Tag: bitcoin

Is Now the Time to Buy Crypto?

To be fully transparent, my crypto portfolio is down 83% from all time highs. My overall net worth is down 40% from all time highs. However, I started seriously investing in crypto in 2018 and my crypto portfolio is up about 700% from then.

Now that 2022 is coming to an end, I have found that this year is the first year when my net worth has declined. In fact, from the start of this year to today, my net worth has declined by 23%, but the peak of my net worth was back in November 2021 and from then my net worth, as mentioned, has declined by 40%.

Focusing on how much your net worth has declined against the all time high is an example of the achoring bias. There are many ways to measure how much you have made or lost from an investment. For example, if you purchased dogecoin for $0.007 back in 2018 and held it until today when it is $0.07, it seems like you have made 10x off your investment. However, dogecoin reached a peak of around $0.70 back in November 2021. If you had sold all the dogecoin back when it was $0.70, you would have made 100x, but because you waited, you only made 10x. Or did you lose 10x because you could have sold back in November 2021 but did not? Did you make 10x or lose 10x? I have thought about this and my view now, after listening to Dave Ramsey, is that it doesn’t matter. According to Dave Ramsey, when you have purchased an asset in the past is a sunk cost. What matters is when you sell it and if you’re comfortable with the volatility when you sell the asset.

Although 2022 has been a hard year, it is important to remember that downturns happen, especially in the stock and crypto markets. In fact, looking at history, none of this is new. The crypto market especially has seen a spectacular decline, especially with the collapse of crypto exchange FTX. However, in my opinion, the collapse of FTX is not as bad as many make it out to be. FTX is merely an exchange, and staff in this exchange stole funds. It doesn’t necessarily mean that there is anything wrong with the actual crypto. To use an analogy, if a bank is corrupt and the staff siphon off money for themselves, it doesn’t mean that there is anything wrong with the currency they stole. If a robber breaks into a vault and steals gold, it doesn’t mean there is anything wrong with gold as an investment.

I have recently started allocated more of my salary into to dollar cost averaging into various cryptos. In my view, there is a real use case for crypto. It is not just imaginary money. The use case for crypto is much clearer in developing countries. For example, if I were an expat or migrant working in Zimbabwe, I would convert my pay into crypto rather than deal with having to send it back to Australia or convert it into Australian Dollars. Look at the recent war in Ukraine. Crypto has been used by many Ukrainians and even Russian who have had to use crypto because their banking system does not work as well during war. Crypto has been used to send money to help the Ukrainian war effort. Crypto is useful when there are problems with the banking system in your country. According to Bitcoin Cash (BCH) user Roger Ver, there is a Russian man who now lives in Saint Kitts and Nevis and spends in Bitcoin Cash because his bank accounts have been frozen.

Although the use case of crypto is clear in developing countries, what about developed countries? Quite simply, there is no telling when a developed country may become a developing country due to a collapse of civilisation. In fact, due to political polarisation and extremism, I think it is becoming more and more likely that developing countries could collapse. And although I currently support the sanctions and asset seizures of Russian oligarchs currently, who is to say that another political party may get into power later and rather than target Russian oligarchs they come after me? Or you?

As such, I view crypto as a safe haven similar to gold. Some people argue that if there is a collapse of civilisation then the internet will not work and therefore crypto will not work. However, just because there is a collapse of civilisation it doesn’t mean that the internet everywhere will stop working. Crypto is useful when there is a situation where there is a collapse where you are but not in other areas. A good example, as I mentioned, is Ukraine.

Which cryptos as best?

After the recent crypto downturn, I have learned again that it is best to diversify across multiple cryptos and to stick to the ones that have been around for a long time. In my opinion, bitcoin, ethereum, and dogecoin are all good cryptos and make up the majority of my crypto portfolio. If you invest in some of the newer cryptos, I recommend investing only a small amount (e.g. PancakeSwap has not done well). If in doubt, diversify. Also I do not recommend staking or investing in stablecoins. If you want exposure to USD, just get actual USD.

As I said, if in doubt, diversify. All good investors are humble enough to understand they don’t know everything, and diversification is the antidote to ignorance. With that being said, I don’t recommend going all in crypto. It is important to not only diversify your crypto but also to diversify into other asset classes such as equities or bonds using ETFs.

How do you hold crypto in a safe way?

As the FTX collapse has shown us (and the Mt Gox collapse before that), holding crypto on any exchange is dangerous. It is much better to hold crypto yourself (self-custody) rather than let an exchange hold it for you. This is one of the reasons why I do not recommend staking crypto anymore because you typically give up self-custody when you stake crypto.

Of course, when you say “self-custody” to the average person, it is very difficult to explain the concept to them, and self-custody is very hard to do correctly. This I think is one of the main barriers to mass crypto adoption. To make self-custody easier, many in the crypto community recommend buying a Ledger hardware wallet directly from the official Ledger website (do not buy a Ledger via eBay).

An alternative to buying a Ledger, in my opinion, is to buy an ETF that invests in crypto companies. An example of one on the ASX is the CRYP ETF from Betashares. For those who are familiar with ETFs but unfamilar with crypto and self-custody, CRYP is a good way to gain exposure to crypto without any of the issues with self-custody. Many people who look at the CRYP price will be stocked to see that has been trending down since inception. However, CRYP was introduced right at the peak of the crypto market, so it makes sense that it will go down with the market. In fact, if we compare CRYP to the prices of bitcoin and ether then we notice that CRYP roughly tracks these major crypto (see below).

CRYP ETF (blue) vs BTC (orange) vs ETH (cyan) throughout 2022

It s worth noting that although CRYP gives you exposure to crypto, it doesn’t actually invest in crypto. Rather, it invests in companies that work in crypto such as exchanges like Coinbase or bitcoin miners. This is analogous to holding a gold mining ETF such as GDX or MNRS rather than a physical gold ETF itself such as PMGOLD. It is like buying Woodside Energy (WDS) rather than storing coal and natural gas in your garage. Exposure to companies rather than commodities means that there is risk associated with company scandals, corruption etc but the advantage is that you don’t need to worry about self-custody of gas, coal, gold, or crypto.

Which crypto am I most bullish about?

Of all the cryptos I invest in, I believe ethereum is the most promising. I would not be surprised if, in the future, companies and even governments are run on the ethereum blockchain. Below is a recent video I watched that captures the many achievements of ethereum in 2022 including the monumental transition from proof of work to proof of stake. Of all the cryptos, ethereum seems to be the most open to innovation.

Thoughts about the 2021 Crypto Crash

The cryptocurrency market has crashed. It peaked sometime in May 2021 but has gone down since. Major cryptos like bitcoin and ether have gone down about 50% while dogecoin has gone down about 70%.

What I find amazing is how negative people get when prices come down. Based on historical price movements in the stock, property and crypto makets, the downturns are usually great times to buy.

Reaffirming the cake and icing analogy

Of course, as I mention in my previous post about cake and icing, crypto is highly volatile, so it should be considered the “icing on the cake,” the extra returns above and beyond the core necessary “cake” portion of your net worth. Suppose you can live off $40k per year comfortably and you had $1 million invested in a balanced ETF that generates about $40k per year. Then any investments beyond that can be as risky as you wish and it will not affect your lifestyle. Because you have created a solid safety net, you are able to tolerate higher risk, and taking on higher risk allows you to potentially have higher returns.

Of course, you need to be sure that you are comfortable living off $40k per year. If you lifestyle inflates, you will need a bigger “cake” which means you won’t be able to take on as much risk, which means your opportunities for larger gains become more limited.

Anchoring bias

One of the most common biases I’ve noticed coming out of the recent crypto crash is the anchoring bias, which Wikipedia defines as “a cognitive bias whereby an individual’s decisions are influenced by a particular reference point or ‘anchor’.” 

A great example of this is seen in Pro The Doge, a 33-year-old man who put in US$180k into dogecoin, which was everything he owned. At the time, the price of dogecoin was 4 cents. Dogecoin went up to around 75 cents, which resulted in his net worth ballooning to about US$2.8 million. However, he did not sell, and dogecoin went back down to 19 cents, and his net worth now is approximately US$800k, which means he is no longer a US dollar millionaire.

Pro The Doge went from $180k net worth to $3 million and back down to $800k

Of course, what should Pro The Doge have done? Clearly he should have sold all his dogecoin when it peaked at about $2.8 million, and many people have criticised him for holding onto his crypto as it went down.

However, market timing is very difficult. There is a lot of evidence that most of us are terrible at timing the market. Pro The Doge could have sold everything at $2.8 million, but it is easy to criticise him in hindsight, and if any of us had the ability to pick the tops and the bottoms perfectly, we would become the first trillionaire on earth.

So I don’t blame Pro The Doge for not selling. My point is that those who criticise him are suffering from anchoring bias. There is no reason why the all time high of $2.8 million is the “anchor” and that his current net worth of $800k must be compared to the all time high, which results in a loss of about $2 million. If you change the anchor to his initial $180k, then suddenly he has increased his net worth from $180k to $800k, which is more than a 400% return.

This practice of comparing the current price to when you got in or what your average entry price is (if you dollar cost average into the asset) leads to strategies such as “playing with house money.” The idea behind the “playing with house money” strategy is that Pro The Doge should take out his initial $180k and convert it into cash. This way it is impossible for him to make a loss.

However, this too is anchoring bias. In the same way that the all time high is an arbitrary anchor, so too the price you got in at is also an arbitrary anchor. It is useful for taxation when calculating capital gains tax, but it is not useful for your personal finances.

To understand why this it the case, consider that Pro The Doge is still dollar cost averaging (or buying the dip) into dogecoin. If he were to sell $180k worth of doge and covert it into cash, he would crystallise capital gains tax, and then when he continues to dollar cost average into doge, he would covert cash back into doge. Why covert doge into cash and then right after convert cash back into doge again? You are just adding more transactions and triggering capital gains tax when you don’t need to.

According to the “house money” strategy, this is what he should do, but as I have shown, this is self-defeating because he would be selling and then buying back into doge when he continues to dollar cost average into it.

I recall watching a video of Pro The Doge buying about US$30k worth of doge after it crashed because he wanted to “buy the dip.” If he were to sell $180k worth of doge and convert it into cash (as per the “house money” idea) and then go on to buy $30k of doge afterward, he would have been better off only selling $150k worth of doge and incurring less capital gains.

What this example shows is that when you get in is irrelevant. What matters is the volatility of your overall net worth and whether you can tolerate that volatility. For example, suppose your net worth is made up of 99% cash and 1% dogecoin. Suppose dogecoin went up 5x and suddenly you have 95% cash and 5% dogecoin. According to the “house money” idea, you should sell 20% of your dogecoin such that you are only playing with house money. This would bring your portfolio to 96% cash and 4% dogecoin. So you have gone from 5% dogecoin to 4% dogecoin and the rest is in cash. In other words, this will have almost no impact at all on the volatility of your net worth.

What this example shows is that the “house money” idea is just another form of anchoring bias. What you should do instead, in my opinion, is look at the overall volatility of your net worth and see if you are able to tolerate that volatility. To know if you are able to stomach the level of volatility of your portfolio, you need to look at your necessary spending vs non-necessary spending and then work out what portion of your net worth is the “cake” and what portion is the “icing.” The “cake” portion should be made up of low or medium volaility assets so that you can reliably and comfortably draw down on it or generate passive income from it to cover your necessary expenses.

For Pro The Doge, it is hard to know how big his cake fund is. It is a personal matter that depends on not just your current obligations but also what your future needs are. For example, Pro The Doge currently lives in a studio apartment. However, if he feels that in the future he must live in a large house (e.g. if he plans on raising a family), he will need more money in his “cake” fund. However, if he is happy living in a studio apartment because it is lower maintenance and if he doesn’t want kids in the future, then he will be able to take on more risk.

Pro The Doge going all in on doge seems very risky to me, but it may be justified if he is comfortable living on little and keeping his obligations low.

How we understand risk tolerance

I remember when I booked in an appointment with a financial advisor to discuss my superannuation. It was a free meeting set up by my super fund, so I figured I’d book in time. At the session, I was given a questionnaire that set out to determine my risk tolerance. It asked me questions such as “are you willing to take on more risk if it leads to potentially higher returns?” Of course, I answered yes for that. Most people just want higher returns, so when they learn that you need to take on more risk in order to get higher returns, they will take on higher risk.

As a result of this meeting with the advisor, my super fund was set to a “high growth” strategy that was almost all in equities. Then the GFC happened and I have to admit that I was shaken watching money I saved disappear so rapidly. I experienced FONGO (“fear of not getting out”), and as a result I dialed down the risk in my super fund slightly to the “growth” strategy instead. However, once the markets went back up again, I suddenly felt FOMO (“fear of missing out”) and quickly scrambled to invest in equity ETFs and even to get a margin loan (which I still have today).

My point is that risk tolerance is something we need to experience to understand. It is normal, in my opinion, to think we can tolerate risk in order to gain higher returns, and this is why so many talk about tracking stock indices like S&P500 or the ASX200 but rarely talk about bond indices like the Vanguard Global Aggregate Bond Index.

In my opinion, we gain a better understanding of our true risk tolerance when we personally experience both FOMO and FONGO that comes from price volatilty. The problem with most people is recency bias. When prices shoot up, they feel FOMO and their risk tolerance is too high, but when prices collapse, they feel intense FONGO and their risk toleraence is too low. You need to remember how you felt when prices spiked and crashed and adjust your asset allocation accordingly such that you minimise both FOMO and FONGO.

I am also concerned about complacency due to constantly rising prices. Cryptocurrency has been rising for the past decade even when you consider the wild swings, but it is no guarantee that it will continue to go up. An asset class can keep going up even in the long run until it does not. However, this applies not just to cryptocurrency but also to e.g. the stock market. The stock markets of the US has gone up historically for the last century or so, which may lead many to think that it is inevitable that it will continue to go up. However, what if it doesn’t? This is why it is important to reduce risk and volatility up to the point where you are financially independent.

Conclusion about crypto

I do personally own cryptocurrency, but it makes up about 25% of my net worth, which is a level of risk and volatility with which I am comfortable. Most of my crypto is concentrated in bitcoin, ether and dogecoin.

If I had to advise on whether someone should invest in crypto or not, I am hesitant to advise them that they should because one of the biggest downsides of crypto is how difficult it is to secure. If you keep your money in a bank account, if you suddenly forget the password needed to log into your internet banking account, you can simply go through the password reset process or just walk into the bank and talk to somoene who can verify your identity and unlock your cash. There is a human element to the traditional banking system, but with crypto there is no human element, which is by design. If you lose your crypto mnemonic passphrase, your funds are gone forever. If you merely expose this passphrase to someone, they can sweep all your funds and it is impossible to reverse the transaction.

The future of crypto is uncertain, but I think over time crypto will become less volatile as the crypto world will integrate with the traditional financial system. We are seeing today bitcoin ETFs and large companies like Tesla investing in bitcoin, and conversely it is possible to buy tokenised stocks. All this shows that the two worlds are merging, and I speculate that this merging will continue into the long term. If these two worlds do merge, I speculate that the crypto world will be the main beneficiary as net value will flow from the much larger traditional system into the much smaller crypto system. As such, it is a good idea, in my opinion, to allocate a portion of your portfolio to crypto, but it should be considered the icing on the cake rather than the actual cake itself.

Betashares Active Australian Hybrids Fund (ASX: HBRD)

I have always been interested in the latest ETFs in Australia. Most people are collectors e.g. they collect stamps, coins, antiques, wine, or wristwatches. I personally like to collect investments. As such I has bought and continue to hold countless investments across many different asset classes. The problem with a passion in e.g. wine or wristwatches is that it may not be profitable (unless the wine or watch is so rare it goes up in value) but an obsession or passion in investments is one you can indulge in without any guilt.

The latest ETF I have researched and purchased is the Betashares Active Australian Hybrids Fund (HBRD). The reason why I have purchased HBRD is because I feel at this stage I have an overweight exposure to stocks, so I want to reduce the risk of my portfolio. However, reducing risk usually involves investing in cash, bonds, or gold. However, these asset classes (with the exception of corporate bonds) pay low passive income thanks to the current low interest rate environment. Investing in HBRD allows me to reduce risk while at the same time getting about 4% or 5% passive income paid monthly.

For a few years now I have been worried about the valuations of stocks and property, but I have been surprised that these assets continue to go up, so the derisking of my portfolio over the last few years has certainly cost me money as I have missed out on large price appreciation. (I also missed out on the cryptocurrency boom as well.) Nevertheless, I have little regrets because I believe in diversification i.e. spreading money across everything. My plan is to gain freedom by slowly building passive income through steady and consistent investment fueled by a minimalist lifestyle. I also believe it is better to be safe than sorry. I’d rather walk steadily towards my goal rather than run there in order to save some time and potentially slip and fall. As they say, everything looks good in hindsight.

What is a hybrid?

All investments have a risk-reward trade-off. The more risk you take, the more potential reward you have. For example, cash or government bonds are safe investments. Government bonds are guaranteed by government. In Australia, cash deposits are mostly government guaranteed as well. However, if you invest in government bonds or cash, you will earn little interest, perhaps 1% or 2% if you’re lucky. Bonds are merely IOUs. If you buy a bond, you are effectively lending money and in return you receive regular interest payments (called a coupon) as well as your money back after a certain period.

In contrast to bonds, stocks are risky investments. Buying stocks allows the stockholder to vote (e.g. for who becomes a director) and allows the stockholder to earn dividends, which are simply payments made by the company to stockholders from profits. Stocks are risker than bonds because bondholders are paid before stockholders. If there is profit made by the company, bondholders are paid first and remaining profit is paid to stockholders. This also applies in the event of bankruptcy. Because stocks are riskier, companies need to pay higher dividends in order to compensate investors for taking on more risk. Dividends from Australian bank stocks such as CBA pay dividends of about 8% currently, but stock prices are volitile and can fluctuate wildly. Although bank stocks pay higher passive income, you are risking capital loss and dividend cuts should the banks become unprofitable.

Hybrids are assets that are a hybrid of bonds and stocks. When you buy a hybrid, you receive regular income as you would a bond. However, under certain circumstances within the hybrid contract, the asset may be converted into equity. All hybrids are different, so it is difficult to generalise. Some hybrids have characteristics that make them more like bonds whereas others have characteristics that make them more like stocks. Regardless, hybrids sit between bonds and stocks on the risk-reward continuum and so can be expected to be less risky than stocks while still paying reasonably high income.

Why buy a hybrid ETF

As explained earlier, every hybrid is different. In order to understand whether a particular hybrid is more bond-like or stock-like, a careful study of the terms and conditions is required. Hybrids are complex investments and as such is suited to active management and oversight by experts, which is what HBRD provides.

Conclusion

Although a good case can be made for active management in hybrids, active management has its issues. You are putting your trust in people, which is generally not a good idea. Nevertheless, I do not intend to put everything into HBRD but will instead spread money across lower risk investments with high passive income. There are another ETF also issued by Betashares that invests in corporate bonds (ASX: CRED). Corporate bonds are higher risk than government bonds thereby allowing higher yields. CRED also pays monthly income, which is very attractive for people who live off passive income (such as myself).

One of the frustrations with hybrids is that there is very little information about it. For example, if you research cryptocurrencies such as bitcoin on the internet, you will find a neverending flood of information, YouTube videos, etc. Bitcoin is a global investment that everyone can access. Hybrids, on the other hand, have few exchanges and are mostly purchased by institutional investors off exchanges. There is little information on the internet about hybrids.

Another consideration is that HBRD purchases hybrids from Australian banks, which are heavily exposed to the Australian housing market. There are currently fears of a slowdown in the property market. Nevertheless, Australian banks do not hold the property itself but rather the mortgages used to buy the property. So long as borrowers keep making their interest payments and paying their fees, revenue should be unharmed. Hybrids are issued all around the world, so the returns on hybrids should correlate with global interest rates. In the recent rising interest rate environment, this should mean higher returns from hybrids but more interest cost for Australian banks as wholesale credit becomes more expensive. Nevertheless, Australian banks do have considerable market power allowing them to respond to rising cost of global wholesale credit by raising interest rates or fees.

 

Why You Don’t Need Debt

I do have debt, but it’s a small amount. For example, I have credit cards, but I always pay it off before there is interest. I also have a margin loan, but I have this so I can buy easily when the opportunity presents itself, and I try to pay off any debt quickly.

Many people talk about how debt is a tool for making money, and theoretically this can be true. For example, if you borrow at 4% from the bank and invest in something an asset, e.g. an investment property that makes 8% then you make a profit. However, if you borrow money from the bank to invest, you need to ask yourself why the bank didn’t invest in that investment itself. The answer is that it is risky.

Banks have a certain level of risk they are willing to take. The property could have gone up 8% but there is no guarantee that it will. If there were a guarantee that the property would go up 8% then the bank would simply invest in it rather than let you borrow money to invest in it. By letting someone else borrow money to invest in the house, the bank effectively transfers risk. If the bank vets the borrower to make sure they e.g. have high enough income, etc and if there were clauses in the contract enabling the bank to seize assets in the event of default, then that 4% the bank makes is almost risk free.

But don’t you need to take on more risk to make more return?

Risk appetite is a very personal topic because everyone has different risk appetite. Generally speaking, it is recommended that young people take on more risk because they have greater ability (and time) to recover should something go wrong. This is the main principle behind the “age in bonds” rule, which states that you own your age in risk-free investments, i.e. government bonds. For example, if you are 25 you should own 25% of your wealth in government bonds.

However, if you’re a 25-year-old who has higher risk appetite, the “age in bonds” rule can be modified to e.g. (age – 25)% in bonds. This slightly more complex rule states that the 25-year-old would have zero in government bonds, which would increases to 1% when he or she is 26 and so forth.

A 25-year-old who has no government bonds and puts all his or her wealth into, say, the stock market, has a high risk appetite, but more risk can be taken if he borrows to invest.

You don’t need to borrow to take on more risk

However, even if someone does no borrow, he can still take on more risk. This can be achieved by investing in internally leveraged ETFs (e.g. GEAR and GGUS) as well as investing in more risky investments, such as emerging markets (e.g. VGE), small caps (e.g. ISO), tech stocks (e.g. TECH and ROBO), and cryptocurrency (e.g. bitcoin, ether, or litecoin).

Right now bitcoin and cryptocurrencies in general are making headlines because of spectacular growth. Had you purchased $10k worth of bitcoin in 2013, you’d be a millionaire today. However, everyone knows that bitcoin and cryptocurrencies in general are risky, and when you hear stories about people borrowing money from their homes and putting it all into cryptocurrencies, most people think this is stupid. It is not that it is stupid but rather than their risk appetite is very high.

However, the example of leveraging into cryptocurrencies shows that you don’t need to borrow in order to gain access to high risk and potentially higher returns. If you simply invest in a riskier asset class, e.g. cryptocurrencies, you already increase risk and the potential for higher returns.

Debt is slavery – the psychological benefits of having no debt

I would argue that there is no need to borrow to increase risk and return because you can simply reallocate your money to risker assets (unless you believe that leveraging into bitcoin is not enough risk).

The benefits of having no debt goes far beyond the lower risk you’re exposed to. Debt is slavery. Happiness is an elusive goal. It is almost impossible for you to know what will make you happy in the future. You may think a particular job, relationship, car, holiday, or house will make you happy, but once you actually have it, you may not be happy. Trying to predict what will make you happy is hard, which is why the best way we humans can be happy to experiment and try out different things. In order to be able to try or experiment with different things that will make us happy, we must have the freedom to do so, and you don’t have that freedom if you’re forced to work in order to pay debt.

Even though freedom does not guarantee happiness, freedom is the best assurance we have of being happy.

Freedom comes from reducing your obligations. Obligations are mostly financial obligations (debt) but can be non-financial as well.

Ultimately it depends on your risk appetite

As I mentioned earlier, everyone has a different risk appetite. I have a fairly high risk appetite myself, but there are limits. For example, I’m happy to put 5% of my net worth into cryptocurrencies. I invest in certain sector ETFs because I estimate that they will outperform in the future (e.g. I am bullish on the tech sector).

Market fluctuations can result in the value of my ETFs and shares to go down by tens of thousands of dollars and I would sleep fine at night. However, there have been many times in my life when I have gotten carried away with buying too using my margin loan account and regretting it. You know you’re taken on too much risk when you worry about it.

Results don’t matter

The outcomes from investing are probabalistic, not deterministic, so results don’t matter. This is a common investing fallacy. Some guy would claim that he is worth $100 million due to borrowing money to generate wealth and that this is proof that you must use debt in order to become rich. However, this is misleading.

The outcomes from investing are probabalistic, not deterministic.

A person may borrow money to invest and be very successful, but another person may replicate the process, borrow to invest, and lose everything. What happens for one person may not necessarily happen for another person. For example, in 2013, there were many people who stripped money from their homes using home equity lines of credit and invested all that money into bitcoin. Just about everyone called these people stupid, but now they are multimillionaires. Does this mean you should borrow to invest in bitcoin right now? No. Just because bitcoin went up from 2013 to 2017 it doesn’t mean the same thing will happen e.g. from 2018 to 2020. Investing is not deterministic. Luck plays a major role.

Do you need debt?

Suppose you put 100% of your investments into risky areas such as cryptocurrencies, frontier market ETFs, mining stocks, etc. If you feel that this is not enough risk, borrowing to invest may be the answer, but I believe that most people do not want to take on this level of risk.

Where debt may be appropriate is if you having little savings and need to borrow money to invest in something that you are fairly certain is greater than the cost of borrowing, e.g. borrowing money for education and training can in most circumstances be a good idea. Even though borrowing money will cost you in interest, you boost your job prospects and your income. If you have savings (or if your parents have savings) then it is better to use those savings to educate or train yourself, but if you don’t have this, you need to go into debt as a necessary evil.

unsplash-logoAlice Pasqual