They invest with ‘play money’ and then play with fire.
As Coinbase, the cryptocurrency exchange, is announced on Wednesday, financial advisers want you to remember the difference.
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As retail investors swell, the allure of finding and exploiting the next new thing increases.
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Enter Coinbase, a platform with 56 million verified users that enables the purchase and sale of cryptocurrencies such as Bitcoin BTCUSD.
and Ethereum, which apparently only increases in value.
An obvious investment, since the expert believes that cryptocurrency is at a “tipping point”, right?
Not necessarily. Do this with caution, say financial advisers.
Experts believe it has always been risky to invest in companies, just as they are revealed.
Without a performance history to succeed, stock prices can be speculative, and retail investors who think they understand the brand may not appreciate it as institutional investors do.
Mix it now with the volatility of the cryptocurrency, and consider the skepticism of some who say the valuation of Coinbase is “ridiculously high”. The number ranges from $ 50 billion to $ 150 billion, and even experts who are strong believe the stock is “not bad”.
(A Coinbase spokesman declined to comment before the IPO.)
The idea is to invest in an IPO with a small amount of money that you could potentially lose. The question is how many? Here are some different answers.
The numbers game
One common refrain is to devote between 5% and 10% of the investable assets to speculative investments or stocks. Others say that the amount that you are in order, if it is not a good word, as it may evaporate, should not exceed 1% of the investment portfolio.
Ron Guay of Rivermark Wealth Management in Sunnyvale, California, tells his clients to limit their “play money” to 10% – and this is the same rule he himself follows.
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“The lower your net worth, the lower you have to cut the percentage of play money.”
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Daniel Johnson of RE | Focus Financial Planning in Winston Salem, NC, says he’s all about pushing people into the companies they’re interested in, because the investment often works with companies they know and understand.
But he is also all for diversification. Keeping the investment in one business below 5% is a good choice, he said.
According to Theresa Morrison, founding partner of Beckett Collective in Tucson, Ariz, the same numbers are not suitable for everyone.
“If you do not want to lose your ‘play money’, you should not play,” she said. The money is perhaps 1 to 2% of the invested assets, she said.
“The less your net worth, the lower you have to cut the percentage of play money,” she said. “Conversely, the more your net worth flushes, the greater percentage you can allocate play money, but only up to a certain point.”
The no-numbers approach
In the run-up to the direct listing of Coinbase, Chris Struckhoff, founder of Lionheart Capital Management in Orange County, California, said he was talking to clients who want to buy Coinbase shares.
“They have these dollar signs in their eyes,” he said.
These people view Coinbase shares as rocket fuel to achieve their financial goals, but ‘the faster you try to go, the more likely you are to shoot yourself up,’ as he wants to do with everything, ‘he said.
Struckhoff does not tell its customers to buy or wait for the stock. He thinks of the idea of play money without applying hard and fast numbers. He 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 they look at the financial wrapping room that someone has to dedicate to something like a Coinbase play.
What about buying cryptocurrency?
Given the price increases in critical currencies such as Bitcoin and Ethereum ETHUSD,
some say it is worthwhile to go directly to the source and buy virtual currency instead. But again, they say do not go overboard.
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“You can search for gold (own crypto), or you can sell digs (own Coinbase share).”
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For example, Vrishin Subramaniam, the founder of CapitalWe, a financial planning firm focused on thousands of investors and younger, recommends investing between 2% and 5% of net worth in cryptocurrency.
If anyone wants to buy into Coinbase, Subramaniam would advise you to drop this investment in the 5% investment basket. “Furthermore, we can increase the allocation for listed securities after a few quarters as soon as we have more information in the public domain,” he said.
“Because Coinbase and other platforms have made it easy 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, said.
There’s a metaphor for the moment that packed California’s own Gold Rush during the mid – 1800s. You can search for gold (own crypto), or you can sell digs (own Coinbase shares). They each have unique risks and upside, but both can be a successful strategy to capitalize on cryptocurrency, ‘he said.