I had an interesting visit with a younger investor this week regarding a particular cryptocurrency. Our office does not offer, nor make recommendations on cryptocurrency investments, but I will share this story for educational purposes only. The young man wanted to buy a certain coin that all of his friends were recommending to him. It was a fairly new coin that sold for only a fraction of a cent. The price appealed to his group since it allowed them, for a relatively small sum, to buy millions of these coins. The thinking, he explained to me, was that if they even went to a dollar a piece they would all be rich. He talked about other commonly traded cryptocurrencies that had skyrocketed in price and made others rich and saw this as his opportunity. His logic seemed reasonable on the face of it, but there were key elements he and his friends were overlooking.
Let me pause to say that as I continue to work more frequently with a younger generation of investors, it is clear they are much more social in their behavior. They care a lot about what others do and think, perhaps because the internet allows them to know a lot more about what others are doing and thinking. Their lives are in each other’s faces daily, creating a greater desire to be part of what their peers are doing. In several other experiences when I question their desires for certain investments the response is often, “everyone else I know is buying it.” I resist the temptation to reply with my generations’ classic “if everyone else jumped off a cliff…” response.
There is admittedly some value in owning something just because everyone else does. Prices of assets are driven by supply and demand so as the demand side increases the price would have upward pressure. At least this would be true in the short term. So, it is not unusual to hear stories of people earning high profits off questionable investments, at least from those who were the first ones in, and more importantly, the first ones out. Ponzi schemes, chain letters and similar scams all thrive on the concept that the early birds make all the money at the expense of the latecomers. But is this really a good way to invest?
Now back to my story. I reviewed with the young man the crypto asset in question, and we discovered that there are 550 trillion coins in circulation. According to the Federal Reserve the total combined household wealth of the United States is only 142 trillion. So, when his coin hits a dollar a piece, well, you get the picture. All the social media hype in the world will never overcome simple math. To my young investors, there is value in keeping an eye on what your investing friends are doing, but if their actions defy the laws of math and logic, I would stay away from that cliff no matter how many of your buddies are jumping from it.