Do Not Invest In Things You Know Nothing About.

That is, unless you are acting on the advice of an expert in all things related to it (who you trust) and you know exactly what you are getting into.

Let me tell you some stories.

Many people think investing is easy: just buy low and sell high. In fact, many amateurs coming to the market assume they know better than anyone else, better than the traders on Wall Street who spend 80 hours per week analyzing investments.

When a friend of mine got into trading gold and silver, he assumed he would make tons of money, because gold was shooting up and silver is always valuable too. He lost all his money in a few short months, because he never bothered to learn the industry. He wanted to get rich quick without any effort: that is not a realistic or honorable way to obtain wealth. Warren Buffett said: “The stock market is a means of transferring money from impatient people to patient people.” If you are impatient and plan to get rich fast, someone else will end up with your money.

Though Bitcoin is not a stock, I feel an analogy to the stock market is appropriate here. Before the big market crash in the 1920’s that signaled the start of the Great Depression, stocks were booming. Everyone and their grandmother was buying stocks, under the assumption that their price would keep going up. A famous stock trader who had spent his life studying the stock market went to shine his shoes one day during this boom. The shoe shiner, unaware of who this man was, started giving him stock advice. The trader immediately pulled all his and his clients’ money out of the stock market: he knew that in order to buy low and sell high, you must do the opposite of what everyone else is doing. If a shoe shiner was giving him stock advice, the pandemonium for stock profits must have seeped into every layer of society. When everyone else is buying, that’s the time to sell.

In the 1800’s, there was a boom in tulip bulbs. For some reason, people got it into their heads that tulips (the flower) were going to become more and more valuable over time. The value of tulip bulbs shot up, and people kept buying more and more of them at higher and higher prices. When the craze settled down and there was no longer any emotional reason to buy, investors realized they could not sell their tulip bulbs to anyone. Many people lost their entire fortunes because they followed a fad. Two lessons to learn: don’t ever let excitement or crowd mentality influence your buying decisions. Second, don’t buy something that is inherently worthless. It sounds crazy that people would be so obsessed with tulip bulbs, but it happened. In a hundred years, will historians be laughing that investors in the early 20th century lost their life savings on imaginary internet money?

Warren Buffett, the world’s most successful investor, calculates a stock’s inherent value and then buys that stock only if its price is below that value. (This is like knowing a Mercedes Benz car is worth $50,000, but you find it on sale for $25,000). So according to Buffett, you should buy an investment product only if you know its true value, and that true value is greater than the price you pay. Do you know how to calculate the true value of a bitcoin? Can you give an exact dollar estimate as to how much a bitcoin is worth, and compare that to the cost of buying one? If the answer is no, you could be like a blindfolded man throwing darts at a wall.

Buying low and selling high is a viable strategy; but if you come in after everyone has been infected with the get-rich-quick fever, you are likely too late. Prices may already be too high and you will be riding the bubble when it pops.

The surest way to lose your money is to follow what everyone else is doing. Right now, that’s Bitcoin.

Again, if you know everything there is to know about Bitcoin, you have done your research, you are no stranger to this industry, and you believe in your investment plan, then this article does not apply to you. But for the vast majority of people who do not know anything about the cryptocurrency and are just looking to make a quick buck, you will lose your investment. Hold onto your money, or at least invest small amounts that you don’t mind losing.

You cannot get rich quick without any effort. You can get rich SLOWLY without any effort, see my article on Financial Advice by clicking on my profile.