“The first rule of an investment is don't lose, and the second rule of an investment is don't forget the first rule, and that's all the rules there are.” - Warren Buffett
Cryptocurrency is in a bubble and it’s going to crash.
Even though Elon Musk says that Bitcoin is better than fiat money and paper money is going away…
It’s really important that you pay attention to the things you do right now.
When an Uber driver starts giving you tips about what crypto to buy, that could be a serious sign that we’re in a bubble.
But don’t worry!
We’ll go over how you can protect yourself and avoid getting burned by the crypto bubble.
History of Crypto
Let’s talk about a guy you might not know named Satoshi Nakamoto.
In October of 2008, he wrote a paper that described a problem that exists in the marketplace.
I’m all about having problems solved!
In his paper, he identified the issue of trust.
So when you buy something online or from people that you don’t know, there has to be a third party involved.
Sometimes it’s PayPal.
Sometimes it’s Visa.
People have safeguards there, but there’s still issues of trust and transactions.
So, Nakamoto created this system where the there’s a public ledger for transactions to make sure they went smoother.
A couple of months later in January of 2009, Nakamoto launches Bitcoin.
But before we get into that, let’s talk about Satoshi.
At this point, nobody knows who this mystery guy is.
There are a bunch of pictures floating around from people trying to figure out who he is, but the fact of the matter is that no one really knows.
Back when Bitcoin launched, twelve Bitcoins were worth less than one penny.
Can you imagine doing that trade today?
That would be amazing!
The math on that ROI would be absolutely insane.
Positives about Crypto
I will say this about Bitcoin and crypto in general:
There are some real positives.
First, there are inflation hedges.
You do get some protection for your investment, which is always good to have.
There’s also the transfer of money.
If you want to transfer money internationally and do so privately, crypto can make that happen.
Is Crypto in a Bubble?
Is crypto in a bubble?
Is it going to pop?
To understand that we have to really go back and understand what a bubble really is.
So I want to take you all the way back to 1636-1637.
There’s something called Tulip Mania.
Yes, it’s just what it sounds like.
People were literally buying tulips and they were paying outrageous amounts for them.
You can see on this chart that when people started out, there was a normal price.
Then, all of a sudden, it went up 100 to 200 times higher than it was until people were paying a whole year’s wages for a rare tulip bulb.
That’s a bubble if I’ve ever seen one!
We know this because eventually, the tulip prices did come down.
Even so, can you imagine that today?
The average wage of the U.S. is over $80,000.
Can you fathom paying $80,000 for one or two tulip bulbs?
We can actually see some similarities with crypto.
You can see this chart shows a very similar pattern to the crypto craze for Bitcoin – at least up to 2017.
We also see a lot of volatility.
We have another chart here that shows that in droves.
Things going up, things going down.
Not only that – but we also have many other cryptos, right?
We’ve got Bitcoin.
We’ve got Dogecoin.
(If you want to see a really funny video about Dogecoin, check this out!)
We’ve got many, many cryptos, many of which you can see on this chart.
They do tend to follow a general path, but which one is the right one?
We really don’t know, right?
For now you can buy one of them, buy them all – just buy what you want.
If you’re interested in checking out crypto compared to other investments, check out this video, where we had a panel compare crypto to real estate and other assets in a really awesome discussion.
Why I Don’t Buy Crypto (and Why You Shouldn’t Either!)
Warren Buffet had this saying: “Rule number one is don’t lose money. And rule number two is don’t forget about rule number one.”
You want to try to avoid any sort of loss when you invest.
It’s important you understand what the risks are of whatever you put your money in.
This is true whether you’re speculating or investing.
We’re gonna talk about later on, so keep reading!
1. Tech Risk
One of the biggest risks of cryptocurrency is tech risk.
Crypto is a technological product.
It’s not a physical product that you can hold, you can touch, you can taste.
None of that.
I tried to understand really how cryptocurrency works and I get the gist of it.
You have a transaction, it goes through, and there’s a third-party verification, which is the ledger.
There are also people that are mining cryptocurrency.
So I understand in theory how it all works.
But I started actually trying to understand how does this really work?
What does the algorithm look like?
I got this 350-page book of code-speak talking about how crypto actually works in programmer language.
To me, it felt like looking into the Matrix.
It was just zeros and ones.
I couldn’t understand it!
These technological products are so complex that very few people really understand how they work.
But we do live in a very technological world.
My credit card information gets stolen about once a year or so.
I do everything I can to protect myself.
I shred my trash, I do other things, but somehow these digital thieves find my information.
So who is to say there aren’t certain backdoors or ways that crypto can be stolen?
Or, worse, your information.
That’s a big risk.
Another risk is Satoshi Nakamoto.
Who is this guy?
We don’t even know who he is.
I’m not a big fan of fiat money, but I do think fiat is better than crypto because at least we know who issued it.
We don’t know the issuer of Bitcoin.
So that’s a big issue.
I think you have to be very careful when it comes to technological products, including crypto.
2. MySpace to Facebook Risk
Another risk is something I call the MySpace to Facebook Risk.
I can already hear you guys asking: What the heck is that?
Well, when I was fresh out of college, there was a site called MySpace.
Everybody was on MySpace.
And then, almost instantly, basically everybody switched to go to Facebook.
You can see just how quickly this happened on this chart.
Why did that happen?
A better technology came out.
A better platform pulled people from one to the other.
This is the same risk that is seen in cryptocurrency.
So, is Bitcoin MySpace or is it Facebook?
It was the first, so maybe it’s MySpace.
If that’s the case: Will people switch to something new?
That’s the real concern I have.
Out of these thousands of different cryptocurrencies, which one is going to be the one?
Which few of them are really going to last?
That’s a really good question you have to ask.
There really is not a moat around the business.
Warren Buffet also talks about the idea of a business being a huge, guarded castle with a moat around it so fewer people can come in and compete.
With crypto, the barrier of entry is low.
In the case of Dogecoin, you could put a dog on a coin and all of a sudden you’ve got a crypto.
With this barrier, I could theoretically start my own crypto called Bronson Crypto.
More competition equals more risk to your investment.
That is definitely a concern.
3. No Intrinsic Value
Another risk of cryptocurrency is the intrinsic value.
Intrinsic value is when something has value in what it actually is.
When something is a technological product, it has no intrinsic value.
You can’t use the technological side of cryptocurrency for anything practical.
It doesn’t actually exist in the physical world.
It’s simply a technological product.
Let’s compare that to intrinsic things with intrinsic value:
Businesses, real estate, physical metals like gold and silver.
If you want a deeper dive into the intrinsic value of gold, check out this video!
But getting back to Bitcoin – what is it worth?
Is it worth zero dollars or is it worth a billion dollars?
It’s very difficult to answer that question because it doesn’t physically exist.
Really, it’s only worth what people are willing to pay for it.
To me, this all feels like Tulip Mania, where Bitcoin is worth whatever people want to pay.
That’s something to consider.
The fourth risk is Fedcoin.
If you haven’t heard of Fedcoin: The Federal Reserve has expressed interest in starting a digital currency.
We’re already seeing this in China.
The basic model is:
You have an app or some sort of digital currency that you give to people.
You tell them if they jump on the app, they get a thousand dollars, but they have to spend it within a certain timeframe.
Eventually, people start using it, and get comfortable doing so.
This model cuts out a lot of commercial banks.
Then, the Federal Reserve is basically the central bank in charge.
They would be heading a lot of traditional bank activities such as lending and what sort of rates you’re getting.
It’s really interesting because, eventually, this would lead to a road where physical currency does not exist anymore.
One of the biggest benefits of cryptocurrency is the promise of privacy.
I think that nothing is private.
In fact, it’s actually less private than it was before.
With Fedcoin, the Federal Reserve has control of all of that.
They have insight into every single transaction.
You might think that’s extreme, but it really is the way things are headed.
There’s a lot of conversation around that.
This could all potentially lead to a ban where the Federal Reserve could ban owning other cryptocurrency.
They actually could potentially make it illegal.
Your digital crypto would be very difficult to access as a banned product.
I’m not saying that’s for sure happening, but that is definitely a risk and something to consider.
The last thing I want to say is that crypto can actually be physically lost.
I have a good friend of mine from college who bought a couple of hundred Bitcoins at less than a dollar each.
In today’s terms, that’s millions of dollars in Bitcoin.
He has a computer but he can’t find the code to access that money.
This story isn’t an isolated incident.
You’ll find story after story of millions of dollars in Bitcoin stuck on a laptop.
People dig through a dumpster, looking for certain things they’re trying to unlock.
One guy had ten tries to guess a password and he used eight attempts trying to get over $200 million.
He only had two more attempts before it was gone forever.
So those are things to really consider when you look into Bitcoin.
Strategies for Investment
I want to be very clear.
I believe crypto is speculation.
You may have a different opinion and that’s totally fine.
But it’s important you understand these three ways of allocating your funds:
The first strategy is speculation.
Like I mentioned, crypto to me is speculating because of all the risks that are there.
Some people say that nobody can tell you where you should allocate your funds.
They will also say that you should put 5-10% of your wealth into speculative assets.
Why would you do that?
It gives you a lot of upsides.
I like gold and silver mining stocks.
I like it because as the price of gold or silver goes up, there’s an exponential move typically in those stocks.
2. Store of Wealth
The second way you can allocate your wealth is the idea of something intrinsically valuable.
It’s a store of wealth, right?
Something you can have that is accessible and will preserve your wealth.
The dollar has lost something like 98% of its value in the last a hundred years.
You can see that in the price of everything – and in this chart!
It’s not because stuff has become more valuable.
It’s because the dollar has become worth less.
So, when it comes to fiat currency, as seen in this chart:
The supply of U.S. dollars has increased by 4x in the last 20 years.
Generally, things should rise by about 400% – which is kind of crazy, when you think about it!
This is why people say they remember hamburgers being five cents when they were younger.
So where can you put your money where it actually stores wealth?
A great way to do that, as I mentioned before, is gold.
JP Morgan is credited as saying: “Gold is money and nothing else is” or “…everything else is credit” in another version.
Like him, I love to invest.
I like putting my money into gold not as an investment, but as a place that actually stores wealth.
If you want to hear more about storing wealth outside of the dollar, you can check out this video.
If you do buy gold, you can have it placed in a third party depository.
There’s a number of these around the U.S. and you can easily put your money in there.
They will loan you money based on how much you store there.
Typically it’s a 75% exchange rate.
So, if you put in 100K, they will loan you 75K at a decent rate.
It’s important that you understand the idea of what an investment really is.
An investment is something that pays you cash to own it.
It’s not speculation.
It’s something that actually is a cash flowing asset.
That is what an investment is to me.
Those people that make the case for stocks or other things like that…
I think for some of them that don’t pay dividends, there is a degree of speculation there.
My friend George Gammon has a 10-80-10 rule.
What this means is you have your cash position separate from your cash position, but you have 10% of your wealth in gold.
I would say gold or silver, but he likes gold.
You would have 80% in cash flowing assets that pay.
And, finally, 10% in speculative things.
The lion’s share of these is that 80% in assets are cash flowing investments.
So there are a lot of things you can do.
A lot of people do real estate and single family houses.
I did that for a while before I realized it was a ton of work.
Then I started getting into multifamily apartments – and that’s our business!
You can even supercharge your retirement by 17x following this method.
Make sure to check out our special report about investing. It compares the stock market to real estate, and it also includes how the pandemic affects your investment future.
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