My entrepreneurial life has taken another unexpected turn recently as I continue to place risky investments in bitcoin, ethereum, other crypto currencies, and trade copying. This has exposed me to the fascinating psychological effects of investing.
The first rule of entrepreneurship is to make money. However, money is never (or should never be) the most important thing.
I find it so easy to get conflicted about money – many entrepreneurs do. The money issue has been playing merry hell with my head recently as I wrestle with fundamental questions like: How much money do I need? How much do I want? What do I want from life?
I appreciate many will label this as a superficial first world problem. But our emotional reactions to money are universal and important – they’re the reasons we make financial mistakes. If you want to make any money from spare cash you have lying around, however tiny, I’d urge you to pay attention to the emotional side to investing.
You can invest a small amount of money. And, if you don’t have much money, you are just as prone to financial mistakes as anyone else, rich or poor.
An important set of caveats – please read!
I’ve got to interject at this point with the following warnings:
- None of the following represents financial advice. I’m simply reporting on what’s going on in my world and in my head. I would actually advise you NOT to invest your money where I’m investing mine. Please don’t try to connect with me personally to talk about any of this!
- The prices of these investments I’m talking about can go down as well as up – and very quickly!
- Only ever invest money that you can afford to lose.
So, what investments have I made? And what am I talking about here?
I’ve been consuming a vast amount of information on blockchain (the technology that underpins crypto currencies) this year and yet I still feel like I understand nothing.
The blockchain is ledger of transactions recorded in linear, chronological order on multiple computers. It is constantly growing as completed blocks with a new set of recordings are added to it. The bitcoin blockchain has been running since 2009 and has never been hacked and nor is it likely to.
I am convinced that bitcoin and crypto-currencies are the future of money. They represent a peer to peer system of value exchange, where individuals and companies can give, sell, buy, and loan money without the middlemen (banks, payment systems, brokers, etc.)
Furthermore blockchain technology represents a web 3.0 – a decentralized way of running commerce and companies where computer code will cut out the middlemen.
Imagine, for example, a world where social networks, house sharing, taxi rides, or freelancing are peer to peer, and don’t need a Facebook, Airbnb, Uber or an Upwork taking your money and changing the rules all the time. Add AI, the Internet of Things, and quantum computing, and you can see we’re only scratching the surface here.
Investing in bitcoin, ether, and other crypto-currencies
In April 2017, I bought some Bitcoin (BTC) and a greater amount of Ethereum (ETH).
Ethereum allows applications to run on a blockchain, and you have to pay to use the platform with their digital currency ether, whereas bitcoin is basically an online store of value or currency. At the time when I bought the majority of my ether (April 2017) I was only hearing good things about Ethereum, and only hearing bad things about bitcoin. And the same is true now!
Hardly a day goes by without a news item about a large company developing applications to run on Ethereum. Whereas the Bitcoin community has been fighting for months over the best way to scale as the volume of transactions on the network are pushing transaction fees and times up.
At the same time I was speaking to an entrepreneur friend who’s also a crypto-currency investor/trader, Urmil Patel. He advised me to invest in ether rather than bitcoin.
I’m hugely grateful to Urmil for this and other advice. To date, the US dollar appreciation of my ether investment is much greater than it would have been had I bought bitcoin.
Rules to conquer emotions when investing in crypto currencies
The obvious “rule” of investing is to buy low and sell high. However, most investor newbies do the exact opposite – we buy high because we get FOMO (fear of missing out) about the latest thing everyone is talking about, and we sell low when prices are dropping to minimize our losses.
Emotions always get in the way of investor success.
Fear, arrogance, and greed are the dominant emotions in investing. So we need to control these in order to succeed and not get carried away on the gravy train.
These are a few rules I have learned so far to keep my emotions in check and my financial future secure:
- Only ever invest money that you can afford to lose. I’ve said it before and I’ll say it again.
- Always keep your invested crypto-currency on a hardware wallet like Trezor or Ledger. Never keep invested crypto-currency on an exchange – this is a new technology, exchanges get hacked, and you could lose all your money!
- Never look at the charts and say, “I just made $xxx”. This is great advice I got from my friend Christopher Lee, who has been fiat currency trading for over 10 years. It’s tempting to see how much a crypto has increased over night and say to yourself, “I made $xxx while I was sleeping”. You didn’t. You haven’t made any money until it’s safely in your bank account and can spend it.
- Before you go in, fix a price at which you’ll go out, and stick to it. This is one rule I’ve repeatedly broken. Read on to find out more.
Warren Buffett, business magnate, investor, and one time richest man in the world, says you should buy when everyone’s scared, but sell when everyone’s greedy. If that’s the case, then we should sell all our cryptos now. Speculation plays a huge part in the dollar price of bitcoin, ethereum and all other crypto-currencies.
So, is there a crypto currency bubble? Probably. But the questions should be: When’s it going to pop. And, at what price will it pop? And, at what price will it fall down to? No one knows the answers.
At some point this year I will convert the dollar amount of my original investment. This way, I’ll get exactly the same amount out as I put in, and still have a sizeable amount of my crypto portfolio left.
Very, very few people could appreciate the bubble. That’s the nature of bubbles – they’re mass delusions. – Warren Buffett on the 2008 sub-prime mortgage crisis
Before I continue, US citizens are often barred from utilizing many of the prominent trade copying platforms due to the FATCA legislation. Sorry guys!
So I was thinking, wouldn’t it be great if you could copy a really good crypto-currency trader? Well, you can. Sorta. Warning: affiliate links ahead!
eToro a social trading application where you can benefit from someone else’s knowledge and market insights. On eToro.com you can trade commodities, fiat currency pairs, stock, and cryptos (at the moment just bitcoin and ethereum, but others are coming). It’s social, so you can interact with other traders.
Traders on eToro can take up multiple positions of varying amounts with stop losses (a stop loss can automatically stop a trade if it goes below a certain value). We’ve seen tremendous volatility in cryptos recently and skilled traders can buy low and sell high during these periods, making more from the currency than just holding (which is what I do). And you can copy these traders with stop losses to minimize your risk.
My favorite trader on eToro is Jay Nemesis, you can see some of his crypto positions above. He also trades in US tech stocks. As eToro is a social platform, you can get regular updates from Jay including a weekly video where he explains his strategies.
The above traders are exposed to the volatility of cryptos and stocks but these people are more likely to be keeping an eye on things and furthermore their use of stop losses can minimize the falls when they occur. Jay Nemesis has returned over 230% over the last year which is staggering.
Important: an eToro representative told me to always copy individuals with a minimum $2000 investment. This is because the minimum trade on eToro is $1 and therefore small investments won’t copy all the smaller trades of the investors and you’ll therefore miss out on some of the gains.
Again, this is not investment advice, I’m just telling you what I’m up to.
Overcoming 0ver-exposure to an asset class
My investing isn’t all about crypto-currencies and copying traders that trade cryptos. That would be a bad idea. It’s a fundamental best practice to invest in a wide ranging portfolio, maybe including bonds, property, commodities, stocks, etc., which range from low to high risk depending on your situation and risk-tolerance.
I want to talk about the other places I have put money in (or would like to put money in, if I had it). But first, here are a couple of books I’ve benefitted greatly from reading:
- Money Master the Game: 7 Simple Steps to Financial Freedom by Tony Robbins, which is apparently better than Unshakeable which contains a lot of the same advice.
- The Little Book of Common Sense Investing by John C. Bogle
The above two (or three) books have given me a small insight on the emotional side of investing. But if there’s one piece of advice that is repeated in these books it’s this:
To guarantee a fair share of stock market returns invest in low cost index funds and steer well clear of managed funds or mutual funds that force you to pay the huge salaries of fund managers even when they mess up and lose your money.
An index fund is a portfolio constructed to match or track the components of a market index. So US index fund may contain a basket of stocks containing, for example, Apple, GM, Craft Heinz, GlaxoSmithKline, as well as many others across a range of industries. You can invest in country specific, regional, or international index funds to spread your risk – a recession in the US will obviously affect US index fund returns.
I’m not suggesting that low cost index funds will protect you from over-exposure or, indeed, protect you from market swings, but they could be part of a well-diversified portfolio of investments.
The emotional investor
This is a different game to doing web design for clients, blogging, selling video courses and Amazon FBA. The big difference (and what I don’t like) about crypto investing and trade copying is that it doesn’t create anything – apart from wealth (and sometimes not even that).
So why am I doing it? Quite simply, it’s an opportunity that seems too good to pass by.
So now my head is full of all the usual investor questions: why didn’t I invest more? when should I come out? how much should I come out with?
All good traders and investors have suffered losses. I’ve failed big and often at business, but so far not at investing. This makes me vulnerable.
A solid exit strategy helps control investor emotions. If you’ve made big wins is best to sell off some of your positions so that there’s something in the bank in case a dramatic crash occurs. But when? And how much?
The ETH I bought at ~$42 is currently at ~$370, there are predictions that it could go up to $1000 as well as predictions that it could drop back down to $80. They’re probably both right. The problem is we don’t know which will come first. More first world “problems”. “Problems” I thought I’d never have.
I’ll let you know how I get on, of course.
What about you?
I have to say I did find this difficult to write. It’s outside my comfort zone on a number of levels. But I am finding crypto interesting and probably to the detriment of other areas of my business.
But what about you? Do you find this sort of blog post helpful or interesting?