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Money Matters

IS NOW THE TIME TO BUY CYBERCURRENCY?

By MARY LYNNE DAHL , Certified Financial Planner ™ Retired

 

August 06, 2022
Saturday

 

jpg Money Matters by Mary Lynn Dahl

Mary Lynn Dahl

(SitNews) Ketchikan, Alaska - When the stock market goes down, many investors recognize an opportunity to invest at lower share prices. If you are an investor with some cash on hand, you could be buying shares for your long-term goals now, given that prices of many shares are down. If you are, in fact, a long-term investor, getting shares now, at lower prices is just smart. If you buy good quality shares, you are simply getting them “on sale”, at bargain prices. When you buy shares during a market decline, you need to wait before selling them, sometimes years. Careful, long-term investors are willing to wait, and it usually pays off. It is a proven, time-tested strategy.

Most people have heard the old investing advice to “buy low, sell high”. The advice is based on the fact that if you buy shares at $10 each and sell them later at $15 each, you will make a profit of $5 per share, which is a return of 50% on that investment. This is not hard to do if you buy when the market in general is down, usually because of economic decline, market correction or a crash in share prices. Buying during a down market is a great idea when and if you have the cash to buy these shares.

Selling when the shares have risen in price should be as easy as buying but it often does not work out that way. The reason is that people often want to hang on to their “winners”, as they refer to shares that have risen in price over time. Often, share prices will rise when the economy is growing rapidly, or when earnings reports indicate that companies are profitable or dividends on shares of stocks are being paid and even increasing.

Some investors are reluctant to sell their shares when share prices have risen because it looks good on paper to see the increase in value. However, no real gains will be realized unless the shares are sold, but for some folks, selling their winners feels wrong. Note that I said “feels” wrong. This is an emotional response, not a rational, strategic response to paper gains.

So, given that a lot of investors know that they should buy when the market is in a decline, some folks are saying that now is the time to invest in cybercurrency, like Bit Coin and others. Is this a good idea? Logically, it would seem so. However, there are several key issues at hand here that any investor is going to face if he or she is investing in cybercurrency. Either one can ruin a sound strategy like “buy low, sell high”.

The first issue is that although it is not difficult to recognize when shares of stock are down in price by looking at the historical prices for the last 10 years, it is much harder to estimate how high they may go when/if the market, and these shares, go back up. Because no one actually knows when the market has risen to the maximum peak, it is guesswork to estimate when to sell on paper gains. This, however, is the goal, the flip side of “buy low, sell high”.

To deal with this problem rationally, smart investors will set a target price at which to sell when they buy. They decide before they buy that they will sell at a certain higher price. It is not an emotional action; it is a plan based on a straightforward strategy. Done correctly, it is generally successful. It allows you to buy shares when they are down in price and sell them later when those same shares have risen in price. Voila! You realize a gain and have cash to reinvest, hopefully to make additional gains.

The second issue is whether or not now is a good time to do this with cybercurrency specifically, like BitCoin. The problem with cybercurrencies, however, is that they go up and down at random, not based on the usual things that drive markets and share prices. It is not predictable, or even clear why the prices of cybercurrencies move up or down when they do. The entire market of cybercurrencies is simply volatile, moving up and down without any correlations to what actually drives markets. If a cybercurrency falls in price, while it may look attractive as an investment, it may in fact, simply drop further in price. Some even disappear from the market entirely.

Early in the cybercurrency market, some people predicted that the prices would trend up and down with gold, acting as alternatives to traditional stocks, particularly when stocks were in decline. That, however, has proven not to be true. Instead, cybercurrencies have been subject to decline along with stocks.

Further, it is not safe to assume that just because shares of stock companies are down in price and offer a potential gain when those shares go back up in the future, that the same will hold true for cybercurrency investments. This is a risky assumption, for a specific reason. That reason is that shares of stocks in ordinary corporations have earnings. Cybercurrencies do not have earnings, however. Ordinary companies have assets, like products and services, or patents and intellectual property, or brick and mortar stores, offices, apartment and commercial buildings. Cybercurrencies do not. Ordinary stock corporations often pay dividends to their investors; those dividends come from net profits on earnings. Cybercurrencies do not have net earnings and do not pay dividends.

This should surprise no one. After all, what is behind BitCoin? What sort of asset does it rely on to provide value? The answer is that it has none. BitCoin, like other cybercurrencies, is a technology, based on “block chain”. Block chain is a system of math algorithms that exist only in electronic form. It does not have any concrete value, nor does it have any assets, earnings or profits. The only value is offers is the potential to buy at one price and sell at a higher price. Based on what? The answer is emotion. The emotion of greed, specifically.

Another issue to consider is that because cyber currency is not legal tender like the US dollar, the Euro, the Yen or the British pound, it offers no guarantee that it has any value. With no government to stand behind it, cybercurrencies are not secure, at least not in most countries worldwide. It can, and it does, go up or down in price based on virtually nothing. In short, it is gambling, not investing.

To make matters even worse, cybercurrencies are prone to being used in investment scams. They are currently being promoted by scammers who will make promises of great investment returns that never materialize. Large, reputable investment firms are sending out warnings to their customers to avoid these scams, but some people will probably fall prey to the scams and lose their invested dollars to them. The latest warning, I am aware of is from Charles Schwab & Co., the large highly reputable, discount brokerage firm, who is alerting their clients to be aware of scams promising unusually high returns on cybercurrency “investments”. Most of these fraudulent scams use social media and bogus phone numbers, with instructions to send money to bogus firms for purchases of bogus cybercurrency investments. This kind of scam only works if the investor succumbs to greed.

Investing is a rational process of accumulating assets of value. With ordinary people, it usually takes time and patience. Making good investment choices requires common sense, a plan with a strategy and action that is not based on emotion. Stocks are a popular investment, as is real estate, because many stocks and real estate represent real value and will pay an investor dividends, rental income and/or a combination of cash benefits while also rising in value based on an increase in the value of the company as a whole. Buying shares in high quality stocks and real estate funds when they are down is smart, especially if a target price to sell at a later date is identified as a strategy to realize a profit. It is not possible to predict and time the market, so smart investors simply accumulate shares routinely through all market cycles, up and down, but often increase their accumulation when share prices fall, if they have cash on hand to do so at that time.

Long term investors gain their wealth gradually, over time and avoid the primary mistakes of making investment decisions based on fear and greed. Cybercurrency is an interesting technology which can be used for safeguarding data effectively, but it is not a valid investment and not appropriate for the average investor. It is not secure, not legal tender, does not pay interest or dividends and is very volatile. It is gambling, not investing.

Is now a good time to invest in cybercurrency? I think the answer is clear. Never is it a good time to invest in cybercurrency.





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©2022 Mary Lynne Dahl, CFP®

Mary Lynne Dahl is a retired Certified Financial Planner  TM . She is a partner and founder of Otter Creek Partners, a fee-only financial planning and investment advisor firm in Alaska. These articles are generic in nature and are accepted general guidelines for investment or financial planning and are intended for educational and financial literacy purposes only.  

Mary Lynn Dahl can be reached at moneymatters@sitnews.us



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