We’ve all seen the hype around Bitcoin play out over the past decade during the emergence of this alternative currency. Bitcoin launched in 2009 and led the way for other cryptocurrencies, with thousands of cryptos now in existence.
By James Millard, author of Insufficient Funds: Make The Right Money Decisions To Bring Your Big Plans To Life
Essentially, crypto is a virtual or digital currency that can be used as a medium of exchange.
It does not require government issue or control, or assistance from financial institutions to process payments. Instead, it uses special encryption techniques to keep data secure, store and create ‘monetary units’, and verify transactions within a decentralised, digital public ledger (a blockchain).
While there are many cryptos in existence, not all of them are active and most are likely to fail as an investment. This is a highly speculative area and there is a risk that government regulation will play a huge part in its future success or failure.
Nevertheless, Bitcoin has created multi-millionaires almost overnight, and in recent years has caused enormous pain for those buying in right before it fell off a cliff.
Is cryptocurrency investing too risky?
I believe crypto will continue to grow as a major player in the money world but the risk you take in picking the right one as an investment makes it pretty tough to justify getting into with more than a very small portion of your available cash.
Here’s a true story. In 2013 I watched Tim Ferriss’ Random Show (check out episode 21 at around 36 minutes) and seriously contemplated investing in Bitcoin. I didn’t. Today, if you’re after an eye-watering Google search, type in ‘How much would I have if I had invested $100 in bitcoin in … ’ and add any year from its birth in 2009. In 2013, $100 would have bought me one Bitcoin, which today (but maybe not tomorrow) would be worth $108,000. Who’s counting!
So is it a no-brainer to dabble in crypto? Here are some brief points to consider when determining if cryptocurrency investment makes sense on your path to Sufficient Funds. Benefits of investing in cryptocurrency may include:
Bright shiny objects!
It’s still relatively new. It’s a novelty. It feels exciting. If this speaks to you, and motivates you to save, then invest wisely, this could be a part of your strategy. Sure, crypto has been around for a while now, but in comparison to traditional investment options, it’s still in its infancy. Making the move to invest now could mean you’re jumping in on the first floor (the ground floor would have been 2013), before potential future growth, both in profit and popularity. This is by no means guaranteed, but if you are attracted to things that might go boom, and have a healthy buffer to allow for volatility, it may be worth a crack.
Banks are for boomers … join the revolution!
Okay, so crypto is a sure-fire way to break free from the clutches of the traditional banking system. If, like me, you’re repelled by the smell of rich mahogany desks and the sight of fabric panel cubicle walls, this is one investment vehicle that doesn’t require a visit to a bank or waiting on hold for 45 minutes to speak to a human. Additionally, bank fees and waiting for days for funds to clear are a thing of the past. For the forward thinkers, this digital asset is a revolutionary way of investing and thinking about money.
Self-serve
Crypto is bought and sold online where you can make direct transactions without the need for any intermediaries. You’re in charge of your own funds and how to use them. With no bank involvement, and currently without much government intervention, there’s no overarching authority telling you what you can and can’t do with your funds.
Embrace tech
This investment type is as modern as it gets. We are on a tech exponential curve where understanding and embracing tech is really the only option for future generations. Our money world has already been upended in recent years, with most of us now getting by day-to-day without cash (remember coins and notes?) in our hands. You already know what it’s like not to actually physically see your money, so the leap to digital assets isn’t that great. If you’re already fairly tech-savvy or have a desire to not be left behind, this type of investment may speak to your values.
Again, who doesn’t love diversification?
Our old mate Warren Buffett famously said that diversification is for those investors who don’t know what they’re doing, but that was well and truly pre-crypto, and long before the digital self-service fintech world we now live in. I like to think of diversification of your investment portfolio as being humble enough to admit we don’t always have all the answers, especially given the exponential rate of tech advancement. So, as with the other investment types outlined above, not putting all your eggs in one basket is generally a smart move. Spreading your investments across a range of options helps reduce the overall risk should markets drop due to unexpected events (did somebody say worldwide pandemic?).
Given cryptocurrency’s relative immaturity, the potential pitfalls need to be weighed up carefully. FOMO is real and just because someone else is investing in crypto doesn’t mean you should too. Do your research and make an informed decision.
This is an edited extract from Insufficient Funds: Make the Right Money Decisions to Bring Your Big Plans to Life, by James Millard (published by Wiley, 2024)
About the Author
James Millard is a financial adviser and director of award-winning firm Sufficient Funds, and stands as a trailblazer in Australian financial services. With 10,000+ hours one-on-one with clients, he delivers approachable and relatable financial advice to those with lots of living left before retirement.