And I’d say the same things to anyone else.
Both my parents are imbued with attributes that I was lucky to have witnessed as I grew up. My mother is the strong-willed, determined type, someone who knows that there is a “yes” available behind every “no.” My father is one of the most resourceful people that I know, capable of fixing almost anything and certainly willing to try. Together, they created an environment and a culture of optimism and possibility that benefited my entire family.
But even with my Dad’s unending curiosity, I certainly wasn’t prepared for him to ask me about Bitcoin.
This, along with everything else going on, should tell you that we are living in very interesting times. It’s hard to escape the emotional rollercoaster of the 24-hour news cycle and must-read articles about the most pressing political crises or economic updates.
Bitcoin is no exception. It’s everywhere these days, given the meteoric rise that the granddaddy of cryptocurrencies has experienced over the past few months. So, I shouldn’t have been surprised that it came to my Dad’s attention. After all, with the pandemic being what it is, he hasn’t had much to do besides absorbing the latest headlines.
Still, when he casually asked for my opinion on an investment that involved Bitcoin, I felt myself slipping into an alternate universe where this conversation made sense. No disrespect to my Dad whatsoever — after all, this man has spent the last few years becoming quite adept at YouTube and has recently become best friends with the Facebook Portal device and all its features (which I myself haven’t even done). He’s fully capable of grasping complex concepts, being a trained auto mechanic and all.
But the reality is, Bitcoin is another level of abstract complexity, one that I’ve struggled to fully understand, not to mention trying to explain it to someone whose idea of ‘mining’ is associated with extracting gold and iron ore out of the ground, not producing ethereal ‘currency’ out of thin air with obscenely excessive quantities of electrical and computing resources.
And then ON TOP of that, the word ‘investment’ has been thrown into the mix. Yikes!
Clearly, readers of this article will have been introduced to Bitcoin in some form or fashion. Perhaps you’ve read a summary of what it is or asked a technology or financial expert in your network to explain it. If you’re really top of the class, you’ve read and digested Satoshi Nakamoto’s whitepaper, which explains the rationale and lays out the blueprint for the Bitcoin project. So I’m not going to explain what Bitcoin is or how it works. You’d be better served by consulting the multitude of resources freely available online.
What I will share is how I broke it down for my Dad, and perhaps how you might think about approaching the topic for yourself.
First of all, my Dad (and now several others) asked about this because he knows that I have an undergraduate degree in Economics and an MBA, as well as a career in global finance that puts me in a position to at least understand what all the noise is about. And he values my opinion.
So he asked for just that — my opinion on an investment that takes your capital, trades in foreign exchange, and deposits any earnings into Bitcoin. Taken individually, each of those three concepts — investment, foreign exchange trading, and Bitcoin — can be complex enough, but when combined into an ‘opportunity’ for everyday people to make decisions about, it becomes so hard to understand that it can be daunting to even respond. Of course, this ‘opportunity’ also includes the promise of consistent payouts at eye-wateringly high-interest rates. As someone who’s spent some of my career assessing investment vehicles and assets, I’m trained to look for red flags and indicators of unrealistic outcomes.
In other words, I was getting the early feeling that this was too good to be true. Throw in some complex-sounding, finance-y terms. Mention Bitcoin. Promise spectacular returns. Haven’t we heard this type of thing before?
My economic history deja vu aside, I wanted to engage with this topic a bit more and thought that if my Dad had this on his mind, it must be topical for other people, as well. And who can blame them?
Right now, things are super confusing. The world has been turned upside down by a once-in-a-generation global pandemic that continues to rage on. Once stable economies appear to be on the brink of recession (if not some degree of contraction), established businesses are shuttering, and millions upon millions of people have been laid off or subjected to reduced income. People are freaked out.
Meanwhile, there is consistent talk about the super-rich getting even richer during this period and the stock market exceeding previous highs. There is a big shift going on in the world, and it’s palpable.
So people, understandably, get the feeling that they might miss out on this once-in-a-generation shift in wealth and opportunity. And along come opportunities like this forex/Bitcoin deal, and people start to get excited about riding the wave of prosperity.
Let me start in the same way I started with my Dad. As with any investment, only put your money into something that you understand. It doesn’t matter if it’s Bitcoin, real estate, stocks, and shares, or your best friend’s cousin’s son who needs money for their new business that’s bound to be a sure thing — can you explain it to someone in simple terms, in a few sentences? I usually implore people to go back to basics with some straightforward questions:
- What is my money being used for/invested in?
- How does this venture make money?
- How and when (or how frequently) do I get paid back, and at what rate of interest?
Bonus question: What experience does the principal in this venture have in the business?
I mean, this line of questioning, when posed to money managers, entrepreneurs, and anyone asking for your money, should result in straightforward answers that you can understand. I’m certainly not suggesting that the complex formulas or mechanisms behind finance need to be explained, but all you should be looking to understand is whether there is a real business here or just smoke and mirrors.
At the end of the day, any venture, regardless of how complex its products or service offering might be, is governed by some basic principles: what problem is the product or service solving, who are its customers, how the business makes money from those customers and how the business rewards the people who provided it with money to carry out its operations (investors).
So my first line of business, so to speak, was to ensure that the venture being proposed to my Dad could stand up to that line of questioning. Of course, this questioning had to be augmented by some personal assessment, which I summed up in one question: Can I afford to live without this money if I were to lose it?
And the reason this question is super important is because of the second thing that I wanted to breakdown for my Dad: my understanding of Bitcoin and why this opportunity might be so enticing to so many people at the moment. Of course, the question of whether you can afford to lose your money is critically important for ANY investment, but I think it’s of particular importance when looking at anything as esoteric and untested as cryptocurrency.
Here’s why:
Attributes of Bitcoin (or reasons why I got nervous when my Dad mentioned it)
- It’s highly volatile — in terms of its value, Bitcoin has seen wild swings in value over the past several years, attributable to many reasons, including negative press, security breaches, uncertainty, and external conditions (such as a pandemic) that might drive investors to look for a hedge against inflation. So it’s just as possible to make an incredible amount of money as it is to lose your money — of course, the upside being limitless, whereas you can only lose as much as you put in.
- It exists in an unregulated market — while Bitcoin is now legal in most developed countries, its issuance is pretty much unregulated, given its decentralised nature. I didn’t mention this as a negative or a judgement necessarily, but simply as a statement of fact.
- It has an uncertain future — it’s clear that Bitcoin has exploded, certainly over the past 5–6 years and its prevalence in the mainstream suggests that it has the potential to be around for a long time. But, it’s still not fully accepted by national authorities and the global financial system, although this is changing. So we’re yet to see what the future holds and that introduces some uncertainty.
- It’s exciting and promises future benefits — it’s the future! My Dad understands that technology is racing ahead, providing ever-increasing benefits to the ways that we live. Bitcoin is no exception, offering the promise of efficiency, cost-effectiveness, and accessibility to the previously unbanked.
- Lots of people are getting into it — “Everybody’s doing it” isn’t usually a good reason to do something, but when you look at the calibre of individuals and institutions giving greater credibility to Bitcoin, it makes sense to pay attention.
Ultimately, I’m pretty sure my Dad will make his own decision about whether to throw a few coins into the pot and see what happens. At this stage, he’s just here for fun and won’t make a serious foray into anything that he’s not comfortable with.
For anyone else at earlier stages of life, looking to make some quick money and get in on the action of this latest boom, I would encourage you to make use of the simple line of questioning that I laid out earlier. As I mentioned, it really can be applied to any decision you’re looking to make that is financial in nature and certainly where you’re being asked to part ways with your hard-earned cash.
I hope I haven’t come across as anti-Bitcoin or cryptocurrencies because I certainly am not. I find them interesting; I’m still learning as much as I can about this revolution in financial technology and applying the principles that I’ve learned over my career about how economics, business, and technology work.
If nothing else, I think that this is such an exciting time for more people to get interested in these topics, to start thinking about their finances and investment plans, and to get to grips with the new technologies that are being designed to usher in a new era of global commerce.
