Cryptocurrency in Retirement
This topic has been on my mind for more than a year. Everyone asks about it and I have several clients who participate in the system. Most of the people who ask about it are approaching retirement with underfunded investment accounts. People in that group often look at what could have been and are cautiously optimistic that an investment in crypto now will work as well as it would have ten years ago. Whether it’s a good idea or not I can tell you that it won’t happen like that again.
Bitcoin was the first and is the most well-known, having been largely responsible for the craze that became common knowledge in the past few years. In the beginning, Bitcoin was born of a distrust for the traditional financial system. Libertarian-minded people love the idea because you can participate mostly anonymously and outside of a system that many people see as being rigged. The problem is that you have to use the modern financial system to get into and out of it because it hasn’t taken over as a stable alternative currency.
When it was created, Bitcoin was basically worth zero and for a while nobody was willing to pay more than a few cents for a coin. But had you been a believer in the idea 14 years ago, just a few thousand dollars would have put you on the billionaire’s list today. I first read about it in 2009 and thought about throwing some money at it when a coin was worth about sixty cents. I don’t spend too much time regretting my hesitation.
Most of the people who got in at the right time were financial quants or computer experts. Sure, some people just got lucky but I get the feeling that it’s the exception rather than the rule. Think about how many banking employees were laid off during the financial crisis. It’s easy to imagine many of them being jaded and eager to pursue something that worked against the system that had failed them. Those same people understood a little more about how databases run the financial system so an encrypted form of digital currency wasn’t as big a jump for them.
The one person I know well who profited substantially from Bitcoin is a retired institutional trader from New York. He has an intricate knowledge of algorithms in the financial system and as an added skill he is also an expert at programming financial models. Money and Computers are his bag. He bought one hundred coins for somewhere around $100 apiece. He sold half of it for $1.8 million about four years ago. That was a good trade but he was in a unique position to understand all aspects of the opportunity and had the luxury of not caring whether he won or lost.
From its all-time high, Bitcoin is down more than 70%. Curiously, most people inquired about it as a retirement catch-up tool when it was near the peak or on either side of the maximum value. I don’t know anyone who put a significant amount of money into cryptocurrency but several people who put a little money in just to learn more about how it works. I sure hope none of my subscribers were seriously damaged but with so much value being wiped from the books it is a possibility.
I’m not going to try to talk anyone out of participation but I’d suggest that you fully research and understand exactly how it works. Bloomberg just published a giant article that explains the whole system from the early days until now. Read it here: The Crypto Story I’ll admit I didn’t know much about the details until I worked through that article. It took me several hours to read, re-read and absorb much of the content and it’s still complex enough that I can’t explain it in my own words within the space of a couple paragraphs that might suit this newsletter.
Recently, a company called FTX went bankrupt and honestly that gave me the motivation to finally get this on the website. Losses are big enough that regulators are trying to figure out whether they can hold some celebrities liable for their endorsement. For anyone that doesn’t remember, FTX ran a big Super Bowl ad last year, with a bunch of athletes and movie stars suggesting anyone who didn’t buy into crypto was living in the dark ages. Not quite a year later, FTX owes its 50 biggest creditors more than $3 Billion. Thousands of people lost a lot of money.
FTX was an exchange that allows you to purchase cryptocurrency. That allows you to trade money in the bank for the cryptocurrency of your choice. Most exchanges offer separate tokens that are kinda like a money market fund. One token is worth one dollar. You buy tokens with your dollars and trade the tokens for an equivalent amount of cryptocurrency. They hold the crypto on their books and use it as leverage to issue more tokens and raise more money and buy more cryptocurrency.
So long as the value of crypto keeps rising and not everyone wants all their money back at once then the game can continue. Cynics like me will notice that this sounds a lot like the banking system. But the banks aren’t dealing with volatile assets like crypto so the exchanges are in a far more precarious position. Forgive me for this basic explanation. It may not be perfect but it’s close enough for our purposes. In short, you not only have to dig into the details of each currency, you also have to scrutinize the exchange you use to make sure they do it the right way.
I’m really not for or against the use of cryptocurrency but I do know that most retail investors would be foolish to chase returns with any significant amount of money. My instincts tell me that the days of astronomical profits are mostly gone. For cryptocurrency to become a mainstream alternative to the traditional financial system the price is going to have to stabilize. Then it might be a good alternative for storing wealth but it’s going to be a speculative investment for quite some time.
If you want to talk about it then you can give me a call next week. Enjoy the weekend!