Who would benefit from this post? Share here:
Join my Financial Transformation Program (25% off)
After helping tens of thousands of expats to plan, save & invest their own money with confidence, I have created this program combining private coaching, online courses, group learning, accountability and community. It has everything you need to know, the flexibility to suit your experience and life schedule, plus the support to make sure you actually take action towards a great financial future.
Everybody’s talkin’ about crypto. Is it a transformative investment or a distraction? Could it make you a better stock index investor? Find out below (with bullet point summary at the end if you’re busy)…
I did it, but…
Last week, I bought some crypto. My financial independence portfolio and processes are in pretty good shape though, so it doesn’t mean you should too. I’m not saying everyone needs to have some.
90% of money-related articles these days are either about crypto or inflation. That’s what gets eyeballs and clicks, though of course it doesn’t mean you need to adjust your portfolio based on the chatter. As I have to write and think about financial independence, I decided I needed some hands-on experience if I was going to have an opinion.
Do Drug Enforcement Officers need to try heroin to be credible? Probably not, because the downside is too bad. I’ve risked some financial downside to understand what it’s like to be about to buy crypto, to buy crypto and to hold crypto.
I’m going to skip a lot of the how to, use cases, risks and the reactions of the FI community (check out JL Collins’ and Andrew Hallam’s articles) to focus on what’s important – the psychology.
How I did it
I used the Binance app (not available in all countries) to spend around 2% of my net worth on 6 of the top coins, mostly Ethereum (ETH). I didn’t buy Bitcoin (BTC) because I don’t like the environmental impact of its energy usage (gold ain’t so great either). Hopefully it will improve with greater use of renewables.
The user experience of the Binance Lite app is impressive, clean, intuitive, minimal jargon, no excessive gamification. Stock platforms would do well to learn from it – yep that’s you IBKR. The ID verification process and money transfer were fast and painless. You can flip between Binance Lite and Pro in the settings – Pro is mind-numbingly complex and best ignored by buy and hold folks. Crypto day trading is surely a rapid way to burn through all your cash.
Just like a stock app, on the Markets page you review the price chart for your chosen coin and watch it bob up and down, then you choose a price that feels right and the amount you want to buy. On hitting the Buy button on the Trading page, you are a proud owner of crypto. All very, very easy – no worrying about wallets (for now), no confusing pop-up messages (you know who you are).
Then attention shifts to the Portfolio page, as it shows you the all-important Total Balance, measure of your success and self-esteem. If you buy equal amounts of the lesser coins, you can enjoy watching them overtake each other like Formula 1 cars – or possible spin off the track altogether.
The greater fool
Many people seem to be willing to take a punt on crypto without wanting anything to do with passive stock index investing. There’s a lottery mentality – you drop $1000 and in ten years’ time it will be $100,000. Or maybe in one year. It seems worth a try, whereas index investing seems slow and a bit complicated vs the size of the prize.
Whether you want to win the crypto lottery or are convinced of their role in the future infrastructure of the world, you have to hope someone is willing to pay a higher price for your coins eventually than you did. As with gold, a ‘greater fool’ has to come along and buy you out when you want to sell. This differs from stocks, bonds and property (not your home), which generate income over time
With crypto, you have to be willing to lose everything and you have to hold (hodl) for the long term. If you’re buying and selling all day or flee at the first sign of a crash, this ain’t going to work. And that’s where things get interesting.
Get started with my free guide:
3 Steps to Expat Financial Independence
15-minute read. Discover the simple process for taking control of your finances so you never have to stress about money again.
Pre-trade: rodeo
The bronco starts bucking about 2 minutes after you begin watching the chart. Is now the right time to buy? Trading charts have different timeframes and usually Max (30 years if you’re lucky) is the optimal viewpoint. Binance lets you choose a 1-hour timeframe, so the chart is moving every few seconds.
What you discover is BTC and ETH move. They really move. The chart is hypnotic, little waves, a spike up, a crash down. Your brain spots patterns and starts to anchor on the numbers: ok, maybe $2,800 is a reasonable price for ETH.
Now you are an expert, and you will not forget that anchor price – possibly ever. If you buy at $2,800, you will kick yourself when it falls to $1,700 within a few days. If it soars to $4,000, you will feel like a genius.
Pre-trade: behaving badly
The adrenaline kicks in as you get closer to making a trade. Should you wait a bit? Did you miss the boat 10 minutes ago? When you switch back to the 1-day chart, you realise it’s all a bit of a storm in a teacup, but the 1-hour chart pulls you back in. It’s much more exciting. You can feel BTC breathing, up, down, up, down.
None of this makes you a good investor. And it doesn’t make you a good person to be around either. I find myself propping the phone up against the sofa so I can watch the chart with half a brain and listen to Mrs Steve with the other half. A couple of hours into my crypto journey and I am becoming addicted.
At some point you have steel yourself and make the trade. I set my limit order (i.e. my maximum price for purchasing) like a good buyer and as the chart goes all over the place I have to wait a good half hour for it to swing back my way so the trade executes. I’m in.
My mindset shifts and calms, because I know I have agreed with myself upfront that I have only one afternoon to devote to buying crypto and I will hold for the long term. There’s nothing I can do now.
Post-trade: buyer’s remorse
Over the next couple of days, ETH does indeed crash down to $1700. I have bought after one crash (clever me) only to buy before another crash (not so clever). Memories of 2017 wash over me – will these coins be crashing down 80%? I’ve been stupid.
My phone stock app shows crypto news articles, prices and the percentage movements. Permanently anchored at $2800, I read with gritted teeth about China banning crypto miners. I check my portfolio value on the Binance app and it’s well over 20% down after just 2 days.
I have thrown a few thousand into the wind. I think about how many Palestinian children would benefit from that money and I feel pretty bad. Perhaps you can combine charity with crypto investing, where you donate any upside each month but if you fall below your initial investment you donate it out of your own cash as penance for being so stupid and greedy.
This is what you trained for, soldier
Eventually, my training starts to kick in. The key thing about buy-and-hold investing is not to panic and crystallise a loss by selling when the market is down. I forbid myself to look at my portfolio value – the dollar losses and swings are too much for the brain to handle.
It’s ok to read the crypto news. It’s ok to check the prices and percentage movements sometimes on the stock app, because they are one stage removed from the dollar value. Seeing -15% is less painful than seeing -$4000, so your brain is less likely to panic.
I do however forbid myself to look at that hypnotic 1-hour trading chart. There’s just no point. I’ve moved from trader to hodler and I’d like my life back thanks.
Crypto is distracting. If you only put a small amount in, say a few hundred or thousand dollars – which is what most people can afford – the hours of distraction can outweigh any benefit. You must be able to put these distracting toys back in their box.
Turning $1,000 into $100,000 is not going to hugely change the life of anyone moving back to a developed country. Spending the same time figuring out how to save and invest an extra $1-3,000 per month will be much powerful and ingrain personal finance habits that will help you to the end of your days.
A crash course in volatility
My little crypto adventure gave me one big and unexpected realisation. Holding crypto through all its weekly booms and crashes, complete with panicking friends and feverish news articles, is like training school for the big event: a stock market crash.
Big stock crashes are predicted every month but when they come (1987, 2001, 2008, 2020) they can be brutal. The market fell 52% in 2008. Your retirement money and life savings are at stake and you MUST sit tight through the craziness. There is a new reason for each crash and for each one it feels like this time it’s different.
The recovery happens eventually, fast or slow. Your old stocks will go back up in value and you will have bought some news stocks cheaply. Unless you panicked and sold, in which case you have actually lost money and damaged your retirement.
The problem is, big stock crashes come along so infrequently, about every 7-15 years, that you can’t build up much experience of dealing with them. You don’t really know how you will react – will you collapse under the strain and do you need to change your mix of stocks and bonds accordingly?
Testing your mental strength
Well now you can find out what you’re like under pressure – holding crypto will test the hell out of you.
Test: panic-selling during vertiginous drops. Looking at Bitcoin, the average drop from a previous record high is 50%, i.e. if it hits $60k it will on average bottom out at $30k. Two-thirds of the time, it is more than 40% below its previous record high, so you have plenty of time for kicking yourself.
Test: wild daily movements. Bitcoin drops 5% in a day at least 6 times per month, 10% in a day twice a month and 20% in a day(!) every quarter. Compare that to the S&P 500 stock index, which drops 5% in a day 1-2 times per year, drops 10% in a day once per decade and has only fallen by more than 20% once ever (Black Monday, October 1987).
So maybe crypto has a use after all – in toughening you up to ride out a stock crisis. You need enough skin in the game to activate your emotional responses. $100 won’t cut it, but $10k definitely will.
Summary of my lessons learned
- Never invest what you can’t afford to lose. Max 10% of your investment portfolio, but max 3% probably better
- Use a trusted broker: HAYVN, Binance, Coinbase, Bittrex, BitOasis etc.
- Stick to the top 5-10 coins and definitely avoid the alt coins and ‘shit coins’ – the swamp is full of scammers just like penny stocks
- Spend no more than one day planning and buying
- Plan to hold for the long-term
- Avoid the 1-hour trading chart!
- Once purchased, look at the coin prices and movements rather than your portfolio value, especially after a crash
- Don’t look too often! Get on with your life and make sure your earning, saving and long-term investing are in good order
- Use the volatility to train your emotions and put in place mental processes to deal with future stock crashes
Any questions or comments? Add them below.
Join my Financial Transformation Program (25% off)
After helping tens of thousands of expats to plan, save & invest their own money with confidence, I have created this program combining private coaching, online courses, group learning, accountability and community. It has everything you need to know, the flexibility to suit your experience and life schedule, plus the support to make sure you actually take action towards a great financial future.
Who would benefit from this post? Share here:
Join Our Community
Get our articles first – practical and memorable advice on saving your money and avoiding financial pitfalls.
We won’t share your email with third parties and will never spam you.
Have you looked at BlockFI’s interest on stable coins? Its a nice option tied to a fiat currency that pays up to 9.5% interest just for leaving your stable coins in your account (buy and hold). It takes most of the volatility out of crypto but allows you to participate and capitalise on some of the gains.
Hi Nicole, at the end of the day, risk and return are strongly linked. If you are getting 9.5% interest, there is risk involved. Stablecoins *may* be tied to fiat currency, but what if everyone wants their stablecoins converted at once or it turns out they are not as stable or backed by fiat as you thought they were. You could lose a lot. Definitely worth a look for a bit of ‘fun money’. The total size of your fun money should be no more than 10% of your investment portfolio (not cash or buy-to-let property).
Hi Steve, I copied and pasted everything you went through on this crypto journey. A month ago I got on the FOMO band wagon with my fun money. Double my cash first trade, beginners luck. Started to top up a bit more as I got cocky. Then it was crash and burn this week as margin was exercised overnight and lost it all. Even though I could afford to lose, it still hurts like hell. Serves me right for the hubris. It was a good exercise in testing my tolerance, how I couldn’t handle wild volatility, the drug like effects and when to cut my losses. Sticking with my ETFs from here on!
Margin?! That doesn’t sound like a good idea… All I’m doing with crypto is buy and hold, even if some of the coins are annoyingly volatile indeed.