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Three Rich Dad Fundamentals Every Cryptocurrency Investor Should Know

When an asset appears to be in a bubble, it’s essential to know your fundamentals

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Everyone is talking about cryptocurrencies like Bitcoin, Ethereum, and Ripple. And why not? With massive fluctuations in value and short-term gains in the 1000% range, it’s very exciting and enticing stuff. And it’s also potentially dangerous stuff…if you don’t know what you’re doing.

If you’re a subscriber to my email list, you’ve seen my emails on my take on cryptocurrency. Basically, I don’t know enough about it and I haven’t been investing in it. Personally, I still prefer to invest in gold. I don’t know if cryptocurrencies will be around in 30 years, but I know that gold will.

But a lot of people in the Rich Dad community have asked about how to invest in cryptocurrencies. So, I’ve recommended James Altucher’s 6-video masterclass on cryptocurrency for those who want to get educated. To be clear, I’m not recommending to invest in cryptocurrencies, and I’m not saying you shouldn’t either. I’ve simply believed and always taught that if you don’t understand something, you should be studying it. James Altucher’s class is one good way to do that, but ultimately you have to make up your own mind.

Playing with cryptocurrency fire

But this blog post isn’t really about cryptocurrency investing. It’s really about financial stupidity—and what to do about it. The reason I bring up cryptocurrency is because I read an article this week that I wish I could say shocked me, but sadly it did not.

According to The Cointelegraph, 18% of Bitcoin investors are using borrowed money to purchase their stakes, and 22% of those investors didn’t pay off their credit card debt after making their purchase. With millions of people investing in cryptocurrencies, this means that a substantial amount of people are putting high-interest debt into an asset that is wildly volatile, going up and down thousands of percentage points in weeks and sometimes days.

As the title of The Cointelegraph article states: “Not recommended.” Essentially, these speculators could lose everything and still owe money month after month in interest on their credit cards. I use the word “speculators” on purpose. To be clear, these are not investors. They are gamblers, hoping to make a quick buck. And it’s a high-stakes game.

Given this, I thought it would be a good time to go over a couple Rich Dad fundamentals. Perhaps you can share this with any of your speculator friends. It might be the best thing you’ve ever done for them.

Rich Dad Fundamental #1: The difference between an asset and a liability

When I was a kid, my rich dad, my best friend’s dad, taught me a very simple lesson. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.

In essence, cryptocurrency is not an asset because it does not put money in your pocket. In fact, whether you use debt or your own money, it takes money out of your pocket when you buy it. Because it is exploding in value, many people feel rich, but they are not. Bitcoin and other cryptocurrencies are not useful for commerce, so the only way to realize value is to sell. Only then, if you make a profit, do they become an asset.

It’s this simple definition of an asset that also led me to teach decades ago that your house is not an asset. People howled in protest when I did so, but they shut up pretty quickly when the housing market crashed. I’m not saying that cryptocurrencies will crash like the housing market did, but they might. What I am saying is that it’s financially dangerous to think of yourself wealthy when you’re really “invested” in liabilities that take money out of your pocket.

Rich Dad Fundamental #2: Invest for cash flow

The beauty of investing in assets is that they produce cash flow. So, for instance, if you invest in a rental property (as opposed to a personal home), you can through rent, realize a profit each month. So, regardless of whether the property goes up or down in value, you make money. Or if you build a thriving business, you will realize cash flow each month in the form of your business profits.

Rich dad taught me that the reason why most people fail financially is because they assume they are investors just because they put money into assets hoping they grow in value, things like stocks, bonds, and mutual funds. But the rich put their money into assets that produce immediate returns in the form of cash flow. They then can use that cash flow to invest in even more assets.

Everyone else simply sits on their money watching (hopefully) grow in small amounts—unless the markets crash like they did in 2008. Then they lose everything. My fear is the same might happen for the uneducated folks jumping into the cryptocurrency markets.

Rich Dad Fundamental #3: The difference between good debt and bad debt

When I was young, I spent 90 days in a real estate course where we had to evaluate 100 investment properties. At the beginning of that class, there were a lot of students. At the end, there were only six of us. It was grueling work, but one of the best educations I’d ever received.

When I finished the class, I found the property I was looking for. It was a 1-bedroom condo in foreclosure on the beach in Maui. It was only $18,000 and required 10% down. I put that down payment on my credit card and financed the rest through the bank.

While this is not a strategy I would endorse for most people, it was fundamentally different that putting something like cryptocurrency on a credit card. Why? Because even with the bank loan and my credit card debt, my condo was cash-flowing. That made it an asset, and it also made my debt good.

One of the biggest secrets the rich know is the difference between good debt and bad debt.

Simply, good debt allows you to purchase assets that cash flow. Bad debt is used for liabilities like TVs and cars. Bad debt loses you money each month.

When you couple good debt with OPM (Other People’s Money), things get really powerful. Essentially OPM is like what I did with my credit card to purchase the Maui condo, only at a much lower interest rate and with flexible deal structures. For instance, using venture capital money is a form of OPM that many entrepreneurs use. Personally, I raise equity for my real estate investments using OPM.

To learn more about good debt and OPM, I encourage you to read my article, “New Rule of Money #2: Learn How to Use Debt.”

In the end, I can’t teach you how to be a wise investor, but I can give you the fundamentals required to get there. The rest will be going out and doing, learning from both failures and success. My hope is that by understanding the fundamentals, those failures won’t be nearly as big as they could be—and those successes will come much more often.

Original publish date: January 16, 2018

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