Bitcoin Crash: The No. 1 Investing Mistake
In the past, I’ve compared gold to Bitcoin and silver to Ethereum.
Today, I’m focusing on the comparison between Bitcoin and stocks — not the assets, but the people who invest in them.
One of the reasons so many people lose big in the stock market or the cryptocurrency market is because they start buying as they see prices going up. Most of us remember the insanity of the dot-com bubble in the late 1990s. In the mid-2000s, it was the real estate bubble.
Today as I write, cryptocurrencies are getting all the attention.
Before January of this year, Bitcoin had only seen highs around $30k. The technology is so new that a lot of people hadn’t bought into what Bitcoin stands for, but then in January, Bitcoin’s price shot up into the stratosphere.
In April, it topped out at $63,000. One of the main reasons for this was that there was a huge influx of investments from large-scale institutions (pensions, university endowment funds, investment trusts)… and companies like Tesla.
When the price started to climb, new investors jumped into the crypto world and betting large amounts of money. This buying frenzy from new investors is reminiscent of what happens in the stock market.
And the volatility storm is leaving a lot of losers in its wake. Here’s what you need to understand about investing, so you don’t become one of them…
The I Quadrant: The Playground of the Rich
The reality is, it doesn’t matter what the investment is, it all comes down to who the investor is. People who work for a paycheck dread economic uncertainty and have a strong need for security. They often say, “I’m not that interested in money.”
What that really means is that they are not interested in making the life-transforming changes necessary to leave the rat race.
For them, job security — which doesn’t really exist — is more important than money.
Employees can be janitors or presidents of companies. It is not what they do or how much they earn that makes them an employee, but rather the fact that they are working for others and earning salaries and benefits.
A benefit is defined as assured compensation over and above their salary.
Does this sound like an investor? They’re not investing when they receive their 401(k). They are receiving a benefit. This is not investing. It’s playing it safe for the illusion of security.
Regardless of how one makes their money, if they hope someday to be truly wealthy, they must ultimately move from the world of employees to the world of investors.
Here’s what I use to illustrate these different types of people. This is the CASHFLOW® Quadrant. The letters in each quadrant represent:
E for employee.
S for small business or self-employed.
B for big business.
I for investor.
“I” is where you want to be.
“I” stands for an investor. And that is where the 401(k) confusion comes in. Let me clarify what an “I” quadrant person does. It doesn’t just stand for Investor. It ultimately stands for Inside Investor.
To be clear, I am not talking about insider trading like what Martha Stewart went to jail for. What I am talking about is moral, ethical, and legal.
An Inside investor is someone who puts deals together. While the ‘E’ quadrant individual is thinking his or her 401(k) is an investment, The Inside investor is the person who actually creates the deal. They create and package all the mutual funds and 401(k) deals together. They don’t invest in mutual funds of 401(k)s. They look at them from the inside of the deal.
When a person receives his or her 401(k) they are outside the deal. Usually, they know nothing of the deal and have a broker managing it for them. They are so outside that they never even look at the deal. The true ‘I’ investor is looking at the deal from the inside.
Let me give you an example. I have never bought gold ETFs. That is outside investing. There is no knowledge required to buy ETFs. When people buy an ETF they did not enter the deal on the ground floor. They are merely one of the millions of people being offered the same deal. They are on the outside.
I’ve bought actual gold mines, made them profitable, and sold stock in those mines. I was on the inside, creating the deal for the outsiders. When I invest, I only invest with Insiders.
Being an Inside Investor as compared to an Outside, 401(k), mutual fund, ETF investor are two different worlds. Two different quadrants. The ‘E’ quadrant does not have “investments”, it has “benefits.”
The ‘I’ quadrant invests from the inside where the knowledge is and where the deal begins, not after everyone else gets their hands into it.
An insider can also be someone who builds a business from the ground up. They know every nook and cranny. They are completely inside every deal that business makes. They know the deal from the inside. They see the complete picture, both the big and small perspectives.
What Are You Investing For?
When a person says, “I bought this stock (or cryptocurrency) because I believe the price will go up,” this person is most likely investing for capital gains. Rich dad used to say, “Capital gains is the dream of gamblers. A true investor first invests for cash flow, not capital gains.”
When you invest for cash flow, you’re investing in a money-back guarantee. If you invest for capital gains, you invest in hope. The biggest thief of all is hope.
When it comes to capital gains or cash ﬂow, there are three general types of investors. They are:
#1 Those who invest only for capital gains
In the world of stocks, these people are called traders, and in the real estate market, they are called ﬂippers. Their investment objectives are generally to buy low and sell high. When you look at the CASHFLOW Quadrant, traders and ﬂippers are actually in the S quadrant, not the I quadrant. They are considered professional traders, not investors. On top of that, in America, traders and ﬂippers are taxed at the higher S-quadrant tax rates and do not enjoy the beneﬁts of the tax breaks the I quadrant receives.
#2 Those who invest only for cash ﬂow
Many investors like savings or bonds because of the steady income. Some investors love municipal bonds because they pay a tax-free return. For example, if an investor buys a tax-free municipal bond paying 7% interest, the eﬀective return on investment (ROI) is the same as receiving a 9% taxable return.
In real estate, many investors love triple net leases (NNN). With NNNs investors receive income without the expenses of taxes, repairs, and insurance. The tenant covers those costs. In many ways, a triple net lease is like a municipal bond, because a lot of the income can be tax-free or tax-deferred.
The good news is that if I dig deeper, I might be able to ﬁnd a property with a much higher return, all the while using more leverage and my bank’s money to lower my risk, which is why I prefer triple net real estate over tax-free municipal bonds. This leads us to the third type of investor.
#3 The investor who invests for capital gains as well as cash ﬂow
Years ago, old-time stock investors invested for both capital gains and cash ﬂow. Old-timers still talk about the price of a stock going up as well as paying the investor a dividend. But that was in the old economy, the old capitalism.
In the new capitalism, most paper investors are looking for the quick buck. A stock price may have no relationship to the value of the company because computer algorithms created an artiﬁcial supply or demand.
If you recall the dot-com era, companies that were not companies, but rather just good ideas, were valued at billions of dollars, and companies that were valuable had their share prices trashed when the dot-com boom busted.
As an old-time investor in this new era of capitalism, I must be smart enough to invest for capital gains, cash ﬂow, leverage of debt, and tax advantages, as well as be above the turmoil the whiz kids and supercomputers cause in the marketplace.
Why People Lose Money
Rich dad used to chuckle and say, “Anyone can find an investment that loses money. Why people pay so-called financial experts to do that for them is beyond me.”
The real question is: How can so many people be so gullible? While there are many answers, one answer is that because they cannot find cash flow today, they invest in the hope of capital gains tomorrow.
On top of that, they invest without a money-back guarantee.
In my opinion, one of the primary reasons people invest for tomorrow, rather than for today, is because, in their minds, they cannot find or afford an investment that pays them today. When a person cannot find an investment that pays them today, they often become believers in tomorrow, which makes them gamblers betting on capital gains.
That is why so many people lose money. They are willing to lose money, even if it is only a little every month, in the hope and promise that tomorrow their ship will come in. These people, who do not know the difference between cash-flow investing and capital-gains investing, are the people who fall prey to financial predators.
Editor, Rich Dad Poor Dad Daily