Cryptocurrencies in your portfolio

[CryptoMD]

I imagine this is not a popular topic in these forums as this is still almost an entirely speculative investment space, but was curious as to if there were any others with cryptocurrencies in their portfolio?

A little about myself...I’m a recent graduate of residency who had followed bitcoin for years and began investing a little over a year ago. I was in a somewhat unique situation in that I didn’t have massive student loan debt and then the debt that I had was bought (or is now held) by a family member that charges me 1.5% interest. My wife and I’s Roth’s were maxed and I was in no hurry to pay off student loans given the terms so I took money I had made from individual stocks (think FANG) as well as profits from selling the house we bought right before residency (again, a fair amount of luck) and rolled them into BTC and ETH initially. I started buying/trading lower cap alt coins that also exploded in value and now hold a significant amount of bitcoin. Or at least a portfolio that is worth a significant amount of bitcoin as I hold a handful of non-BTC crypto (or alt coins). If BTC gets to $30k by the end of the year, I will likely be a “crypto millionaire.”

My initial investment was recouped a long time ago and profits have been used to fully fund wife’s 401k and family HSA in 2017. Also, while I answer questions honestly, I have made zero attempts at convincing family or friends to put money into crypto. I don’t want to deal with the trouble/animosity that lost $ can bring. That being said I find both the technology and the markets fascinating and am always trying to learn more.

Since this isn’t index funds or REITs, I expect a lot of blowback which is fine. I’m more than happy to answer questions but would really like to learn from or alongside others who have entered this world. What are your thoughts? Strategies? Projects you like? Etc.

[The White Coat Investor]

You can't use investment profits to fund retirement accounts. That has to come from earned income.

I also find technology and markets fascinating.

If I were you I would sit down and consider the odds of whether your good fortune is primarily due to your skill or your luck. If you conclude luck, as I probably would in your situation, I would suggest you sell enough crypto that it won't hurt your financial future if it drops by 90% next week.

[CryptoMD]

I should clarify since I was very loose with my description in the previous post. As far as the IRS is concerned, earned income was used to fund retirement accounts. My wife and I have the income to do so without any investment profits. Sometime after they are funded, investment money is withdrawn from exchanges with an allocation for taxes set aside. Money is never (and really can’t be until TD Ameritrade and the like decide they want in the game) rolled directly into any of the retirement accounts either.

Hitting on some of the alt coins has involved luck, though I don’t completely discount the time and energy that goes into researching individual projects and looking at charts. The timeframe in which you can witness an entire market cycle in this space is incredible...and scary...and awesome all at the same time. It makes for entry points of well established projects (many with use cases) near all time lows relatively easy to achieve. Of course, BTC’s parabolic growth in 2017 was pure luck. It was a good year to get in...

As a 31 year old high income professional with very few liabilities compared to my peers, Im very risk tolerant at this point. From a cryptocurrency standpoint you have to be as you can watch your portfolio shrink by 30-50% in a matter of days, only to reach all time highs a week later. But I constantly question when to “get out,” pay my taxes and throw everything left into an index fund. The addiction of insane returns is the obvious thing that keeps me (and I imagine others) from doing it. I also believe that this space is in its infancy despite a market cap that will have grown from $600 billion to $1 trillion in a matter of weeks. Personally I think you’re insane if you believe bitcoin (for example) will lose 90% if it’s value next week or even next month, but that day will come and I certainly can’t predict when. Your last comment is something I clearly struggle with and would love to pick the brain of others who may have any amount of money in this space.

[hightower]

CryptoMD wrote:

The addiction of insane returns is the obvious thing that keeps me (and I imagine others) from doing it.

Click to expand...

This is the most revealing sentence you've typed.  Does this sound like it could be applied to anything else?  Gambling perhaps?  You are gambling with your future.  I understand that blockchain technology is likely to have a role in the future of banking/currency/commerce, etc, and that's great and I am very excited about that, but there's no guarantee that bitcoin will be the one that survives. Bitcoin is just one of many and there will likely be many more.  To have a very large portion of your entire portfolio in bitcoin is incredibly risky, probably foolish.  You say you are "risk tolerant" but have you ever lived through an actual bear market where your portfolio dropped and didn't bounce right back in a week as you describe with bitcoin?  If not, then you are not risk tolerant.  You're just addicted to gambling.  And it may seem like money is rolling in easily right now at the beginning of your career, which is common for new attendings, but what if you're 45 and want to cut back a little?  You're going to be much more protective of your portfolio at that point because you are going to realize that you don't want to work like a 30 year old forever.  If you lose all your money to bitcoin investing, you're going to really feel the burn then.

There's nothing wrong with gambling per se, but you have to ask yourself what amount of money would you be comfortable with losing completely and not getting back.  You're investing in a single "virtual thing" and relying on others to continue to pour money into it at higher and higher prices.  You're not investing in shares of physical companies that produce goods/services and have profits and continue to grow and invest like you would be if you were buying shares of an index fund.  You're not even investing in the technology of blockchain itself.  You're just speculating on the price of a single thing.

You'll hear people defend bitcoin by saying "it's the future of currency" or whatever.  And you might be right that blockchain technology will eventually play a huge role in our financial systems.  Yet, I don't think most people fully think about what that means for bitcoin specifically.  For bitcoin to be used as currency, it's value would need to stabilize and remain stable for long periods of time with only very minimal fluctuations (just like the value of the USD).  Right now, it is so wildly volatile that it is useless as a currency.  How could you ever use bitcoin to buy something when every day it's value can drop or rise by 20-50%?  Imagine trying to buy a car with bitcoin.  What price would you be able to agree on if you weren't sure where the value of a single bit coin would be after driving off the lot?  Both the seller and the buyer would be taking a huge risk in using bitcoin.  The buyer could get screwed if the price of bitcoin goes up and stays up (you just paid 2 bitcoins for a car worth $20k, but next  week those 2 bitcoins could be worth $40k, you could have bought two cars if you would have waited a week!) or the seller could get screwed if it drops.  So, in order for it to be useful for currency, there can't be much fluctuation in value.  Imagine what would happen if the price of bitcoin stabilizes and stops going up for many months...all of the speculators who are just in it to make money, would start to sell their bitcoins to finally cash in because they would see it as "the market top."  If they do this, the value of a bitcoin would start to fall.  Then more people would panic and sell and before you know it, bitcoin would be worthless as a currency again and it's value would be gone.  This is one of the many reasons I think it's a bad idea to have much of anything at stake in bitcoin.  If you want to play around with it and put a small portion of your portfolio in it, fine.  No big deal if you lose 5% or so of your portfolio.  Have fun.  But, for me it's way way too risky and I work way too hard for my money to gamble with it like that.

This article explains more clearly why I have no plans to buy any cryptocurrency. 

[Donnie]

Borrowing from your family to buy Bitcoin sounds like a recipe for disaster. You will only hear success stories about things like this. You don’t hear about the guy who borrowed from his family to invest in Pets.com in 1999 and lost everything. Cash out now and repay your folks.

[VagabondMD]

I have a small position in a managed futures fund that has started buying/selling bitcoin futures. The fund does not have direct exposure to bitcoin; it just trades the trend. Conceivably, it has the ability to profit whether bitcoin rises or falls.

[Hank]

Certainly the purple tulip bulbs and the variegated ones couldn’t drop 90% in value, could they?

You’ve watched your highly volatile crypto currency portfolio gyrate 30-50 percent during a time of unprecedented low volatility for the broader stock market. But you didn’t have years’ worth of retirement investments lose more than 50% in 2008 or watch “sure fire” companies crash and burn during the dot com debacle in 2000.

You don’t know your real risk tolerance until you’ve lived through a bad bear market or two. Many younger folks on the forum have seen great returns in the last year or two. Their entire personal investing experience is in the prolonged bull run since 2008.

I like your idea of locking in some gains and fully funding all qualified funds available to you and your wife. Put it in something boring like a low cost total stock market index. Make absolutely certain to pay back your family member.

Take some time to read up on tulip mania, the South Seas bubble, the Mississippi Company, etc. Sir Isaac Newton was a pretty smart guy, but he lost his shirt in a speculative bubble.

[Hatton]

CryptoMD I would advise you to start taking some profits ASAP.  I would not try to hold out for a LTCG.  To me this is an obvious tulip bulb.  Even MMM hates bitcoin.  In fact his newest post is entitled Bitcoin is Stupid.  Gambling is fun.  It is an endorphin fueled rush.  I know what I am talking about because I was invested in tech stocks in the late 90s.  Dont keep holding for a LTCG.

[CryptoMD]

I’m not sure how it came across that I borrowed money from family so that I could buy bitcoin. I did not. I actually thought I was pretty explicit in the fact that I don’t really even discuss this with family and friends other than when they ask questions, and even then I keep it pretty vague. Maybe I wasn’t clear enough in order of events regarding when I started in this space and when my family member offered to essentially take over my loans and charge an incredibly low interest rate? And it was inferred that I took that money in order to get started in BTC?

I think the boss man made some good points I’d like to respond to and flesh out a little when I get some time later today...

I own the book and listen to the podcasts so I appreciate the community he’s built here and the input from those community members.

[VagabondMD]

I think that by borrowing money from family (the 1.5% student loan from family), you are indirectly using borrowed money from family to fund your bitcoin speculating.

I am probably different than most here. I have nothing against a small speculation in bitcoin. Just recognize that it is a speculation, do not skip the more traditional investments, do not fall into the trap that you are smarter than everyone else trading bitcoin, and, for goodness sake, don’t go broke over it.

 

[Rotish]

I have a very very small amount of play money in crypto.  I would consider it a part of my "portfolio" as much as I would my fantasy football league annual dues.

[EMscout]

Congrats on your success. Get out as fast as you can. You are relatively high on that pyramid that may come crumbling down soon.

[Donnie]

Cash is fungible.  You have debt outstanding to your family and you are buying Bitcoin.  Investing in Bitcoin is absolutely a discretionary use of cash that you could be using to pay your family back.

Make no mistake about it, you are borrowing from your family to invest in Bitcoin.  They gave you a loan with a low interest rate to help you out.  Your actions come across as exploiting their generosity.  Don’t you think they have a better use of money than to lend it to you at a rate that doesn’t cover inflation?

[CryptoMD]

I think that by borrowing money from family (the 1.5% student loan from family), you are indirectly using borrowed money from family to fund your bitcoin speculating.

I guess I still don’t understand this thinking. I put money into cryptocurrencies. Many months later a family member offered to buy my loans and charge me a much cheaper interest rate. Since that time, I haven’t put another dime into BTC, I’ve only taken profits (currently my realized gains are just over a 100% return from my initial investment after I pay taxes on them this year). So I haven’t used money that I borrowed or even monthly savings of the lower payment that I make to family every month to “fund” anything.

Can I not put the several hundred dollars a month I save by paying back family instead of Nelnet into any investment space? Because to me, your statement implies that anywhere I put that money (again it doesn’t go into crypto), would be indirectly funding whatever account it goes into with money I borrowed from family.

[bean25]

I am at a similar position in life to you and am struggling with this same question. Assuming your financial house is in good order, I also don’t see the problem with a small speculation in cryptocurrency.

I personally know multiple people who have turned 5k into >100k this past year with small speculative positions. If you make that kind of money, great. If you lose your 5k, well then it’s a good reinforcement to not bet on individual stocks.

People that are taking out heloc’s and borrowing money are the ones who will be crushed when the inevitable crash hits. But if you’re an MD with stable source of income and commit to not playing with more than 1-5% of your portfolio, i don’t think it’s going to ruin you.