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The recent rally in Bitcoin, along with the recent approval of several exchange-traded funds that track Bitcoin’s price, has led to an increase in calls to our office inquiring about jumping on the Bitcoin wagon It is natural for these questions to come up when money is seemingly being made so quickly. This isn’t the first time we’ve heard these questions about Bitcoin, and it definitely won’t be the last. But there is one important underlying question you must ask yourself if you are having these feelings, Am I investing or am I speculating? In February of 2022, I had the pleasure of being interviewed about the cryptocurrency craze by financial journalist Vicky Nguyen for a segment that aired on the Today show. At that time, euphoria for virtually all cryptocurrencies was at a fever pitch. It seemed like every other television commercial was pushing crypto in some way, especially during the 2022 Super Bowl. Bitcoin was trading around $43,000, down from its then all-time high price of more than $68k just three months earlier. It turned out that the downhill slide got much worse through that year with Bitcoin dropping to less than $16,000 in November 2022. Many other cryptocurrencies fared much worse and even some of the major industry darlings of the time imploded completely.
When it comes to crypto, we didn’t know then, and we still don’t fully know now, how governments are going to react, how the IRS is going to react, what their ultimate utility will be, who the winners and losers will ultimately be, or whether there will even be clear-cut winners and losers. There is nothing inherently wrong with speculating – as long as you know you are speculating – and that you are speculating with dollars you can afford to lose. Fast-forward two years and the current rally has seen Bitcoin’s price reach a new all-time high of over $73,000. By the time you read this, it could be back under $50k or closing in on $100k. That is by no means meant to be a prediction or recommendation either way – quite simply, no one knows. I am just highlighting how inherently volatile Bitcoin can be. These types of wild swings in pricing are not for the faint of heart and can lead to significant losses. If these extreme fluctuations weren’t enough, crypto buyers also face the potential of losses through fraudulent activity in an emerging industry with little regulation. For example, the founder of FTX, a popular cryptocurrency trading platform, is currently waiting to be sentenced for fraud and deceptive practices that led to billions in losses for retail clients. So what is investing? Investing, in its essence, is a strategic endeavor aimed at building wealth over the long term. It involves thorough research, analysis of fundamental factors, and a commitment to holding the right mix of assets such as stocks, bonds, real estate, and cash given an individual’s personal circumstances, risk tolerance, time horizon, and financial goals. When investing, you are prioritizing the long-term performance of the chosen assets over short-term market fluctuations. A key aspect of investing is its ability to minimize the negative impact of behavioral biases that often lead to suboptimal investment outcomes for individuals. With this type of approach, the investor benefits from the power of compounding and the potential for wealth preservation and growth over time. Speculating is different. On the other hand, speculating is focused more on price movements and market trends, aiming to profit from fluctuations in the short term. The selection of the asset is based on the potential for outsized gains compared to investing where each asset is selected and analyzed for its role in the individual’s overall portfolio. Often speculation is associated with new or emerging industries where potential gains may be significant, but extreme volatility and non-existent or undeveloped regulatory environments expose individuals to losses beyond the assets’ price movement. Where traditional investing can minimize the potential negative impact of behavioral biases due to its long-term nature and diversified approach, speculation can magnify the potential impact of these biases due to the extreme volatility in prices and uncertainty around both the regulatory environment and the future of the industry. Knowing the difference matters. Again, this is not to say that there is no place for speculating in an individual’s portfolio – even potentially with cryptocurrency. However, it is essential to approach speculation with caution and to carefully manage the associated risks. The unpredictability of speculative assets can result in significant losses – even losses that exceed the initial investment. Therefore, speculation should be undertaken only with funds that one can afford to lose and as part of a well-thought-out investment strategy that primarily considers individual risk tolerance, time horizon, and financial goals. Speculation, if attempted at all, should complement, rather than replace, a diversified long-term investment approach. As I said in the Today Show segment, the slow, diversified investment approach really does tend to win, it just doesn’t tend to produce exciting headlines or to yield great Super Bowl commercials!
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Fi360, a Broadridge Retirement and Workplace, Inc. owned company, licenses the designation marks Accredited Investment Fiduciary® and AIF® in the United States. Attainment of the AIF® Designation demonstrates initial and ongoing understanding of the Prudent Practices® and methodology. Designation requirements include training, exam, experience, ethics and standards components-- more information is available at Professional Designations. DISCLOSURE: Information presented is for informational purposes only. StraightLine Group, LLC (“StraightLine”) is a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Past performance is not indicative of future results. Investing involves risk, including the possibility of loss of principal. The ideas and opinions expressed herein do not constitute legal, tax, or investment advice or a recommendation of any particular security or strategy. Before making any investment decision, you should seek expert, professional advice and obtain information regarding the legal, fiscal, regulatory and foreign currency requirements for any investment according to the laws of your home country and place of residence. Any forward-looking statements or forecasts are based on assumptions and actual results may vary. Information presented from third parties is believed to be reliable, but no warranty is provided. StraightLine is not required to update information. Comments are closed.
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