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Cryptocurrencies for the Average Investor

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[August 2020 update] Pay attention to the key indicators that less savvy investors miss

It is far easier to lose money than to make it. That is why rich dad always said, “It’s not how much money you make, it’s how much you keep.” That applies to cryptocurrencies too.

Risk management is quite possibly the most important (though least sexy) part of investing. Every, and I mean every, investment comes with risk. Could you have predicted Corona? Did you see the massive unemployment coming? The world is a place of chaos and in the investing world this is even more true.

Rich dad also said, “One of the reasons so few people become rich is that they become set in one way of thinking. They think there is only one way to think or do something. While the average investor thinks, ‘Play it safe and don’t take risks,’ the rich investor must also think about how to improve skills so he or she can take more risks.”

Yup, more risk.

Average investors and flexible thinking

Rich dad called this kind of thinking, “Thinking on both sides of the coin.” He went on, saying, “The rich investor must have more flexible thinking than the average investor. For example, while both the average investor and rich investor must think about safety, the rich investor must also think about how to take more risks.

“What does this mean?

“While the average investor thinks about cutting down debt, the rich investor is thinking about how to increase debt. While the average investor lives in fear of market crashes, the rich investor looks forward to market crashes. While this may sound like a contradiction to the average investor, it is this contradiction that makes the rich investor rich.”

In a little bit I’m going to share what Jeff Wang, my cryptocurrency expert, told me about the bubbles and market crashes that could be entering the crypto world. As an investor, I want to learn more because crashes and bubbles bursting transfer wealth from the uneducated to the educated faster than anything else.

For the average investor, these investments are too risky, not because the investment itself is necessarily risky, but because all too often, the average investor lacks sufficient education, experience, and excess capital to handle the exigencies of the investment.

Rich dad said, “You cannot teach someone to be a great investor. But a person can learn to become a great investor. It’s like learning to ride a bicycle. I cannot teach you to ride a bicycle, but you can learn to ride a bicycle. Learning to ride a bicycle requires risk, trial and error, and proper guidance. The same is true with investing. If you do not want to take risks, then you’re saying you do not want to learn. And if you do not want to learn, then I cannot teach you.”

Investing Is Not What Most People Think

Years ago, rich dad explained to me that investing is not what most people think it is. He said, “Many people think investing is this exciting process where there is a lot of drama. Many people think investing involves a lot of risk, luck, timing, and hot tips. Some realize they know little about this mysterious subject of investing, so they entrust their faith and money to someone they hope knows more than they do.

“Many other so-called investors want to prove they know more than other people—so they invest, hoping to prove that they can outsmart the market. But while many people think this is investing, that is not what investing means to me. To me, investing is a plan— often a dull, boring, and almost mechanical process of getting rich.”

When I heard rich dad make that statement, I repeated it back to him several times. “Investing is a plan—often a dull, boring, and almost mechanical process of getting rich?” I asked. “What do you mean by a dull, boring, and almost mechanical process of getting rich?”

“That is exactly what I said and what I mean,” said rich dad. “Investing is simply a plan, made up of formulas and strategies, a system for getting rich—almost guaranteed.”

“A plan that guarantees that you get rich?” I asked.

“I said almost guarantees,” repeated rich dad. “There is always some risk.”

“You mean investing doesn’t have to be risky, dangerous, and exciting?” I asked hesitantly.

“That’s correct,” rich dad answered. “Unless, of course, you want it to be that way or you think that is the way investing has to be. But for me, investing is as simple and boring as following a recipe to bake bread. Personally, I hate risk. I just want to be rich. So I’ll simply follow the plan, the recipe, or the formula. That is all investing is to me.”

“So if investing is simply a matter of following a recipe, then how come so many people don’t follow the same formula?” I asked.

“I don’t know,” said rich dad. “I’ve often asked myself the same question. I’ve also wondered why only three out of every hundred Americans are rich. How can so few people become rich in a country that was founded on the idea that each of us has the opportunity to become rich? I wanted to be rich. I had no money. So to me, it was just common sense to find a plan or recipe to be rich and follow it. Why try to make up your own plan when someone else has already shown you the way?”

“I don’t know,” I said. “I guess I did not know that it was a recipe.”

Rich dad continued. “I now realize why it is so hard for most people to follow a simple plan.”

“And why is that?” I asked.

“Because following a simple plan to become rich is boring,” said rich dad.

“Human beings are quickly bored and want to find something more exciting and amusing. That is why only three out of a hundred people become rich. They start following a plan, and soon they are bored. So they stop following the plan and then they look for a magic way to get rich quick. They repeat the process of boredom, amusement, and boredom again for the rest of their lives. That is why they do not get rich. They cannot stand the boredom of following a simple, uncomplicated plan to get rich. Most people think there is some magic to getting rich through investing. Or they think that if it is not complicated, it cannot be a good plan. Trust me. When it comes to investing, simple is better than complex.”

I sat there nodding and feeling a little bit better. I knew then that rather than try to make more money and take bigger risks, I would focus on studying harder. That made more sense to me, it seemed less risky, and it certainly took less money—and money was not something I had much of then.

Rich dad summed it up for me. “You often hear people say, ‘Investing is risky.’ But really it is the investor who is risky. It is ultimately the investor who is the asset or the liability. I have seen many so-called investors lose money when everyone else is making money. I have sold businesses to many so-called businesspeople and watched the businesses soon go bust. I have seen people take a perfectly good piece of real estate, real estate that is making a lot of money, and in a few years, that same piece of real estate is running at a loss and falling apart. And then I hear people say that investing is risky. It’s the investor who is risky, not the investment.

So in short, I want to minimize risk and become a more educated investor who does not look for drama but desires a solid, boring plan. There are many ways to become educated. Study. Get a coach. A mentor.

Cryptocurrencies for the Average Investor

When I seek advice on cryptocurrencies, I talk to Jeff Wang. I pick his brain and listen to his experiences and ask a lot of questions. Here is a basic summary of my last conversation with Jeff:

Jeff acknowledged that last month was one of the craziest months he had ever seen in the crypto space because it was the inflection point before a massive bull run in the DeFi space.

While Jeff explained that doesn’t happen every month in crypto. But, Jeff went on, it probably happens more often than in any other asset class. So I asked Jeff, in his opinion, how will this all end?

He answered using historical data (which made me feel really glad that I chose Jeff to listen to for crypto advice).

“If 2017-2018 bubble was any indication, it’ll be a likely huge flush out of everything at once with some “fake” bounces on the way. Those fake bounces will make everyone think that the bubble has not popped, keeping uninformed people holding their coins until ~$0. Let’s not be fooled this time.”

Here are a few likely indicators that may happen and should make us cautious:

  1. Market cap for the YFI clones start exceeding $1B, this indicates a lot of value is able to drop on top of everything else in the event of a correction.

  2. Market stays steady for a long period of time or can’t break out, that might signal to large token holders to start selling.

  3. DeFi pulse locked assets start decreasing, data shows exiting assets that can go towards selling to Ethereum.

  4. ETH and BTC start selling off quickly, now you know it’s going to be hard to exit.

  5. A major hack in one of the YFI clones steals all assets.

External factors may happen too:

  1. Gold and other precious metals start dipping, bringing down Bitcoin with it.

  2. Stock market crashes, bringing risky investments out of everything including crypto.

  3. Governments tightens laws on crypto (though the United States SEC relaxed them recently).

  4. Interest rates come back, which makes bonds and other savings accounts more attractive again.

In Jeff’s view, there aren’t many options for your investing dollars. There is real estate, stocks, precious metals, and crypto, but that can all flip at any moment. Because of this, Jeff is taking profits into various stable coins and staking them in different systems (just in case one is hacked). This is to make sure that even if everything corrects or pops, he’ll still maintain the profits and not be affected (in theory).

The more aggressive approach is selling into USD and putting it back into your bank account, but some of these crypto systems are offering 100% annual profit even for stable coins!

Jeff feels strongly that we’ll be back to the original “slow” moving projects once all this DeFi stuff calms down. But remember, this is indeed a bubble, so don’t get caught up into thinking this will go on forever. Jeff says to make sure you take your profits along the way.

I like that Jeff is taking profits now, if he pulls out all the capital he put in and leaves the rest in the crypto markets he is basically investing with house money and his gains are infinite. I love infinite returns. It is my goal in nearly every investment.

Original publish date: September 04, 2020

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