I received these two messages within three minutes of each other recently:
Years back I used to mine Bitcoin, and then I sold most of them off for a down payment for our house. I had 400 BTC at one point, which would be worth $6.8 million today. Needless to say, I am really depressed now. I only kept one Bitcoin. I should have kept more.
And this one:
My husband has invested in Bitcoin, and my son has invested in Etherium! I am debating about switching my 401(k) to Bitcoin.
Everyone, including my mother, is wondering if they should buy Bitcoin or some other cryptocurrency. And since everyone is asking, there are plenty of semi-informed people providing answers.
But if you try to find a solid answer to this question, you will probably just end up more confused. Answering the question means guessing where the price of Bitcoin is headed, and nobody who is being honest actually knows.
So may I humbly suggest that asking if we should all buy Bitcoin is the wrong question, and that we should ask a different one instead. The question we should be asking ourselves is this:
Does buying Bitcoin fit into my investment plan?
That is a much more important question and one that we can all answer much more easily. It places the attention on the process of investing correctly and not on the outcome of events that we have no control over.
In order to answer the investing plan question, it might help to clarify a few things.
Investing is different from speculating or gambling.
Investing is a means to an end, and that end is our collective financial goals. Beating the stock market, buying what’s hot, outperforming a brother-in-law — those are not financial goals. Financial goals are things like having money to send kids to college, buying a house, taking a trip or retiring someday. This is why we invest.
If we start by declaring that certain important goals are the reasons we are investing, then we can move on to figuring out the investment process that can help us meet those goals while taking the least amount of risk. The moment we start down that road, we run into the closest thing we have in finance to the law of gravity: diversification.
Investors do not put all their eggs in one basket.
That’s something speculators do. Our financial goals are important, and the consequence of failure are high. So we spread our risk out by diversifying across lots of different types of investments, like stocks and bonds and real estate, both in the countries where we live and far away. We choose each one carefully based on how it interacts with the others in our portfolio.
This is what the process of investing looks like. And yeah, it can be a little boring. But it is far better than repeatedly getting our teeth kicked in from buying high and selling low, which is often what happens when we chase the latest shiny thing that’s grown in value exponentially or that Peter Thiel is betting on.
So this isn’t really about Bitcoin at all.
Just like it wasn’t about real estate in 2007, or internet stocks in 1999. This is about investing versus something else we typically call gambling or speculating. It’s not about where Bitcoin is going, or what we might have missed out on over the last year. All of that is out of our control.
What is in our control is the process of identifying goals, building a portfolio that matches those goals and then maintaining it for a very long time (even when it’s scary, or hard) so we can achieve those goals.
So no, I cannot tell you if you should be buying Bitcoin. But I can urge you to ask a very different question.
Carl Richards, a certified financial planner, is the author of “The Behavior Gap” and “The One-Page Financial Plan.” His sketches and essays appear weekly. Have a question for him that he can answer in this column, with a customized sketch? You can submit it here. Follow him on Twitter: @behaviorgap