There’s investing with “play money” and then there’s playing with fire.
As Coinbase, the cryptocurrency exchange, goes public on Wednesday, financial advisers want you to remember the difference.
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With retail investor ranks swelling, there’s growing allure in finding and profiting off the next new thing.
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Enter Coinbase, a platform with 56 million verified users that enables the purchase and sale of crytpocurrencies like Bitcoin
BTCUSD,
and Ethereum, which appear to just keep increasing in value.
An obvious investment, considering the expert take that cryptocurrency is at a “tipping point,” right?
Not necessarily. Do so with prudence, say financial advisers.
Experts say it’s always been risky to invest in companies just as they are going public.
For example, without a track record to work off, share 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 with cyrptocurrency’s volatility, and consider the skepticism of some who say Coinbase’s valuation is “ridiculously high.” That number ranges froom $50 billion to $150 billion and even experts who are bullish say the stock is “not for the faint of heart.”
(A Coinbase spokeswoman declined to comment ahead of the IPO.)
The idea is to invest in an IPO with a small portion of money you’re okay potentially losing. The question is, how much? Here are a couple different answers.
The numbers game
One common refrain is devoting somewhere between 5% and 10% of investable assets to speculative investments or stocks. Others say the amount that you’re OK, if that isn’t too glib a word, seeing potentially evaporate should not 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.
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‘The less your net worth, the lower the percent of play money you should cut loose.’
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Daniel Johnson of RE|Focus Financial Planning in Winston Salem, N.C. says he’s all for people putting money into the companies that interest them, because many times the investment works out on companies they know and understand.
But he’s all for diversification too. Keeping the investment in any one company below 5% is a good bet, he said.
But the same numbers do not fit everyone, according to Theresa Morrison, founding partner at Beckett Collective in Tucson, Ariz.
“If you don’t want to lose your ‘play money’ then don’t play,” she said. That money might be 1% to 2% of invested assets, she said.
“The less your net worth, the lower the percent of play money you should cut loose,” she said. “Conversely, the more flush your net worth, the higher percent of play money you can allocate, but only up to a point.”
The no-numbers approach
In the lead up to Coinbase’s direct listing, Chris Struckhoff, founder of Lionheart Capital Management in Orange County, Calif., said he’s been talking to some clients who want to buy Coinbase shares.
“They have these dollar signs in their eyes,” he said.
These people view Coinbase stock as rocket fuel to meet their financial goals, but “like with anything, the faster you try to go, the more likely you’re going to trip yourself up,” he said.
Struckhoff doesn’t tell his clients to buy the stock or wait. He thinks about the idea of play money without applying hard-and-fast numbers. He does this by thinking backwards with clients.
They start by remembering the financial goals a person has — a house, a boat, a nest egg or something else. Then they look at the financial wiggle room someone has to devote to something like a Coinbase play.
What about just buying cryptocurrency?
Given the price surge in crytpocurrencies like Bitcoin and Ethereum
ETHUSD,
some say it’s worth going straight to the source and buying virtual currency instead. But again, they say not to go overboard.
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‘You can either search for gold (own crypto), or you can sell shovels (own Coinbase stock).’
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For example, Vrishin Subramaniam, the founder of CapitalWe, a financial planning firm focused on millennial investors and younger, recommends putting somewhere between 2% and 5% of net worth in cryptocurrency.
If someone wants to buy into Coinbase, Subramaniam would advise folding this investment into the 5% cyrptocurrency investment basket. Going forward, “we can increase that allocation for listed securities after a couple 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 gain cryptocurrency exposure is through direct ownership of cryptocurrency,” said Graciano Rubio of Infinity Financial Planning in Los Banos, Calif.
There’s a metaphor for the moment that’s wrapped up California’s own Gold Rush during the mid-1800s. “You can either search for gold (own crypto), or you can sell shovels (own Coinbase stock). They each have unique risks and upside but both can be a successful strategy to profit from cryptocurrency,” he said.
