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A friend asks: Should I put all my money into this can’t lose cryptocurrency venture?

Our passive investing logo: A slow and steady tortoise

When word gets around that you understand a little of the black art of investing, friends and family start to ask you about it.

Which is flattering, but it can also be rather scary and a little frustrating.

We’re not financial advisors for one thing. Also you’ll discover it’s a bit of lose-lose proposition.

People want two-minute solutions, not a reading list. They want to know how to get rich quick, not how to get comfortable in 30 years.

Some seem to believe you’re holding the good stuff back from them.

And even if your boring passive investing advice is implemented nothing good will happen quickly enough for most people to remember why you suggested it, whereas if a hot tip rockets to the moon and you swore someone off it they will remember that for the rest of your days.

Still, we get letters. Here’s a mildly re-jigged one I received very recently from a friend, who shall remain nameless, and my reply, which is more or less as sent.

(If this sort of thing is interesting perhaps we could make it a semi-regular feature?)

Hi [The Accumulator],

How’s life?

Anyway remember that time in The Fox and Duck when someone loud – probably [person X] but maybe [geezer Y] – went off about The Wolf of Wall Street and burning capitalists, and you sort of defended the bankers?

Which nobody expected, because most of the time you’re like us, but you sounded like you knew what you were talking about when it came to betting on the stock market.

WELL I was impressed anyway, and vaguely made a mental note to ask you if any opportunities came up.

So that day has come and I wondered if you had heard much about this block chain stuff…?

A mate was saying he’d already made a few thousand and that his next move was going to be into [obscure cryptocurrency venture redacted to protect the innocent] and I have to say investing in it sounds like a one way ticket to The Sunday Times Rich List

But maybe it’s not… and perhaps that’s where you come in!?

What do you reckon? Deal or no deal?


[A friend]

Dear [friend],

Please be very careful when you get these kind of tips. One-way trips to El Dorado are mirages 99.9% of the time.

Blockchain is hot. As in, off the back of Bitcoin, cryptocurrency is big news and everyone thinks they’ll make out like bandits.

Unfortunately, it’s more like a gold rush. A few early movers make it big and mostly everyone else gets buttons.

This sort of thing happens regularly. The process relies on a compelling story along these lines: investors believe that a particular section of the economy has excellent prospects and so bet big on firms that operate in that sector.

Early investors see success, latecomers get jealous and double or triple down. A few converts even ‘bet the farm’. (Luckily for our stomachs mostly farmers are less flighty folk).

Recent examples include green energy, robotics, 3D printing, and bitcoin. Back in the day it was gold, computing firms, and telecoms.

Go back far enough and it was railroads.

This kind of bet has historically been a bad one for most regular Joes.

Precisely because everybody thinks there’s huge profits to be made in a particular technology, firm, or sector, capital floods in.

This raises share prices. Share prices get so high that even fairly solid future returns can’t justify the prices paid. And so returns in the future are low, flat, negative, or CRASH.

Also, all the capital that’s pumped in is gladly accepted and put to work by those operating in the hot space. Most of them spend the millions as fast as they get it in an effort to outdo their rivals who are doing the same.

Competition is intense, but capital is wasted. There’s often plenty of innovation – but not enough to justify the gazillions pumped in. Bubbles can be good for humanity, but they’re bad for most investors.

This sort of thing happened in railroads, airlines, computing, the Dotcom crash of 2001 and most recently in crypto-currencies.

Essentially you have too much cash chasing the shares because of over-optimism about future prospects. The smart money identified the trend and got in early. The dumb money comes in later and gets burned.

The dumb money is ordinary mortals like you and me who can’t compete with the inside knowledge, research, analysis and computing power of the 24/7 City players that are the smart money.

It’s very hard to compete with people who were incredibly lucky, too. Buy your friend a congratulatory pint, but I’d talk about the football or the theater, not about his next hot tip.

High returns depend on the unexpected, not the expected. For example, everyone expected Facebook to soar into the distant future. Its share price was bid high.

When the Cambridge Analytica scandal broke, the share price fell because there was seen to be an increased chance of politicians imposing regulation on Facebook. That was unexpected news and the market for Facebook shares moved on it.

Today, some regulatory fear is in the price. How much? Haven’t the foggiest. But if you buy Facebook now then you’ll do well if that regulation does not happen – because some sort of regulatory cost to the company is expected. Conversely, you’ll do badly if the regulation has a bigger impact on Facebook’s prospects than predicted by the market.

There’s no sure way of predicting that outcome. That’s why everyone with experience diversifies. It’s also why a company can report amazing profits but the share price falls if they’re lower than expected. It’s fresh news and changing expectations about the future – good or bad – that truly moves the share price.

Over the very long-term it’s often unfashionable and boring sectors – for example tobacco companies – that have done well because nobody expects anything from them. Everybody was too busy throwing cash at the hot sectors. The unfashionable shares fall further than is warranted and strong profits can be made.

Academics have made careers out of showing we humans pay a premium for the new and shiny and overlook the unloved that’s available on discount.

Because we can’t predict, and to confound our natural inclinations, it’s generally better to spread your money across every sector, including all the snore-fests. That is, to invest in a total market index fund which basically buys and holds everything.

With an index fund you have exposure to hot sectors (they may do even better than expected after all) but also you’re snapping up bargains among the unfashionable sectors, too.

Tips from mates are dangerous because we trust our mates. But they’re usually acting on the same duff information and compelling story as anyone else is.

If you’re inexperienced and operating on the basis of a this-is-amazing story then that’s a massive red flag. It typically means you’re shark food for somebody else.

If you do venture into this then put in no more than you can afford to lose. And by that I mean if the entire investment went to zero. I am not saying it will. I’m stressing it could.

Even if block chain is a success as a technology (that’s not totally clear at the moment), nobody can predict whether this company will eventually be the Amazon of Blockchain or just another failed start-up that’s crushed by whatever company does become the Amazon of Blockchain.

Start-ups go to the wall all the time. The Facebooks and Googles of the world are very rare. The ratio of new companies touted as The Next Facebook or The Greatest Opportunity Since Google to, well, Facebook and Google would be similar to the ratio of many thousands of stars you can see on a clear night sky – with binoculars – to the lonely sole moon.

Single investments in individual companies are extremely dangerous to your wealth for this very reason. If it goes bust you lose all the money you put in.

If you must do something, think of it as like having a punt down at the dog-track rather than an investment. Bet a fiver, not your pension.

Take it steady,

The Accumulator

{ 36 comments… add one }
  • 1 Accidental FIRE May 31, 2018, 10:07 am

    People want two-minute solutions, not a reading list.

    That is a great line, sums up how people approach investing, losing weight, and a host of other things.

    I know a guy who will sell you some lotion that magically makes your biceps bigger… oh, that guy also has some great stock tips.

  • 2 UK Value Investor May 31, 2018, 10:10 am

    Lots of people seem to want total safety most of the time, but when they do take a risk they’re willing to take massive risks in pursuit of an improbably small chance of getting rich (obviously that’s not how they see it).

    Here’s my example: Boiler repair man turns up and asks me what I do for a living, seeing as I’m home to make tea for the boiler repair man. I say I run a website for stock market investors. He says oh that’s interesting, is oil a good bet right now? I say hmmm, oil’s not really my thing because it’s too risky…

    For some reason there’s a lack of middle ground with a lot of people. It’s cash or property for “safety” (I’m not sure either of those are particularly safe), or oil and gold stocks (or cryptocurrencies these days) when they want to take a risk.

    To be fair, this might make sense as a sort of core/satellite approach (core of low risk stuff plus a little bit of high risk), but the real risk is that a big win or two with a cryptocurrency will see them go all in on the high risk stuff, at which point it inevitably goes belly up and they lose their shirt.

  • 3 The Rhino May 31, 2018, 10:59 am

    The ‘lose-lose’ observation on providing any advice rings very true

    Probably means the correct response would have been ‘I dunno mate..’ and leave it at that?

    My experience is that it is impossible to talk about finance in any useful way with anyone other than similarly interested people on blogs.

  • 4 Fatbritabroad May 31, 2018, 12:19 pm

    @accidental fire. Does that lotion work on other things too? Asking for a friend….

  • 5 John May 31, 2018, 1:08 pm

    I’m an investment professional and get requests for investment advice all the time. After I painstaking explained diversification, one guy put “everything in astra – have you seen the yield?!”. Learning from my mistakes, the only advice I give now is to family and close friends and takes the form “here’s what I invest in”. If it does badly then they know you’ve lost with them.

  • 6 weenie May 31, 2018, 2:41 pm

    “Does that lotion work on other things too? Asking for a friend….” Haha, nearly spat my tea out all over my keyboard, @Fatbritabroad! 🙂

    None of my friends invest but recently, one wondered if she should be investing the money sitting in her cash ISA. I pointed her to the Monevator post about Vanguard Lifestrategy Funds as I think they’re the best thing for absolute beginners and told her to do a bit of reading but to not expect fast profits.

  • 7 YoungFIGuy May 31, 2018, 3:07 pm

    I’m loving these comments!

  • 8 Accidental FIRE May 31, 2018, 3:08 pm

    It does indeed! Send me his address and credit card number and we’ll get started!

  • 9 Fatbritabroad May 31, 2018, 3:44 pm

    It always amazes me however much people have they are always looking for the next thing. My dad rang me about bitcoin as several people he knew had made alot of money on it. I said good for them but bearing in mind that everything could go to zero. What would you risk on it. He said 10k (bearing in mind hes got about 3m net worth including his house). I said ok great so if you make 2x or even 4x that amount will it make any difference to your lifestyle. He said no. I said and how peed off would you be if you lost it. He said very. So i said so what exactly is the point of doing it. If you want high right split it 1000 in several crowd cube investments or do some p2p like i do at 15% interest. Id be annoyed if i lost it but i won’t lose my house and at least its regulated. Why would you need more than 15%!

  • 10 ermine May 31, 2018, 4:12 pm

    I think Warren Buffett said it best about LTCM

    But to make money they didn’t have and didn’t need, they risked what they did have and did need, and that’s foolish. That is just plain foolish.

    If it’s good enough for Warren, it’s good enough for your pal 😉

  • 11 Flacko May 31, 2018, 4:36 pm

    @fatbritabroad – does it work on other things? Since I’ve been using it I go everywhere with a wheelbarrow.

    @accidentalfire – please send my 50% sales commission in bit coin. I’ll pop it in the wheelbarrow alongside my other “investment”.

  • 12 Fatbritabroad May 31, 2018, 5:18 pm

    Sorry i appear to have turned the comments section in to ‘carry on investing’

  • 13 The Accumulator May 31, 2018, 5:33 pm

    Ooh matron, don’t

  • 14 Accidental FIRE May 31, 2018, 5:46 pm

    @flacko – roger that! My Nigerian to English dictionary is good!

    – Your Friendly Nigerian Barrister

  • 15 QuittingTeaching May 31, 2018, 5:54 pm

    My mantra is always “when I hear about it, the moments gone”. I’m sure you, your mate, and every commenter would wish they have bought bitcoin at $1. How far did AMZ fall? I’m sure everyone wishes they had bought it then.
    The next big thing is happening right now. Somewhere. What is it? Well we will probably never know until the bubble needs some dumb money just for a final pump.

    The best chance of most of us riding the next big thing is if a lowly startup hiding in the allshare is about to blow up. But as true passives we will ride it up to the top and then to the bottom again!! We all have shares in the next big thing. We just don’t know what it is. Too bad there is carillon, and M&S, capita and other stinkers there too! Passive investing is like betting on every horse where the overground is against the bookie.

  • 16 Bastiat May 31, 2018, 6:49 pm

    Nassim Taleb had a very similar advise: don’t ask someone what you should invest in, ask him what his portfolio is. That way he has skin in the game.

  • 17 dearieme May 31, 2018, 7:48 pm

    “My experience is that it is impossible to talk about finance in any useful way with anyone other than similarly interested people on blogs.”

    I have had success pointing to tax shelters, as in “this would be a good year for you to contribute to a personal pension”. I decline to recommend investments to hold within it.

    Though thinking about it, how about canners of beans and manufacturers of bullets?

  • 18 The Borderer May 31, 2018, 10:02 pm

    @Quitting Teaching.
    “We all have shares in the next big thing. We just don’t know what it is. Too bad there is carillon, and M&S, capita and other stinkers there too.”
    Too right. But this is concerning regarding Emerging Markets – https://www.ft.com/content/3ea51148-632f-11e8-a39d-4df188287fff

  • 19 Matthew June 1, 2018, 12:14 am

    I don’t think you can ever reasonably expect to convert get rich quickers, so I usually direct them towards premium bonds
    But it’s not really a bad thing if these people participate in unwise “investments” because as you say, bubbles benefit humanity – when crypto is eventually history there will be a massive flood of computing power onto the market that’ll make things like medical research cheaper. Block chain might be useful for certain situations but it seems a lot like hard work to me, more appropriate where data integrity is more important than speed, but not every situation.

    I do however think that the leading crypto currency (whatever that is) will have some underlying value based on its value to money launderers, drug dealers, terrorists, etc. I would never invest in something that didn’t have a realistic plan to grow (ie currency) but if you really wanted to I think indirectly holding it, even if overpriced, means you’re less likely to be viewed as a criminal by your bank than if you had unexplained payments in from a bit coin exchange.

    Although I think that non- growing assets might be easier to market time/ trade because you’re more likely to return to previous lows. Not that it go to that effort or risk…

  • 20 Emily June 1, 2018, 2:11 pm

    I think the format of writing a letter is really useful, for some reason I was better able to digest the information than I normally am. Also the reading list link was appreciated!

  • 21 Kraggash June 1, 2018, 3:55 pm

    @quittingteaching “My mantra is always “when I hear about it, the moments gone””

    That used to be mine as well, but then I found that I was noticing things before they got famous. Being heavily in the tech industry, I knew about bit coins and their potential about 4 years ago, but thought that a ) their moment (in the rudimentary form they are now) had passed, and b) there were great possibilities for future applications.

    Luckily, I also know about a form of ‘survivor bias’: I probably only remember the things that I spotted early that later became big, and not the ones that didn’t…


  • 22 Jim Brown June 1, 2018, 8:48 pm

    Maybe the next big thing is lurking on the AIM.

    That’s where I am looking now . Hoping to have 5% AIM exposure , investing in individual stocks. Other 95% of my portfolio made up of index trackers.

    The next bohoo or ASOS might be lurking

  • 23 QuittingTeaching June 2, 2018, 8:42 am

    Slightly digressing…i don’t subscribe to the FT. Should I? What is the gist of your link?

  • 24 Mike June 2, 2018, 8:45 am

    Hi, interesting article but somewhat missing the point. Have you ever tried to send money to another country? It takes 3 – 5 days and it is completely unclear at the beginning of the process how much it is going to cost you. You could get in a plane and fly it there quicker.

    Have you ever tried to make micro transactions for fractions of pence? The fees are ludicrously high and make it unviable.

    Now consider the difference between the very first day between a horse and an automobile. What do you think people said?

    There are digital assets out there solving real world issues – actually use cases and although nascent are now beginning to deliver on those use cases. The companies provide the railroad infrastructure but the digital assets are the trains than run on these.

    As you cleverly highlighted “People want two-minute solutions, not a reading list”. I`ve done a lot of research into digital assets and am 100% clear in my mind that there are some global game changers out there for how we deal with money. The internet of value is coming and money will move as quickly as digital information (finally!).

    It is an exciting time and don’t be fooled by the speculative bubble element. For real use case digital assets this is the era of the automobile. Stay on your horse if you choose but with all the research materials at your fingertips then don’t be so quick and glib to write something off as you have done above.

    Kind Regards,


    Now imagine

  • 25 Matthew June 2, 2018, 12:06 pm

    @quittingteaching – only subscribe to ft if you’re actively managing or for mental stimulation, news doesn’t really have a bearing on a passive strategy or asset allocation I think (which is more to do with your needs)

    @Mike – I think we’ll get exposure to any fintech revolution via indexing, going overweight in it is ok if you think it’s undervalued and accept any risk, but that is a more active judgement, maybe own the crypto brokers?

  • 26 SemiPassive June 2, 2018, 12:36 pm

    I lent Investing Demystified to someone and they were hugely disappointed there was no rapid road to riches described in it. They then asked me about leveraged bets on Crypto currencies and other Get Rich Quick opportunities.

    I lent Tim Hale’s Smarter Investing to a couple. They kept it for a year or so. Eventually they gave it back, neither having read it. At that point I decided never to lend books out that I ever wanted back.

    Essentially we are freaks compared to the vast majority of the population.
    Annecdotally it seems very rare a colleague runs his own self invested portfolio with no adviser – even for people in the industry!
    Sometimes its better to keep your cards close to your chest, unless prompted by someone genuinely interested in discussing or learning something.

  • 27 Matthew June 2, 2018, 3:52 pm

    @semipassive – indeed I think the rarity of slow investing types is partly why we have inequality like we do in the developed world, but bear in mind we are very lucky and the first generation to really have free information on the Internet, indexing, fscs protection, good is a limits, pension freedoms – it’s far easier nowadays than it used to be and without the Internet it would’ve taken me much longer to learn.

    But it’s still too early for all these changes to take root and help inequality more deeply. When you think about it, the creation of the stock market itself introduced opportunities to more “ordinary” people that they didn’t used to have

  • 28 Kraggash June 2, 2018, 8:51 pm

    @Mike “Have you ever tried to send money to another country? It takes 3 – 5 days and it is completely unclear at the beginning of the process how much it is going to cost you..”

    To send £1000 to e.g. Germany costs about £5, takes a couple of days max, and all charges (and exchange rate) are shown up front before you hit the ‘send ‘ button.

  • 29 The Accumulator June 3, 2018, 12:12 pm

    @ Mike – the point isn’t whether or not the tech will change the world. The question is can you profit from it? As an investor, can you pick the right company out of the crowd, early enough to make it big, and hold on even if its value is cut by 90% along the way? If you can, can you repeat the trick?

  • 30 TheFIJourney June 3, 2018, 4:11 pm

    Good post. I have the same situation at work where a couple know that I invest in the stock market. One person in particular talks about crypto on a daily basis. When crypto currency was on the large bull in November and December, he pretty much begged me to get in but I said that to me it wasn’t a long term investment I have any confidence in. As a experiment, I invested £100,000 in a virtual find on eToro at the time. I invested in 6 different crypto markets and currently the average is 72% loss. Even if this was to turn around, I simply have no long term confidence in any of this and will stick to get rich slowly thank you very much. Chris

  • 31 Mike June 4, 2018, 6:33 pm

    @Matthew You will not get exposure by indexing as the space is unregulated and the companies haven’t floated. Therefore you will miss the boat.

    @Kraggash You reinforced my point. Why should it take days and cost so much? It shouldn’t and there are solutions in place for sending trillions around the world into any currency for fractions of pence transmission costs and in 3 to 5 seconds.

    @The Accumulator I already have profited from this tech because I conducted in depth research of XRP and backed it. The technology is still nascent and still has huge potential. Also I think it is impossible in this example to “pick again”. Life only throws you a financial revolution once. It is happening now and there will be no repeats shown on TV 🙂

  • 32 Naeclue June 4, 2018, 6:50 pm

    @Mike, there are loads of ways of sending money abroad. Credit cards, PayPal and similar, bank transfer to any bank in the world that has an IBAN (embargoed countries excepted), there are a lot of good FX companies you can use which will undercut the banks and allow a few £ks to be sent hassle free online. Western Union is a good, but expensive, way to transfer a few hundred in cash instantly to someone in a fix overseas. Used them a few times. If you want to send very large amounts to an overseas bank you can use SWIFT and it is instantaneous. The overhead of block chain is crazy and totally unnecessary unless you are a criminal.

  • 33 Mike June 4, 2018, 7:20 pm

    @Naeclue Thanks for your input. The actual settlement does not occur instantly, it is held in Nostro/Vostro accounts. The settlement times are 3 – 5 days and carry a counter party risk as well as a requirement to hold lots of capital. XRP is an open source system and therefore free to use (no overheads). If you would like to do some research I could point you to some good sources.

  • 34 Filip June 6, 2018, 1:56 pm

    We are all aware of the advantages of cryptos over alternative ways of sending money, just like we were all aware of the potential of the internet, during the dot.com bubble.
    The point of this article seems completely lost on you.
    You’re either heavily invested in cryptos hence biased, or just trolling.

  • 35 Martin T June 8, 2018, 2:12 pm

    This article resonates so much with me, particularly the ‘lose-lose situation’. I’m only a beginner when it comes to investing, but explaining ideas I consider as simple to people who ask for advice becomes a real struggle.

    I did a summer internship in a bank within the markets sector and trying to explain why active investors as an average will always under perform passives as long as fees are higher was frustrating. “But won’t the active fund manager be able to sell and wait while the ETFs are forced to hold”
    “Active investors can choose to be more defensive when markets look overvalued”
    Few cases of fund managers correctly market timing and suddenly it’s the norm. They really should have made it clear in the ‘Big Short’ movie that had the market remained stable for a few more years, all those early shorters would have bled dry.

  • 36 Matthew June 8, 2018, 4:22 pm

    If everyone was financially responsible and aware the economy would probably grind to a halt, or dramatically change anyway, I suppose suddenly you’d have more supply than demand on a lot of things so inflation would be subdued, and there wouldn’t be the same inequality

    I think migrants are an example of how easy it is to get financial judgements wrong – they think they’ll be better off because of the currency valuation but end up renting, so they’re disadvantaged compared to the locals (who could’ve stayed with mum and dad), and they end up having to work every hour going to pay that rent – that is why they supply so much labour. They might even succeed in sending money home but I wonder if they would’ve been better off as homeowners in their own country.
    Some migrants i work with sadly quit their pension just to pay bills, so you can see why employers like them

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