Topic: How To Invest

Learn about Bitcoin investment risk—and its false narrative—to protect yourself and your portfolio

Avoid bitcoin investment risk and the false narratives that surrounds it. This is important to know to keep your overall investment portfolio on the right path

Bitcoin investment risk is real and we think it needs to be well understood by all investors.


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Discover how a beginning investor can avoid getting off to a very bad start

Many first portfolios consist of choices from a single theme or area of investment interest. One young investor I spoke to recently had acquired a cryptocurrency portfolio. His biggest holding was in Bitcoin, the original cryptocurrency—the “blue chip” of the category. He had smaller commitments in newer, more speculative cryptocurrencies, including Litecoin, Ethereum and Ripple.

Over the decades, I’ve heard from investors whose first portfolio was a collection of gold coins, or penny stocks with mining claims close to a producing mine, or start-up tech stocks from a single industry. They expected their newfound portfolio orientation to protect them against losses and lead to above-average gains. But with investments like these, results are bound to vary widely. That’s because they depend almost entirely on market timing: gains and losses depend mainly on when you get in and when you get out.

Any stock can make money for you if you get in and out at the right time. You can say the same thing about any portfolio of stocks. Unfortunately, no one can consistently make money with investments that require accurate market timing. The random factor in stock prices is too strong even in high-quality stocks, and stronger still in speculative stocks.

After gaining some experience with selecting investments and building a stock portfolio—and with our Successful Investor advice—most serious investors go on to recognize that success as an investor requires something more. You need to develop what you might call a successful investor mindset.

Understand false narratives and how it relates to Bitcoin investment risk

The term “false narrative” has been around at least since the 1830s, but came into common use around the time of the 2016 U.S. Presidential Election. Each of the two main political parties accused the other of concocting and spreading an incomplete and/or biased story that falsely showed their candidate in a bad light.

However, it’s easy to concoct your own false narrative and let it guide your financial decisions. Widespread false narratives happen rarely enough that they find a way into history. Personal false narratives happen much more often. But each one is a little different from the next, and most people would prefer not to talk about them.

Here is a look at a false narrative involving Bitcoin investment risk:

Bitcoin is going to replace the U.S. dollar. This will happen because of a voluntary switch from the U.S. dollar to Bitcoin, which is already underway. People will keep switching to Bitcoin because you can carry out transactions much faster and at lower cost in Bitcoin than in U.S. dollars. Bitcoin transactions are much more private than U.S. dollar transactions, and you can transfer Bitcoin around the world with no need to declare it to any border guards or government agents along the way.

The blockchain technology that Bitcoin rests on seems to have a lot of commercial applications, and is undoubtedly a revolutionary invention. But Bitcoin is just the first of many digital “cryptocurrencies” that blockchain technology can create. Why assume blockchain is the ultimate cryptocurrency? Why assume that all U.S. dollar users will go along with the narrative and shift to Bitcoin?

For that matter, the biggest U.S. dollar user of them all is the U.S. government. The second biggest spenders are state and local governments. Governments may use blockchain technology for their own purposes, of course. But they have no incentive to support Bitcoin, or any cryptocurrency that can thwart taxation and help people hide assets and transactions.

Entrepreneurs launched many blockchain-based Bitcoin alternatives, and Bitcoin enthusiasts lapped them up. That’s a classic sign of an investment mania. Manias begin as a mass attraction to a specific investment or area of investment. They go on to include a wide range of related investments that have an ever-fainter resemblance to the spark that got things rolling.

Of course, this false narrative could still have a lot of life left in it. I’m not saying it will end overnight. I am advising against investing in Bitcoin, since the odds in my view are heavily weighted against you.

Use our three-part Successful Investor approach to avoid Bitcoin investment risk while making top stock selections and building a portfolio

  1. Invest mainly in well-established, dividend-paying companies, with a history of rising sales if not earnings and dividends.
  2. Spread your money out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; Utilities.
  3. Downplay or avoid stocks in the broker/media limelight.

There are more instances of Bitcoin investment risk as millions of dollars have been stolen through exchanges. Why do you think this has not deterred as many investors as one would expect?

What do you think will happen with Bitcoin investments in the future? Is this a fad or do you think cryptocurrency will continue to attract investors?

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