There is investing with “playing money” and then there is playing with fire.
As Coinbase, the cryptocurrency exchange, goes public on Wednesday, financial advisors want you to remember the difference.
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With the inflating of retail investments, there is a growing appeal when it comes to finding and taking advantage of the next new thing.
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Enter Coinbase, a platform with 56 million verified users that allows the buying and selling of crytpocurrencies such as Bitcoin BTCUSD,
and Ethereum, which seem to continue to increase in value.
An obvious investment, given that the expert believes that the cryptocurrency is at a “turning point”, right?
Not necessarily. Do it wisely, say financial advisors.
Experts say it has always been risky to invest in companies as they are made public.
For example, if there is no background, stock prices may be speculative and retail investors who believe they understand that the brand may not value it as institutional investors do.
Now mix it with cryptocurrency volatility and consider the skepticism of some who say Coinbase’s valuation is “ridiculously high”. That number ranges from $ 50 billion to $ 150 billion, and even experts who are bullish say the shares “are not for the faint of heart.”
(A Coinbase spokeswoman declined to comment before the IPO).
The idea is to invest in a stock market with a small amount of money that is well worth losing potentially. The question is: how much? Here are a couple of different answers.
The numbers game
A common saying is to dedicate between 5% and 10% of reversible assets to investments or speculative stocks. Others say the amount that is okay is that if this is not too clear, seeing it potentially evaporate should not account for 1% of the portfolio for investors.
Ron Guay, of Rivermark Wealth Management in Sunnyvale, California, tells his clients to limit their “money game” to 10%, and that’s the same rule he follows himself.
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“The less net worth you have, you’ll have to reduce the percentage of gambling money.”
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Daniel Johnson, of RE | Focus Financial Planning, in Winston Salem, NC, says it’s meant for people who put money into companies they care about, because investing often works in companies they know and understand.
But it is also dedicated to diversification. Keeping the investment in any business below 5% is a good bet, he said.
But the same figures don’t fit everyone, according to Theresa Morrison, founding partner of the Beckett Collective in Tucson, Ariz.
“If you don’t want to lose your‘ gambling money ’, then don’t gamble,” he said. That money could be 1% to 2% of the assets invested, he said.
“The less equity value you have, the more money you have to reduce the percentage of gambling money,” he said. “Conversely, the cleaner your net worth is, the more percentage of money at stake you can allocate, but only up to a point.”
The numbers approach
In the run-up to Coinbase’s direct listing, Chris Struckhoff, founder of Lionheart Capital Management in Orange County, California, said he has been talking to some customers who want to buy Coinbase shares.
“They have those dollar signs in their eyes,” he said.
These people see Coinbase’s actions as rocket fuel to achieve their financial goals, but “as with anything, the faster you try to go, the more likely you’re going to break down,” he said.
Struckhoff does not tell his clients to buy the shares or wait. Think about the idea of playing money without applying difficult numbers. It does this by thinking backwards with customers.
They start by remembering the financial goals a person has: a house, a boat, a nest egg, or something else. Then look at the financial movement room that someone has to dedicate to a work like Coinbase.
What about buying a cryptocurrency?
Given the rise in prices of crytp currencies such as Bitcoin and Ethereum ETHUSD,
some say it’s worth going straight to the source and buying virtual currency. But then again, they say don’t overdo it.
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“You can search for gold (own cryptography) or sell shovels (own Coinbase shares).”
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For example, Vrishin Subramaniam, the founder of CapitalWe, a financial planning company focused on millennial and young investors, recommends putting between 2% and 5% of net worth in cryptocurrency.
If anyone wants to buy Coinbase, Subramaniam would advise folding this investment into the 5% cryptocurrency investment basket. In the future, “we may increase this allocation for listed securities after a couple of quarters once we have more public domain information,” he said.
“Because Coinbase and other platforms have made it convenient to own cryptocurrency, I think the best way to gain exposure to cryptocurrency is through direct ownership of cryptocurrency,” said Graciano Rubio of Infinity Financial Planning in Los Banos, California.
There is a metaphor for the time when the California gold rush ended in the mid-19th century. “You can look for gold (own cryptocurrency) or sell shovels (own Coinbase shares). They all have unique risks and benefits, but both can be a successful strategy to take advantage of the cryptocurrency,” he said.