In a few short days after my last post on why I don’t own cryptocurrency, many cryptocurrencies took a nosedive. It would be tempting to flout this as proof of the validity of my opinion on the matter, but this isn’t actually fair – there could just as easily have been a surge in prices and, no doubt, a few people who think me a fool (who don’t already). Of course, at that point I would encourage them to reread the final paragraph of my post where I explain that return is almost always a product of risk, and that is why a high return is not always a good thing.
However, while this sudden drop doesn’t necessarily “prove” anything, what it does do is demonstrate the inherent volatility of cryptocurrencies. Word on the street (never smart to trust too much) is that people have been using crypto as a hedge against inflation. Why the hell you would do that is absolutely beyond me, but many now speculate that Biden’s proposed tax changes have spooked people into selling, and Bitcoin has dropped 15 or 20% in response.
But this is the news doing what it usually does: trying to sell hype. If the stock market goes down 1% in a day, the news will say that it’s “tanking” and try to find a reason for it. Although, for the record, if the stock market dropped 20%, you’d be seeing calls for the apocalypse, or at least a major recession. I guess we pulled through last year all right (sort of…), but still.
And that’s why it’s important to remember: Bitcoin, for example, is like one stock. Individual stocks are also extremely volatile. Putting all of your eggs in one basket, whether it’s one cryptocurrency, one stock, or even one house (such as when people become “house poor” when they have absolutely no assets other than their house), often has pretty negative consequences.
In fact, if I actually had to make an argument for homeownership, it would be that owning a house is a way to diversify your portfolio. Personally, I’d probably only consider buying a house once my other assets greatly exceeded the purchase price of the house, but even I can appreciate how a paid off house provides a certain degree of protection from stock market swings and the uncertainties of the future. The key word there is “paid off”. But it is an interesting trade off and you have to consider the risk of entropy, but I digress. [and please don’t get me wrong, I’m honestly not one of those guys who believes taking out a mortgage is a bad thing, I’m just speaking to my preference on these things as someone who could realistically pay cash for a house in the semi-distant future]
Bitcoin’s not going away. Not any time soon, I don’t think. But while some people bought at the top and are getting crushed, some people bought much lower and are still “up”. I can’t bring myself to spend too much time investigating this market.
But there’s one major downside to volatility: at a certain point, you have to live your life. At a certain point, you will likely need or want to sell your asset(s). And after all, isn’t that the whole point? Investments, retirement, savings? Is it not to live your life, to pay for financial things? Investing simply to invest is silly. No. We invest so we have the financial means to live the lives we want (or need) to live later. Highly volatile assets expose us to what is called “sequence of returns risk”, which refers to the risk that at any point in time, when you need to sell an asset, its value may be “down”, causing you to lose much more from the transaction than at another time, when it is “up”. Bitcoin, for example, has experienced many surges and crashes in its past. And sure, people have made lots of money from this. They have also lost lots of money. But if you only see a surge in price every 3 years, and significant drops in between, how can you possibly plan when to withdraw your money so as to minimize SORR?
I’ve seen some smug memes talking about “buying the crypto dip”. Sure, I get it. Buy low, sell high. Yeah. When one of my previous employer’s stocks lost nearly 50% of its value while I worked there, I bought $200 worth thinking I was a pretty smart cookie. But then it dropped to 50% of that, and then 50% of that! Turns out I can be a dumbass. That was the first and last time I ever bought individual stocks. You do not have a crystal ball. Nobody does. Besides, if a dip only happens every 3 years, that doesn’t mean it’s going to go down far enough to make it more worthwhile to have waited rather than invested in the very first year. That’s why “buy and hold” is so powerful. I do this with the market in general, but some people do this religiously with specific cryptocurrencies. I don’t understand how some crypto fans have become so fanatical: that’s like holding onto GM stock, bound and determined it will go up in the long run and thinking you are a genius for buying and holding it. WTF?
See, when people use these investments to try to get rich fast, they have two obstacles: when to buy, and when to sell. You have to guess the trough, and you have to guess the peak. Most rational people decide to tap out at a certain point, when they’ve gained a certain percentage, like 25%, 50%, etc. But of course, this runs the risk of missing a steeper climb, and it also defeats the point of investing long term. You may as well just throw your hands up at that point and say, “I love gambling! I just want to make money, I don’t see any inherent value to this asset as a long-term investment!” And hey, that’s your prerogative, but you’re exposing yourself to some huge opportunity costs when you choose to gamble like that.
I say forget that crap, don’t waste your life following this garbage.
Stocks rise and fall, too, and they tend to fall during recessions. Which means that the biggest drops happen roughly every ten years. They are still quite volatile overall, but especially when you diversify through mutual funds, the risk and volatility drop significantly. I don’t doubt that “crypto” mutual funds exist, but when the whole crypto market is propped up by speculation, I don’t have any trust in that.
Anyway, I just figured I’d add a note. No, the recent drop doesn’t “prove me right” (as much as I love to pretend I’m right). What it does do is show you just how volatile the crypto market is, though, and that should tell you a lot about whether it really makes sense as an investment in your life.
(Why are there so many crypto fanboys? I just…I don’t understand….)