The last week has been a tough week for some cryptocurrency owners. Today, I want to explain why this isn’t such a big deal for actual investors.
I’m sure you’re wondering what I mean by speculators versus investors, so, I’ll go ahead and explain that investors treat cryptocurrencies as an investment (logical, I know), considering it over the long-term just like they would real estate or any other investment vehicle that they buy and hold for appreciation over time.
A speculator on the other hand, sees cryptocurrencies as a lottery. They think in terms of “How can I flip this quickly for a profit?” They’re looking for the quick buck, buy low/sell high, turn your money in a day type of deals.
But remember, lotteries aren’t investments. They’re gambles. And the overwhelming majority of people lose money on anything that they treat as a lottery.
That’s fine if you play the lottery for entertainment or because you want to buy a raffle ticket to support your child’s school. But it’s a terrible idea if you want to actually grow your net worth.
So, what happened this week?
What happened, to be blunt, is that cryptocurrencies lost collectively over a trillion dollars in value. Bitcoin, specifically, lost over a quarter of its value.
In fact, bitcoin dropped to below $90,000 for the first time… since April.
And the fact that that time frame (seven months) is in the news highlights the absurdity of the lottery, quick-flip mentality of too many people investing in cryptocurrencies (or anything else).
Because cryptocurrency valuations can fluctuate wildly.
And that’s a feature, not a bug.
Remember, with volatility, with risk, comes the possibility of reward.
Without risk, there is no reward, and with higher risk levels, there is the possibility of larger rewards… and the possibility of larger losses.
But don’t take that as a prediction that cryptocurrencies should be avoided. Quite the opposite.
Cryptocurrencies can be a great investment for those who take the long-term view on things.
What would Warren Buffett do?
Take investment giant Warren Buffett. Most people would agree that he is one of the most successful investors in all of human history, so he may have some thinking on prices, risks, market timing, and rewards that we should pay attention to.
And, in fact, his hamburger quiz makes the point. Adam Hayes with Investopedia reminds us of Buffett’s favorite lesson on prices.
“If you plan to eat hamburgers throughout your life (and are not a cattle producer), should you wish for higher or lower prices for beef?” The answer is lower, of course. Yet, according to Buffett, this question cuts to the heart of how investors should also think about markets and investing.
We prefer lower prices for things we buy regularly (gas and groceries). By Buffett’s logic, long-term investors should see market declines as opportunities, not disasters.
And that’s what this bitcoin price drop and cryptocurrency drawdown is: An opportunity!
But speculators don’t like it.
It’s people who take a dollar-cost averaging process to cryptocurrencies that are going to reap the bigger rewards over time. The big returns on cryptocurrency investing will come from steady, consistent investing of a set amount of money each month which is then allowed to grow.
And there’s another strategy that smart cryptocurrency investors use, as well…
The other smart crypto strategy
The other smart strategy is a smart action to take with any type of investment with higher risk levels: Diversification.
It can be smart to both diversify into more than one cryptocurrency, and it can be smart to treat cryptocurrency as a part of your investment portfolio, not the totality of your portfolio. That way, you can manage the overall risk levels for your portfolio. We discussed this last week in the context of bitcoin vs. gold.
Because, to reference investing legend Peter Lynch, you want to have an overall level of risk in your portfolio that allows you to sleep well at night (diversification helps with that)… but at the same time has sufficient growth potential for your needs.
Long-term investors who know themselves, who understand their own risk tolerance and have their eyes on the horizon? They are able to tune out the day-to-day noise. They’re the ones who take advantage of discounts on hamburgers. They sleep well at night.
To paraphrase a famous investing joke, speculators sleep like babies – they wake up every two hours crying and soil themselves.
So, if you want to take smart, measured steps to diversify with cryptocurrencies that you control directly (rather than outsourcing to someone who has no personal interest in your investment plans and goals), a smart next step for you would be to get our free Insider’s Guide to Crypto IRAs and start your due diligence. For one-on-one assistance, call one of our Digital Currency Specialists at (800) 299-1567. And if you’re ready to take the plunge, you can set up your Digital IRA here anytime, day or night, in less than 10 minutes.
