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How NOT to build wealth in cryptocurrencies


 “I’ve got $20,000 in savings. How do I generate wealth in crypto?”

 “Sell house. Buy Bitcoin

 -Anonymous forum posts



A trader noticed this one stock had lots of order flow on the buy-side.

The trader called the firm’s analyst, a well-respected expert on the sector. This highly credentialed analyst was hot on the stock. He was anticipating excellent results in the upcoming release. He seemed plugged in, so his conviction was reassuring. The trader initiates a position.

The day before the anticipated announcement, the behaviour of the stock started to change.  The selling increased, and the selling pattern was unusual, considering the expectations of the analyst. The trader checked around for news and called the analyst back for any updates. The analyst was still bullish. He hadn’t heard anything unusual, but the action wasn’t confirming the expert.

The next morning the news came out. The news confirmed the unusual action the day before, it was negative. Poof! $60,000 gone, just like that.

Peak anonymous expert

During the bull run in crypto and during the first decline, people were asking anonymous forum members how to generate wealth in crypto. The identity of these advice volunteering members was unknown. Their track record unverified. Trust was offered where none was due.

The advice that flowed on these forums was a mix of cliche, canned answers and “just buy some and put it away.” Or put another way, nothing that someone who was planning to get wealthy could use.

Looking across various articles written over that time, you could trade crypto almost exclusively on the level of conviction. The higher the conviction in the article, the lower it would go. After all, the best time to buy crypto is not when existing hodlers have a religious conviction, it’s when they are cautious and unsure.

Less trust

If you have a bunch of savings, want to build wealth and value privacy and trust, what you shouldn’t do, should be obvious.

You probably should not ask for anonymous advice on these matters from a forum. After all, there’s no difficulty level, nonce, expensive calculations, and verifiable network for internet BSers. Anonymous internet advice isn’t “trustless” in the blockchain marketing sense, but rather trustless in the “should not be trusted” sense.

If you can lose lots of money trading in the regulated market relying on a verified expert analyst,  how much can you lose listening to anonymous posters? Now add to that an evolving unregulated, highly volatile, speculative asset – where anybody with a dozen articles under their belt can call themselves an expert…

Sell house and buy Bitcoin?

Do you really want to rely on that advice to build your future wealth?

So what should you do?

Think like a financial advisor.

Questions to find an answer

Now, let’s take a step back and look at this situation.

If you were talking to a professional financial advisor, the question of what to do with twenty thousand dollars and building wealth would be the start of an in-depth conversation.

After all, without seeing your whole picture, it’s tough to give you any kind of useful advice on how to build wealth. Because wealth isn’t just about money, it’s a way of thinking about “money.”

A professional (licensed) financial advisor would start the conversation by assessing a series of things before even considering suggesting anything. The areas that he or she would assess would include:

  •   > Your personal and professional goals
  •   > Your income and assets
  •   > Your investing and trading experience
  •   > Your risk tolerance
  •   > Your time horizon

Now, if you posted a question about generating wealth in crypto and the person that answered didn’t ask you these questions first, there’s a reason for it.

They don’t know what they are doing either.

Investment money versus play money

If you don’t have your own financial advisor and don’t want to hire one, you will have to do it yourself.

Being your own money manager means asking yourself important questions about your goals, risk tolerance, time horizon, and experience. Starting with these questions, you can get a better idea of what might be the right plan for you.

Let’s assume you have $20,000 in savings, and you want some crypto exposure. But you don’t want to lose all of your savings if your bet goes sideways.

Your first step would be to compartmentalize your funds.

Let me explain.

Invest and play

Compartmentalizing funds means dividing funds into investment money and play money.

Your investment money, or the majority of it, is better suited for established wealth development and investment products. These funds could be allocated to professionally managed low fee products like index funds or ETFs.

Your play money, on the other hand, is for higher risk, more volatile, speculative activities. This is where you might allocate a portion to trading in volatile stocks, cryptocurrencies and other speculative assets.

By dividing your money in this way, you can work on advancing your wealth accumulation in terms of investment assets, while participating in areas like cryptocurrencies. Play money allows you to pursue opportunities where outsized gains and losses can happen without losing everything you have.

Compartmentalizing your funds can also protect you psychologically. Volatility and risk of losses will impact your decision-making. So by allocating a small portion of your resources to speculative cryptocurrency assets, the mental burden of losses and volatility is minimized.

Using the financial barbell

So how do you compartmentalize your funds?

You could decide to allocate 10% of your twenty grand, or $2,000, to your play money bucket for speculative trading activities. The balance of the savings could then be allocated to professionally managed low fee products. A sort of barbell approach.

With your speculative money, you could buy some Bitcoin or Ether. Or both.

Now, you could break your Bitcoin allocation into tranches of 5-10% of the $2,000 and execute each tranche at predefined levels. You ladder into the position by buying small amounts as the market moves around to get a better overall price. Then you can hodl the position or trade it.

If you decide not to hodl the position, you can trade the position around in various ways. For example, hodl half of your speculative position as your core position, and trade around the other half as the market ebbs and flows.

Trading around a portion of your position allows you to always have exposure while helping to reduce your overall cost basis as you trade in and out. If you trade well that is.

Wealth isn’t a choice between a mansion or a tent

Whatever you decide to do, it’s key as in all decisions related to your funds to own the decision and take responsibility. Don’t use ALL of your wealth-building capital on speculative activities.

Think like a financial advisor, not an asset evangelist. 

Compartmentalizing play money from investment money will give you a lot of psychological breathing room if something goes wrong. When you have extra reserves in other assets, you can start over. That’s how you build wealth.

The definition of wealth-building does not include selling your house to buy Bitcoin. It doesn’t include taking a flyer on one asset, never mind a speculative one.

Because when you put all your chips on the table for one roll, you don’t get to choose whether you end up with a mansion…or a tent.


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