- Did you know that speculative investing (highly volatile) goes back even to the 1600’s?
- Why is it valued at about $700 today when nothing would be stranger if it were at $7 or even 7 cents?
- We think the block chain technology is fascinating. But to this date, it still remains a potential. Most importantly, what makes the value go up is not due to the.
We have had a few inquiries about cryptocurrency lately.
Cryptocurrency is a hot topic in alternative investment circles. It’s a creative idea, offers the hope of spectacular returns, and gives an option for those losing faith in the dollar.
Did you know that speculative investing (highly volatile) goes back even to the 1600’s? In Holland, it somehow became fashionable to buy rare tulip bulbs (striped or speckled) and display them as a luxury item. The trend caught on and soon six companies began selling rare, exotic bulbs to those interested in holding them as an investment. The bubble quickly grew with tulips being sold at exorbitant prices. At top of the market, an expensive tulip would sell at a price of a fine house! This craze ended abruptly when buyers, who had promised to pay a certain amount, refused to pay, causing prices to plunge. Isn’t it interesting that even a perishable item could claim such a high value? Here is the link for you find more about this fascinating history that happened in one of the finest economies in the world at the time, Holland. [[Link to the tulip article: click here](The Real Story Behind the 17th-Century 'Tulip Mania' Financial Crash)]
How about another example? My father-in-law was a patent attorney for luxury apparel companies. One of his clients was DIOR. He gave Ujae a pair of DIOR sunglasses when he was heading off to college over 20 years ago. He told him to be careful with it since it was worth about $500 (todays value). However, he couldn’t tell the difference between a $20 pair of sunglasses at Walmart and the DIOR pair. In fact, DIOR’s biggest issue was identifying counterfeits. Many times, the counterfeit looked so real that even its executives and my father-in-law couldn’t tell the difference. So, what makes DIOR roughly 25 times more expensive? It is an agreement by the people who have money to show it off and are ready to defend it’s authenticity.
Here is another example that might be a bit controversial, but it reveals a bit about who we as humans are. Why does the Queen of England have so much more net worth and prestige than the average citizen? It is because there is an agreement by the people who have the vote and money in England. Please tell me what Queen Elizabeth has more of than you and me that commands fame, recognition and reverence from the British? The biggest factor is ultimately the British citizens’ agreement, or their collective desire, to believe in the Queen.
Back to cryptocurrency. Why is it valued at about $700 today when nothing would be stranger if it were at $7 or even 7 cents? The answer again is that there is an agreement by the people who are putting their money behind it. This fundamentally different from stock or bonds that entitles you dividend or interest cash flow and transparent financial performance of the business.
We think the block chain technology is fascinating. But to this date, it still remains a potential. Most importantly, what makes the value go up is not due to the intrinsic utility or value, as with dividends or interest from stocks and bonds, because it has not been proven yet. Rather, the value depends on a consensus amongst a group of people just as the value of rare stamps or art does. To be clear stocks have consensus factors like cryptocurrency at times, weather sound or baseless, to drive up the price to the point of bubble, but it can always be referenced to the cash flow history and projections.
If you have about 2% to 3% of your net worth available AFTER you have other financial resources properly invested to support your real needs, then we, as financial advisors, can direct you to cryptocurrency investing. Or, if you are the type of person who needs to speculate just to stir you up and you have some extra money that won’t hurt your financial goal even if all is lost, you can go for cryptocurrency too. But, the right mindset is to know that you can get hurt by it. In the video below, I will show you what happened to my husband after pursuing speculative fun at a ski slope. He went down off the trail just to enjoy more danger and fun. It didn’t go very well. Thankfully he didn’t get hurt.
Sarah & Ujae Kang
Founders of UAK Diversified Wealth Management
Link for the video version of this article.
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