Crypto as an Investment

We're going to talk about crypto, cryptocurrency, crypto assets. This is a huge category of assets out there. But when most people think about it, most people are thinking about the leader in this category Bitcoin. So most of the comments I'm going to make today refer to Bitcoin, but most of them also apply to other crypto assets. Obviously there's differences between the thousands of crypto assets available out there and Bitcoin. And if you really get into this space, you can learn an infinite amount of material about all of these. But I want you to understand the basics of investing in these sorts of assets. Let's start with the pros, okay? The first pro of investing in Bitcoin or, you know Ethereum or any of these crypto assets is you might just get fabulously wealthy. Okay, it's entirely possible, right? If I had bought a few bitcoin when I first learned about it in 2011 and waited until, you know, the beginning of 2025 to sell it, I would have made a great deal of money. Now I would have had to hold it through some seriously volatile times. But I would have made a lot of money if I could do that. So I've run into a few people out there that really got into this stuff a few years ago, put a lot of money into it, sometimes swapped around and traded a little bit and ended up being fabulously wealthy. One guy I think was in his 20s was worth $50 million.

So that's one of the exciting things about this. And let's be honest, the reason why most people get into it, right, they watch these exploding charts of it going through the roof, and they say, I gotta get me some of that. And that's why they get interested in that investment. Is it possible? Yeah. It's impossible. It's possible to for this to happen to you. I think most people that invest in it don't get fabulously wealthy on it for various reasons, but it is possible. Another pro about it is that you're going to learn more about it. When you invest in something, you pay more attention to it. So if you really want to learn about this stuff, I'd encourage you to put a little bit of money into 10 or 15 different crypto assets or cryptocurrencies. You're going to learn. You're gonna learn a whole bunch of money about it. You don't have to put a ton of money into it, but just a little bit, and you'll pay a little more attention to it and you'll see how it really works. Certainly, if you're thinking about getting serious, you know, putting something like, you know, 5% of your portfolio into it, it doesn't hurt to mess around with little tiny amounts for a while to learn more about it. Better to make all your mistakes with a tiny amount of money, I assure you. Okay. Another pro of bitcoin is that you can smuggle money.

Now that sounds criminal, right? To smuggle money. But you know what? Imagine you were in Nazi Germany in the 1930s and you wanted out and you wanted out with a substantial portion of your wealth. You know, so you're, you know, sewing jewels and gold into your clothing and trying to get out of the country. Well, you know, it works a heck of a lot better than that. Bitcoin. Bitcoin works a heck of a lot better than that. It's way good for smuggling money. You know, this might be why some criminals like to use it, but it works very well. In fact, that might be the best use case for Bitcoin is to flee a terrible political situation with some or most of your wealth. And so I think that's a really cool, really cool use case for it. And even if it's some tiny percentage of your wealth, like I don't recommend even those who are serious about this, but more than a single digit percentage of their portfolio into it. But even starting over with 5 or 10% of your money is huge compared to starting with nothing. Okay, another great pro of crypto assets is capital gains tax treatment, right? You know, people wanted to say it was a currency, right, that everyone was going to be buying pizza and gas with it within a couple of years. That didn't really pan out. Nobody's buying pizza and gas with Bitcoin these days. Yes, there's probably a pizza place somewhere that'll sell you a pizza for some tiny percentage of Bitcoin, but nobody's really doing that.
Part of the issue is the US government decided, okay, this is an investment. We're going to give it capital gains tax treatment. Okay. Well that's cool because not all speculative assets like bitcoin get capital gains tax treatment right. Precious metals get collectibles tax treatment. That's a higher rate in capital gains tax treatment. So that's that's a really cool aspect of crypto assets. Another cool tax aspect of them is that there's no such thing as a wash sale with Bitcoin. Your Bitcoin goes down 70% and some terrible crypto winter. You can sell it, buy Bitcoin back 10s later and claim that loss on your taxes. Now like any other capital loss, you can only use $3,000 a year of it against your ordinary income, but you can use an unlimited amount of it against capital gains and carry an unlimited amount of it forward over the years. So that's better than stocks, right? Stocks. You got to wait 30 days one month. Right. To avoid having a wash sale on, you know, a tax loss harvesting transaction. So that aspect of crypto is a little bit better than mutual funds or stocks etc.. Another cool thing about it is that it has low correlation with other asset classes. Yes, it tends to be viewed as a risky asset. So when risky assets go down, stocks and real estate, etc., it tends to go down a little bit more, but in reality it doesn't have much correlation with anything else.

You invest in stocks, bonds, precious metals, real estate, whatever, right. That's pretty low correlation with all that stuff. And that's a good thing in a portfolio when your asset classes have low correlation with each other. Another really cool thing about crypto, Bitcoin in particular is blockchain security. It's a really cool invention right. There's lots of ways it could be used. You know, people are still trying to sort out all the ways that it can be used. But, you know, decentralized records of ownership, it's never really been hacked in that way. You know, exchanges have been hacked and bitcoins been stolen that way. But as far as the blockchain breaking down, it's never really happened. So that feature is really pretty cool and it's an exciting invention. Another pro of crypto and crypto assets is you can trade them 24 hours. Right. You don't have to wait till the markets are open. You know, basically four times as often as you can trade a typical security. You can trade crypto assets naturally. There's lots of cons. The first one that comes up on my list is that it's a speculative asset. What do I mean by that? Well, I mean, it doesn't produce anything, right? In that respect, it's like gold or other precious metals. It's like, you know, forex investing in other currencies. It's like empty land that you can't rent out for whatever reason.

You know, you're basically relying on somebody else to pay you more for it down the road. It's not going to produce any interest, any profits, any earnings. You know, no rents, nothing like that. It's just. Is value, right? You're speculating on future value when you invest in this. And and that's not a place lots of us like to put lots of our money. The second one is that it's just super volatile, right? The downturns are huge and they seem to come every couple of years. Now nobody minds volatility so much when it's going to the moon and skyrocketing. But this sort of an investment requires you to be very tolerant of volatility. And most investors are not. They panic sell when things go down sharply. And if that's you this is not an investment for you. I'm not sure I can tolerate the volatility of Bitcoin. And I've been investing for two decades relatively successfully. But I don't know that I can tolerate that volatility. You've really got to have what those in this world like to describe as diamond hands in order to hold on to it through, through the frequent downturns in its price. Okay. The third downside is it has a fairly long, steep learning curve. I mean, I suspect I know more about Bitcoin than most of the people that own Bitcoin. But it's relatively complicated. You know, by comparison it makes a typical stock or bond mutual fund just look downright simple right? Don't invest in stuff you don't understand.

And I suspect only a tiny fraction of crypto asset investors really have more than a superficial understanding of their investment. So if you really want to invest in this, I would recommend you spend some time learning about it. I think that'll help you stay the course. The serious volatility it's got. But you know, people who are in it say you got to read for 1000 hours before you really understand it. I don't know, maybe I've read 1000 hours about Bitcoin over the years, but if you don't want to spend 1000 hours reading about this stuff, then maybe this isn't the asset class for you. Another issue with it is counterparty risk. Okay, So where are you going to put your bitcoin right. All of these crypto brokerages, for lack of a better term, don't have the greatest reputation. A number of them have been hacked. Many of them have gone out of business, gone bankrupt, turned out their, you know, founder was a fraudster. Whatever. That's a pretty serious risk. Now, if you take it off the exchange and put it into what's called cold storage, that brings its own risk. You know, it's easy to lose the keys and that sort of thing, but you can eliminate that counterparty risk. Otherwise you're going to be dealing with this counterparty risk, you know, and you buy a mutual fund at a brokerage. It at least gets some securities. Investor Protection Corporation SIPC protection.

It's only up to half $1 million, but at least there's some fraud protection there that doesn't really exist at Coinbase or other crypto exchanges. Another big downside is there's a lot of manias and scams, right? People just go crazy. It's going up. I got to get some. Well, that's not generally a great time to be buying investments. And of course, any time you have some sort of an alternative, it attracts the scammers. It attracts the fraudsters. And so there's quite a bit of that. You know crypto investing really is the wild wild West still. And you got to be careful about that. Another downside is regulatory issues. Some issues have been worked through in the last decade. There's still plenty that haven't. And they're still trying to sort out how it's going to be regulated, how it's going to interact with our government and other governments. And sometimes there are surprises in how things get decided as the rules change over the years that can have serious effects on the value of your investing. Okay. Another downside is it's relatively unproven, right? This stuff hasn't been around that long. Bitcoin was invented in like 2009. Lots of people didn't even hear about it until 2015 or even 2020. This is not the same as, you know, stocks that have been around since the 1600s, right? You know, we've got very good stock market data that goes back a century or two centuries even. You just don't have that sort of investment history with crypto assets.

It's all relatively short time period. Feels like it could be easy come, easy go. You know, we'll look back on it 50 years from now, and a lot of these projects are just going to be gone. They'll have gone to zero. We don't know which ones will still be around. You know, the real winners may still not have been invented yet. We just don't know. It's unproven. So that's the downside of these investments. One of the issues with cryptocurrencies in particular is most of them do not scale well. Everybody can't use them all at once. Slow transactions cost money. They subtract value. It's a serious limiting factor in the everyday use of crypto assets of any kind. Hopefully this can be solved with further technology and computing speed, but at present, it's just not there yet. It works at scale for a speculative asset. It doesn't work at scale for any sort of a real currency. Another issue is there are some security risks. I mentioned losing keys. I mentioned, you know, exchanges can be hacked, etc. so you got to be careful with those as well. Now the real question everybody has is what's going to happen with crypto. Is it going to go up. Is it going to go down. What's it going to be worth in ten years or 50 years? The truth is, I have no idea. I have no idea. If I was forced to guess, I would expect that it continues to be around in some form.

I think cryptocurrencies are going to become more useful as time goes on. I don't know which one's going to be the best 110 years or 20 or 30 years. You know, the Bitcoin fanatics believe there's no way anybody's ever going to catch up to Bitcoin. I'm not so convinced. But have I seen its replacement? I certainly have not. So I have no idea. If you want to speculate on this price, I'd recommend you limit it to no more than five, maybe at the most 10% of your portfolio. That way, even if it goes to zero, you've still got 90 or 95% of what you saved and invested for retirement. And it's not going to, you know, cause you to be eating Alpo in retirement. On the other hand, if you believe in this stuff. Right. You think it really is going to be worth $1,000,000.10 years from now. You think that's a very good chance that's going to happen? I would recommend that you don't just put like $500 or five grand into it, put 5% of your portfolio into it, right. Make it enough that it's actually going to make a difference in your financial life. Not so much that it's going to tank if you're wrong, but enough that it's going to make a difference. And I think that's probably something like 5% when it comes to a portfolio. Hope that's helpful to you and helps you to understand crypto.

The White Coat Investor Podcast is for your entertainment and information only and should not be considered financial, legal, tax or investment advice. Investing involves risk, including the possible loss of principal. You should consult the appropriate professional for specific advice relating to your situation.