Investments are made with ‘play money’ and then there is playing with fire.
As Coinbase, the cryptocurrency exchange, goes public on Wednesday, financial advisors want you to remember the difference.
As the retail investor rankings increase, there is more and more appeal to find and profit from the next new thing.
Enter Coinbase, a platform with 56 million verified users that enables the purchase and sale of cryptocurrencies such as Bitcoin BTCUSD,
and Ethereum, which seem to continue to increase in value.
An obvious investment, as the experts assume that cryptocurrency is at a “tipping point,” right?
Not necessary. Be careful, say financial advisers.
Experts say it has always been risky to invest in companies just as they go public.
For example, if there is no track record, stock prices can be speculative and retail investors who think they understand the brand may not appreciate it the way institutional investors do.
Now mix that with the volatility of cyrptocurrency, and consider the skepticism of some who say Coinbase’s valuation is “ridiculously high.” That number ranges from $ 50 billion to $ 150 billion and even experts who are optimistic say the stock is “not for the faint of heart.”
(A Coinbase spokeswoman declined to comment prior to the IPO.)
The idea is to invest in an IPO with a small portion of the money you may lose. The question is, how much? Here are a few different answers.
The numbers game
A common refrain is that anywhere from 5% to 10% of the invested capital is spent on speculative investments or stocks. Others say the amount you’re okay, if that’s not an overly simple word, seeing potential evaporate shouldn’t be more than 1% of a portfolio for investors.
Ron Guay of Rivermark Wealth Management in Sunnyvale, California, tells his clients to limit their ‘play money’ to 10% – which is the same rule he follows.
“The less your net worth is, the lower the percentage of play money you have to lose.”
Daniel Johnson from RE | Focus Financial Planning in Winston Salem, NC says he is all about getting people to put money into the companies that interest them because the investment often ends up in companies they know and understand.
But he’s also all for diversification. Keeping investment in a business below 5% is a good bet, he said.
But according to Theresa Morrison, founder of Beckett Collective in Tucson, Ariz, the same numbers don’t fit.
“If you don’t want to lose your ‘play money’, don’t play,” she said. That money could be 1% to 2% of the capital invested, she said.
“The less your net worth is, the lower the percentage of play money you have to lose,” she said. “Conversely, the more you have flushed net worth, the higher the percentage of play money you can allocate, but only up to a certain point.”
The no-numbers approach
Leading up to Coinbase’s direct listing, Chris Struckhoff, founder of Lionheart Capital Management in Orange County, California, said he was in talks with a number of clients looking to buy Coinbase stock.
“They have these dollar signs in their eyes,” he said.
These people view Coinbase stocks as rocket fuel to achieve their financial goals, but “as with anything, the faster you try to go, the more likely you are to trip yourself up,” he said.
Struckhoff does not tell his customers to buy or wait for the stock. He is thinking about the idea of play money without applying fixed numbers. He does this by thinking back with customers.
They start by remembering a person’s financial goals: a house, a boat, a nest egg, or something else. Then they look into the financial playroom that someone has to devote to something like a Coinbase play.
How about buying cryptocurrency?
Considering the price increase in cryptocurrencies such as Bitcoin and Ethereum ETHUSD,
some say it’s worth going straight to the source and buying virtual currency instead. But again, they say not to go overboard.
“You can search for gold (own crypto), or you can sell spades (own Coinbase supply).”
For example, Vrishin Subramaniam, the founder of CapitalWe, a financial planning company targeting millennium investors and younger, recommends investing anywhere from 2% to 5% of the net worth in cryptocurrency.
If anyone wants to buy Coinbase, Subramaniam would advise putting this investment in the 5% cyrptocurrency investment basket. In the future, “we can increase that allocation to listed securities after a few quarters once we have more information in the public domain,” he said.
“Since Coinbase and other platforms have made it easy to own cryptocurrency, I think the best way to gain exposure to cryptocurrency is through direct cryptocurrency ownership,” said Graciano Rubio of Infinity Financial Planning in Los Banos, California.
There is a metaphor for the moment that wrapped up in California’s very own Gold Rush in the mid-1800s. “You can search for gold (own crypto), or you can sell spades (own Coinbase supply). They each have unique risks and benefits, but both can be a successful strategy for taking advantage of cryptocurrency, ”he said.