By Dr. James M. Dahle, WCI Founder
Many doctors, including some white coat investors, buy cryptocurrency. Most of them readily admit they are simply speculating with a tiny percentage of their portfolio. It is essentially play-money for them. In fact, I have gotten into lengthy arguments with some of them only to discover they had less than 1% of their portfolio invested in crypto. I roll my eyes and walk away.
If they believed in it half as much as they say, they'd put their money where their mouth is. You can invest 1% of your portfolio into anything you want, whether it is your favorite stock, a cryptocurrency, the Brooklyn Bridge, a Nigerian scam, or your brother-in-law's new business, and you'll be just fine. Go have fun! In fact, many financial advisors have found giving their clients up to 5% of the portfolio to play with helps them to stay the course with the rest of the portfolio, which is more than enough to reach their financial goals.
But let's explore this idea a little more. Knowing what we know about cryptocurrency and its volatility, should you invest in it?
What to Consider Before Investing in Cryptocurrency
If you are considering investing real, serious money into cryptocurrency, I think you need to spend some serious time thinking about it. Ask yourself why you want to invest in it. If you cannot make a clear, logical case for it improving your portfolio performance, then I would suggest you stick with play-money type amounts. Do you need to take on that sort of volatility and risk of permanent loss of capital to reach your financial goals?
The vast majority of physicians willing to save 20% or more of their gross income and work full-time as a doc for 20 or 30 years can simply invest in boring old index funds, enjoy a very comfortable retirement, and leave millions to their heirs or a favorite charity. Before taking on the speculative risk that investing in cryptocurrency entails, you may wish to take on additional market risk and maybe even some leverage risk.
Investing is about reaching your financial goals while taking on the least amount of risk possible. It's a single-player game: you against your goals. It doesn't matter if someone else has a better return than you or whether you beat the market, much less whether you have the best thing to brag about at the next cocktail party. Yes, some people have become fabulously wealthy speculating in cryptocurrency. But plenty of investors have also lost tons of money, and far more people have become wealthy in the long run by following a reasonable investing plan that involves stocks, bonds, and real estate.
The main question one must answer before investing in a given cryptocurrency is whether it will go up in value between when you buy and when you sell. Unlike a company, a bond, or a property, there is no way to value a cryptocurrency, so there is no way to know when it is a good deal to buy and a good deal to sell. It is purely speculative. It's a guess. There is a price at which a Bitcoin is a good deal. There is also a price at which it is not a good deal. However, I don't know what either of those prices are. Neither do you. Neither does anyone else. How much of your nest egg do you want to bet on your guess?
Why I Don't Invest in Cryptocurrency
I do not invest in cryptocurrency and have no plans to do so going forward. I have been accused over the years of not understanding it. The argument goes, “If you only understood it, you would not only invest in it but beg your entire audience to do so as well.” Honestly, it's the same thing the whole life insurance salespeople say. I assure you that I understand it enough to make a decision of whether to invest in it. Here are the reasons I do not personally invest in cryptocurrency.
Cryptocurrency Is Too Speculative
Unlike stocks, bonds, and real estate, cryptocurrencies produce nothing. No earnings, no interest, no rents. I don't invest in any speculative assets (empty land, commodities, gold, or Beanie Babies). If the only way for me to make money on something is to sell it to someone willing to pay more for it, I'm not buying it with serious money. I just don't invest that way. Yes, every investment has some element of speculation in it, but if that is the primary element, I'm not interested.
Cryptocurrency Is Too, Too Volatile
After investing through four bear markets, I have a pretty good handle on my risk tolerance. I can lose 75% or so of an asset class and 50% or so of my portfolio before I stop sleeping at night. Cryptocurrency is simply too volatile for me as an investor. Too many cryptos have lost 90%+. Fifty percent drops are routine (sort of like when Bitcoin dropped 40.4% in a 44-day span in the spring of 2022). I don't have diamond hands or an iron stomach.
My Wife Won't Let Me
Even if I wanted to invest in cryptocurrencies, my wife wouldn't let me. We work together in our financial lives, and that has been a major key to our success. No way am I going to jeopardize that just so I can brag on my blog about a 10,000% return on the newest cryptocurrency.
Cryptocurrency Is Too Easily Manipulated
There is too much hidden behind the scenes and in the protocols for my taste. If a tweet from one person can move an asset 20% or if an investment becomes a popular subject on the wallstreetbets subreddit, I'm not interested.
Too Many Bad Characters
Cryptocurrency is the Wild West of the investment world. Thus, it attracts a lot of unsavory characters. I don't get my excitement from my investments. That comes from other aspects of my life. If I have to spend any time at all wondering if I'm getting scammed, that's not for me. Just look at the history of various cryptocurrencies. At least half of them involve a scam or scammer.
Don't Need to Take on That Risk
We've already reached all of our financial goals. We simply do not need to take on risk like that inherent in cryptocurrencies. Maybe if we did and we struck it big, we could leave a little more to charity. But that's about it. We already have more than we will ever need and more than we want to leave to our children.
So, if I'm answering my own question at the top of this article—Should I invest in cryptocurrency?—the answer is going to be a resounding no. But if you want to take a little piece of your portfolio and see if you can take it for a ride to the moon, have at it. Just make sure you can afford to lose everything you invest in crypto, because there's a chance that most or all of it could be gone faster than you can believe.
Have you invested in cryptocurrency? What was your experience like? Did you make a bunch of money, or did you lose your shirt? Comment below!