A few months back, I was digging through the attic for Christmas decorations to bring downstairs. Like every year, I found an old box of things that should have been donated or thrown out long ago. Among other things it included several pairs of multi-colored Crocs my girls use to wear in their elementary school days as well as a long overdue movie from Blockbuster. I threw it all in the back of my car and forgot about it, thinking I would make a stop by Goodwill once they started taking donations again.
For some odd reason, I remembered the other day that it was still in the back of my car just as I was reading another story about the impressive returns in Bitcoin over the past few months. Anything generating such large returns in a short period of time will have people considering whether they should get in on the action. I smiled and it dawned on me why I thought of the Blockbuster movie and Crocs shoes in the trunk of my car. They were both famous IPOs earlier in my career. It is the classic story of how investors quickly drove up the value of both stocks and just as quickly it evaporated.
Not all fad or hot investments seem as mysterious or complex as Bitcoin. The IPOs of Blockbuster and Crocs showed us that companies offering products we all understand can become temporary investment darlings . . . only to later break hearts. Both companies went public at an offering price of around 15 bucks a share, Blockbuster in 1999 and Crocs in 2006. Blockbuster quickly made its way up to about $28 per share in 2001 before sinking to about $1 per share by 2010. Crocs took an even wilder ride, reaching almost $70 per share within a year of their IPO only to sink to about $1 per share a year later in October 2008. Crocs, despite being hated by fashion critics, survived to find their way onto millions of feet and the company currently trades around $75 per share. Today, one Blockbuster store remains open in Bend, Oregon, and the stock trades around two cents a share.
So, when people occasionally ask me whether they should invest in Bitcoin, I ask them to stop thinking about how much they could make, but how much they can afford to lose.
Is Bitcoin the latest investment fad leaving a lucky few very wealthy and most other investors licking their proverbial wounds? Will it die out like Blockbuster or live on like Crocs and, in a decade or two be a regular part of some folks’ portfolios? Even if Bitcoin succeeds in lasting beyond the near term, it is likely going to be one heck of a ride.
Fad investing typically only rewards those with good information, excellent timing, and a great deal of luck. If you still want to try your hand at Bitcoin or any type of high risk investing, it must be done with a keen eye on your overall financial picture. Anything you put towards hitting it big must be made with the recognition that you may lose your entire investment. Sort of like someone that takes an annual trip to Las Vegas. They go for the relaxation, the shows, the people watching, and yes, a little bit of gambling. I am not much of a gambler myself, never have been, but I don’t begrudge anyone that finds occasional enjoyment in an afternoon of blackjack or a day at the racetrack. Rational people go in knowing how much they can comfortably afford to lose and see it as a reasonable entertainment cost.
However, once that bankroll is gone, they may walk away a little disappointed but still ready to enjoy dinner and a show. They avoid trips to the ATM and they don’t chase their losses. The most successful people who have luck at the tables on a given day will step away with their winnings.
No matter where you land on the risk budgeting spectrum, a financial advisor may be reluctant to give a stamp of approval to a high-risk investment like Bitcoin. But if you feel strongly about at least dabbling in things like Bitcoin, a good financial advisor can offer an emotion-free look at how any investment may impact your entire financial picture. With high-risk investments, it often means showing you what you can afford to lose. And of course, ensuring that you have a downside risk mitigation system using quantitative data in place to help you weather a significant loss and to better help put you in the highest probability of financial success.
But you know, good financial advisors can also be a source of much needed information. A good advisor constantly reviews different types of investments to understand potential pitfalls and risks beyond pure volatility. He or she will also explain to you how the Bitcoin marketplace lacks regulation that can allow easier access for fraudulent players and activities. Bitcoin, while a medium for value, cannot be used like regular currency to purchase goods and services because of its volatility. No car dealer wants to accept a Bitcoin worth $44,000 today for a car, when that Bitcoin might only be worth half of that by the following week. In addition, you will need to know the way Bitcoin is held can be different than traditional marketplaces.
All these things should be accounted for if you are going to pursue a Bitcoin investment. Only time will tell if it will one day become a mainstream investment, or go extinct like Crocs or Blockbuster!
So as always – be vigilant and stay alert, because you deserve more!
Have a great week.
Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield. Jeff can be reached at jeff@cutterfinancialgroup.com.
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