Part 4 of 4 – Do you have the right kind of money?
This is the final part of a 4 part series meant for new cryptocurrency investors to read before entering the space. The goal of this series is to determine if it investing in crypto is the right move. Head to the cryptocurrency section for more information and links to the rest of the series.
For the sake of brevity when I refer to Bitcoin just assume I am referring to any other coin or token available as well (Ether, Ripple, etc.). This series is not exclusive to Bitcoin but rather should help you understand what investing in cryptocurrency would mean for you.
This series will help you determine your motivations for wanting to invest in cryptocurrency, prepare you for the psychological games of a bubble, understand the risks involved in this new and volatile asset class, and help you determine if you have the right kind of money available to get the best result possible.
Part 4 – Do you have the right kind of money?
The Right Kind of Money
What I am really asking is do you have money you can afford to lose? The right kind of money is money you don’t need for your monthly bills, money that is leftover after you have saved some for your emergency fund and put some into your retirement account. The right kind of money is your discretionary income.
After reading the rest of the posts in this series you know that cryptocurrencies are a volatile and risky investment, with no guarantee of future returns. Even though there are times when it seems every coin is going up, crypto is definitely not a “sure thing”. To determine if you have the right kind of money to invest, be honest with yourself as you answer the following questions
- Do I have an amount of money I am willing to lose?
- Am I using an amount I will not lose sleep over or stress about?
- Am I using an amount that I will forget about?
- Is investing in crypto with this money a better use of this money than what I’d usually use it for?
The above questions will help you determine the appropriate amount of money to invest. If you go beyond that and use too much money you become susceptible to trading your emotions rather than being a rational investor.
Please don’t assume you are immune to this unless you have risked real money before, you will be surprised at the psychological games we play when our money is actually at risk
If you use too much money, you will likely be trading scared rather than investing wisely. Using too much money will mean you need absolute conviction in your investment belief so you have the ability to ride it out, or you need to use a more appropriate amount of your total net worth/ portfolio so that when price drops 10-30% for no reason at all, you do not panic and cut your investment short. Trust me, your mind will play games when real money is on the line.
One Final Word of Caution
DOs for Cryptocurrency Investing
- DO let this be a small percentage of your total investment portfolio
- DO use some of your discretionary income (income you’d spend on going out drinking, fantasy football, or trashy magazines, etc)
- DO use an amount of money that you are OK with losing/ forgetting about/ not touching for a while (over a year)
DON’Ts for Cryptocurrency Investing
- DO NOT take money from your retirement account
- DO NOT take money from your emergency fund or savings account*
- DO NOT borrow money to invest
Now if you do break one of these rules, happen to get lucky and make money, please realize it was just luck! Have fun trying to convince yourself otherwise and rationalize why you are different but in reality, I assure you it was still a stupid decision that just happened to work out. Making reckless financial choices like borrowing money or risking your nest egg is stupid and these poor decisions which will eventually catch up to you. Think of this investment as a sunk cost, money you quite possibly may never get back.
*Savings account – if you were saving for a specific goal (ie. not your emergency fund) and decide you’d rather delay that goal to risk some of this money then it is OK to take some from your savings account. Just don’t expect to use crypto investing to speed up the realization of that goal.
- Understand why you want to buy cryptocurrency (part 1)
- Are prepared to handle the psychological roller coaster that can be cryptomania (part 2)
- Understand the incredibly volatile high-risk nature of cryptocurrency investing (part 3)
- And if you have money you can afford to lose (part 4)
then yes, you should buy some cryptocurrency.
Here is my next article discussing how to safely buy and store crypto coins. As a quick getting started guide, open a Coinbase account if you are from the US, diversify across their assets by buying some of each, but do your own due diligence. I am personally most bullish on Ethereum but could be wrong, so do your own research on which coins specifically to buy. This is not investment advice, this is just my opinion.
Bottom line, this is an exciting time and it is easy to feel you are missing out but in the dot-com, plenty of people lost a lot of money. You won’t hear most of those stories. Use money that you can afford to lose, be willing to forget about your investment for a few years. Get rich quick schemes rarely work so stay patient. And be careful of who you listen to, anyone can pick a coin and get lucky when the entire crypto market is going up.
If you are still unsure about all this, that is OK. Buy even less than you were originally thinking or just let it go. In my opinion, it is more important to get your total financial house in order in the first place.
Having a solid grasp of the personal finance basics is something that will stand the test of time, and more important your long-term financial prospect than just investing in crypto. Head to the start here section and begin learning how to get cash flow positive, build your emergency fund, and invest for retirement. When you do this, you can have a life where you never have to stress about money again. You might still have to work but a slow, steady, safe approach to wealth and is an approach that will last and truly give you peace of mind.
This is part 4 of a 4 part series meant for new cryptocurrency investors to read before entering the space/ to help determine if it is the right move for them. Head to the cryptocurrency section for more information and links to the rest of the series.