Billionaire Investor, Warren Buffett, Chairman and CEO of Berkshire Hathaway, thinks cryptocurrencies will end badly.
He told CNBC’s ‘Squawk Box’, “We’ll never have a position in them, I can say with almost certainty that they will come to a bad ending.”
Ominous words, enough to stress out most investors, but then earlier this week one popular cryptocurrency, ripple, plunged in value by almost 13%, with bitcoin shedding nearly 8% of its value.
Cryptocurrencies have been called both a ‘fraud’ and ‘the future’ – owning such an asset can be stressful and emotionally intense for some. After bitcoin lost 30% of its value in December 2017, one post on reddit said “I just re-financed my house to get in. I’m freaking out.”
Jim Smigiel, CIO of absolute return strategies at SEI Investments Co, said “It’s the 24-hour cycle of cryptocurrencies that can wear on people’s nerves. With other speculative investments, like private equity and venture capital, you can’t check your phone every five minutes. With cryptocurrencies, you’re able to track the minute-by-minute value of it. Looking at something with such high volatility all the time is not conducive to an investor’s mental health.”
So, how to keep calm once you’ve boarded the cryptocurrency roller coaster. Look away – says one professor at the Department of Economics at Oxford University, Willemien Kets.
Here’s what she said,
“We know from social psychology that the best way to get people hooked on something is to give them a reward on a very uncertain time frame,”
Don’t fall into the trap. Checking the value of cryptocurrencies constantly is unproductive,
“You can’t do anything about the price movement itself.”
Instead she recommends people decide on a price point at which they’ll sell — say, if the asset drops below $10,000 — and set their phone to alert them at that threshold.
Jack Tatar, co-author of “Cryptoassets: The Innovative Investor’s Guide to Bitcoin and Beyond,” pointed to another reason why constant phone checks are futile.
“It’s very hard to realize the gains you see on your phone,” Tatar said. “These markets are not as liquid as the stocks and bond market. You can check your phone and see you’re up to $30,000, but if you want to realize that gain, you probably won’t be able to do that.”
That’s because it can take days for a cryptocurrency transaction to complete, during which the value can change substantially. Despite his advice, Tatar admitted he, too, can’t look away.
“My son has tried to tell me to take a few days off,” he said. “But I just can’t.”
Buy to hold – According to one financial advisor, founder of Edelman Financial Services, Ric Edelman, “when people buy and sell in a dizzied cycle, they miss the bigger picture of cryptocurrencies and the blockchain technology on which it’s traded.”
“There’s no question that digital currencies are the future,” Edelman said. “You should be prepared to own it for years.”
He said his decision to hold bitcoin for more than a decade has paid off. “I’ve watched it go from $1 to $1,000, back to $200 and then to $16,000,” he said.
Although he acknowledged that such ups and downs are intolerable for some people.
“If owning this asset is causing you to stare at the ceiling at night, you shouldn’t own it,” he said. “There’s more to life than money.”
Diversify – “Diversifying is useful for another reason, it’s so early, we don’t know which cryptocurrencies will survive.” said Edelman.
Michael Sonnenshein, investments director at cryptocurrency firm Grayscale, said people might be less anxious if they’re not banking on just one cryptocurrency. Fortunately, you don’t have to: There are currently some 2,000 cryptocurrencies to choose from. And more investment firms are looking into establishing index funds for cryptocurrencies. For example, Grayscale is soon launching a “basket of digital currencies,” in which investors’ money will be spread across five digital currencies.
Peter Ayton, who studies behavioural decision theory at the City University of London, said it’s hard to expect people to be rational with cryptocurrencies. Many people who’ve been seduced by bitcoin are individuals who might not fully understand what they’re buying, he said.
“When you have something as volatile as bitcoin, it doesn’t lend itself to long-term strategic thinking,” Ayton said.
Only invest what you can afford to lose. – Jack Tatar said people must restrict how much of their investments go to cryptocurrencies.
“You’re seeing too many people jumping in and betting the ranch, and just saying ‘yee-haw!'” he said. “They’re not disciplined enough to realize they have to stay within their asset allocation models.”
“Re-balancing” your investments is essential with cryptocurrencies, he said, because of their tendency to rapidly change value.
“If you’ve invested 20 percent of your portfolio into bitcoin, and all of a sudden you check and, lo and behold, your bitcoins have increased so much that they’re now 35 percent of your portfolio, you can rebalance and go back to your asset allocation,” Tatar said. “That should protect you from some of that volatility.”
Jim Smigiel also commented, it’s not just the owners of cryptocurrencies who are stressed. Recently, he finds himself consoling his clients who haven’t bought any bitcoin, ripples or ethereum.
“We also see anxiety on the flip-side — the people who feel they are missing out,” he said. “And so, you’re anxious either way.”