to boom, you’re in a position to be rewarded with an appreciating asset, and maybe even cash out with a major capital gain at some point. On the other hand, if it goes bust, the net damage will be minimal.