There is the investment with “play money” and then there is the game with fire.
As Coinbase, the cryptocurrency exchange, goes public on Wednesday, financial advisers want you to remember the difference.
With the ranks of retail investors swelling, it is more and more attractive to find and profit from the next big thing.
Enter Coinbase, a platform with 56 million verified users that allows the buying and selling of cryptocurrencies like Bitcoin BTCUSD,
and Ethereum, which appear to continue to rise in value.
An obvious investment, given that experts believe cryptocurrency is at a ‘tipping point’, isn’t it?
Not necessarily. Do it with caution, say financial advisers.
Experts say it has always been risky to invest in companies as they go public.
For example, without a track record to operate, stock prices can be speculative and retail investors who think they understand the brand might not value it the way institutional investors do.
Now mix that up with the volatility of cryptocurrency and consider the skepticism of some who say Coinbase’s valuation is ‘ridiculously high’. This figure ranges between $ 50 billion and $ 150 billion, and even optimistic experts say the action is “not for the faint of heart.”
(A Coinbase spokesperson declined to comment ahead of the IPO.)
The idea is to invest in an IPO with a small chunk of the money you’re willing to lose. The question is how much? Here are a few different answers.
The numbers game
A common refrain is to devote between 5% and 10% of investable assets to speculative investments or stocks. Others say the amount is fine for you, if that’s not too offhand a word, potentially seeing evaporate shouldn’t be more than 1% of a portfolio for investors.
Ron Guay of Rivermark Wealth Management in Sunnyvale, Calif., Tells his clients to cap their “play money” at 10% – and that’s the same rule he follows himself.
“The lower your net worth, the lower the percentage of play money you should lose.”
Daniel Johnson from RE | Focus Financial Planning in Winston Salem, NC says it’s great for people who invest money in companies they are interested in because often times the investment works on companies they know and understand.
But it is also for diversification. Keeping investment in a business below 5% is a good bet, he said.
But the same numbers don’t suit everyone, according to Theresa Morrison, founding partner of Beckett Collective in Tucson, Arizona.
“If you don’t want to waste your ‘play money’, don’t gamble,” she says. This money could represent 1% to 2% of invested assets, she said.
“The lower your net worth, the lower the percentage of fictitious money you should be losing,” she said. “Conversely, the higher your net worth, the higher the percentage of play money you can allocate, but only up to a point.”
The No Numbers Approach
Ahead of Coinbase’s direct listing, Chris Struckhoff, founder of Lionheart Capital Management in Orange County, Calif., Said he spoke to clients who wanted to buy Coinbase shares.
“They have these dollar signs in their eyes,” he said.
These people see Coinbase stock as rocket fuel to reach their financial goals, but “like everything, the faster you try to go, the more likely you are to trip,” he said.
Struckhoff does not tell his customers to buy the stock or to wait. He thinks about the idea of fictitious money without applying specific numbers. He does this by thinking backwards with clients.
They start by remembering a person’s financial goals – a house, a boat, a nest egg, or whatever. Then they look at how much financial leeway someone has to devote to something like a Coinbase play.
What about just buying cryptocurrency?
Given the surge in the prices of cryptocurrencies like Bitcoin and Ethereum ETHUSD,
some say it’s worth going straight to the source and buying virtual currency instead. But again, they say don’t go overboard.
“You can either search for gold (own crypto) or sell shovels (own Coinbase stock).”
For example, Vrishin Subramaniam, the founder of CapitalWe, a financial planning firm focused on millennials and younger investors, recommends placing between 2% and 5% of net worth in cryptocurrency.
If anyone wants to buy into Coinbase, Subramaniam advises to fold that investment back into the 5% cyrptocurrency investment basket. Going forward, “we can increase this allocation for listed securities after a few quarters once we have more information in the public domain,” he said.
“Because Coinbase and other platforms have made it convenient to own cryptocurrency, I think the best way to get cryptocurrency exposure is to directly own the cryptocurrency,” Graciano said. Rubio of Infinity Financial Planning in Los Banos, California.
There is a metaphor for the moment that closed California’s gold rush in the mid-1800s. “You can either dig for gold (own crypto) or sell shovels (own Coinbase stock). They each have unique risks and benefits, but both can be a successful strategy to profit from cryptocurrency, ”he said.