With Bitcoin romping to new all-time highs of $23,770 without stopping for breath—and the surge winning coverage in national news outlets that wouldn’t normally touch crypto with a 10-foot pole—curious investors are now examining digital assets for the first time.
Although BTC is now in a period of price discovery, meaning that there could be further upwards movement, gaining exposure right now is incredibly risky. Those with long memories (and potentially decimated bank accounts) will know this all too well.
On Dec. 18, 2017, Bitcoin hit $20,089 for the very first time. Countless investors—certain that further upside lay ahead—rushed into the space to capitalize on the next leg up. But unfortunately for those opportunists, that was as good as it got. By New Year’s Eve, BTC had collapsed back down to $13,000 again… and 2018 was going to be even worse.
Interestingly, Coinbase’s CEO Brian Armstrong wrote a blog post in which he warned casual observers of cryptocurrencies to think twice before snapping up some BTC. He added:
“While it’s great to see market rallies and see news organizations turn attention to this emerging asset class in a new way, we cannot emphasize enough how important it is to understand that investing in crypto is not without risk.”
Armstrong proceeded to urge investors to seek expert financial advice so they can find out whether Bitcoin is right for them—enabling them to understand more about the dangers.
In a sign that the latest crypto bull run could leave some people’s finances in tatters, there are also concerns that some people may be tempted to borrow money they don’t have in order to jump on board the Bitcoin bandwagon.
On Dec. 11, a high-profile Twitter user raised alarm bells when he revealed that he had taken out a $46,250 loan—with an interest rate of 7.9%—in order to buy 2.55 BTC. Peter McCormack also disclosed that he had lied to his bank about what the funds were for.
This prompted Ethereum co-founder Vitalik Buterin to issue a strongly worded tweet in which he urged his one million Twitter followers not to engage in such risky practices.
Of course, on Dec. 17, prices did exceed $22,669—prompting McCormack to claim that he is technically up $11,000 because he can now close the loan and pay just $1,000 in interest.
But here’s the danger: copycats could be encouraged to emulate this stunt, and there are fears it could lead to financial ruin. Even though there is optimism that Bitcoin’s best days lie ahead, would you really want to bet your house on it?
As for McCormack, moments after tweeting about the loan, he felt compelled to add, “THIS IS NOT FINANCIAL ADVICE.”
An example of such a strategy going wrong actually emerged back in June, when a Twitter user revealed that he had taken out a $100,000 loan in 2017 to snap up BTC when it was at its then all-time high. Prices then crashed and he lost his job as a flight attendant, meaning he was unable to keep up the repayments. Worse still, he lived in the United Arab Emirates, meaning that he risked jail time if he defaulted. Although other Reddit users came to his rescue and donated $27,400 to help him meet his commitments after the story hit crypto news sites, not everyone who falls into this trap would be so lucky.
So what should you do?
Well, curious crypto newcomers have a series of options at this point.
The first is to follow the conventional wisdom of “buying the dip.” It’s highly likely (and almost inevitable) that Bitcoin will slide back down at some point—possibly even below $20,000—before it potentially continues its journey upwards.
A second option is to jump in feet first, but to ensure that the portion of your portfolio that you allocate to Bitcoin is money that you’d be willing to lose a substantial chunk of in the worst-case scenario. Some crypto investors, such as Mike Novogratz, now recommend devoting 5% of net worth to Bitcoin.
The third is to explore other cryptocurrencies that are still some way off their all-time highs, such as XRP or LTC, which have been outperforming Bitcoin of late. Again, this isn’t without risks. After all, if these digital assets are so promising, why haven’t they returned to the record highs they posted around the time BTC hit $20,000 in 2017?
And there’s always a fourth option: sit this one out and watch the drama unfold from afar.