In this post, we will cover my experience with the crypto craze, but first, here is our disclosure.
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Crypto, the Core-Satellite Strategy, and Play Money
I am a cautious risk-taker who puts up guardrails to keep myself on track. I do not typically invest in the volatile crypto market; it is the riskiest investment I have made in more than two decades of investing. So, before I go further into my foray into crypto, let me explain my investment approach. This is important as I want you to read this article in the proper context. I do not want you to think I am glorifying or advocating for investing in highly speculative investments.
Core-Satellite Investment Strategy
I firmly believe in the core-satellite investment portfolio strategy for my long-term money goals. It tries to maximize your returns at the lowest possible cost while minimizing risk.
This approach means the bulk, or core, of your investments are in passive, low-cost index funds or ETFs. They are funds that capture broad segments of the market. Examples would be a low-cost S&P 500 or total market index fund and could include a total bond ETF.
You can use the smaller satellite investments to take on greater risk or diversify into other asset classes. These include actively managed mutual funds, individual stocks, REITs, commodities, sector-specific funds, etc.
The takeaway is that you are trying to keep pace with the market for most of your investment dollars, not beat it. It is tough to beat the market. Many have tried. Most fail.
Segmentation
I also think it is essential to segment your money into different buckets. An emergency fund is an emergency fund, and it should not be used to buy a tv. A retirement account is a retirement account, and it should not be used to go all in on a penny stock that your best friend said is a sure thing. This leads me to “play money.”
Play Money
I segment a small amount of money as play money, which is more like a “play fund,” as I took an old 401K with a small balance and rolled it over into a large discount investment broker. Now my investment options are almost endless. It is one of the satellites, a tiny satellite, orbiting my core investments.
This “play money” is real money, but it is money that I can afford to lose, and it lets me entertain my risk-taking side without jeopardizing my long-term financial health. If I want to take a chance on that penny stock from the example above, I will use this play money; I would not use money designated for a down payment on a house.
Some people set aside an amount of play money based on the relative size of their portfolio, like 1%, or based on a fixed amount of money they budget for yearly.
By now, you can probably guess that when I decided to invest in the cryptocurrency market, I used my play money, and I am glad I did because it was a complete disaster. Ultimately, it was a textbook example of what can go wrong when investing in a highly speculative stock.
My Choice of Crypto Investment: Coinbase
It was 2021, and Bitcoin and other cryptocurrencies were hitting new highs. Bitcoin had reached $60,000 by April when it was trading at around $6,000 a year earlier. By this time, I was looking to take a chance on crypto.
I was uncomfortable investing in Bitcoin or other cryptocurrencies as blockchain technology is hard to understand. Also, cryptocurrencies are not controlled by any governments and are not regulated. At this time, Coinbase caught my eye as it went public.
Coinbase checked many of my boxes when it came to investing in the cryptocurrency craze,
In April 2021, shortly after the IPO, I bought a few shares of Coinbase at $337.99 to test the water. The idea was that I could always buy more shares if things went well.
I knew Coinbase would be a volatile investment, and it did not disappoint.
My One-Year Journey: Going This Way, That Way, but Not Up
After I bought the stock, things went downhill fast.
Within a month, Coinbase was trading right around $225 a share. If you are keeping track, you know this is a 33% decrease in one month since buying the stock.
One thing that became clear in that first month was how closely tied Coinbase was to the price of Bitcoin. Bitcoin went from a high of around $60,000 in April 2021 to a low of just under $35,000 by the end of May 2021, and Coinbase’s stock went with it.
I did not panic. My position in Coinbase wasn’t large, and I had bought it using my play money. I also try to pick companies that are leaders in their industry and making money. I believed I had that with Coinbase, so I was okay with the volatility.
After May, Coinbase and Bitcoin settled into the dog days of summer, and Coinbase’s stock did not do much over the next few months.
Strong Earnings and the Bounce That Never Came
This is what I was waiting for. Coinbase would report its Q2 2021 earnings, and I was confident it would pop. I knew Coinbase was profitable. Bitcoin was also moving up and trading in the mid-forty thousand dollar range. I was convinced I would see a massive swing in the upward direction.
Coinbase reported its earnings in August of 2021, and it beat expectations. It was a big beat. Coinbase had posted revenue of over $2 billion for the quarter, and their earnings per share beat expectations by over a dollar. Over a dollar! I was excited. I was pumped. Coinbase was making real money and blowing away expectations.
That excitement soon turned to disappointment. Coinbase came off of its lows by the time earnings were reported. It was trading in the $250 to $260 range. And after Q2 earnings? It traded in that $250 to $260 range. No bounce. No pop. Nothing. What a bummer.
Now We’re Cooking with Fire
As autumn approached, things were looking up for my position in Coinbase. Bitcoin was heading back into the $60,000 range, and Coinbase was right behind.
From October 2021 to mid-November 2021, Coinbase went from a low of around $230 to over $340 per share. That is a huge increase of roughly 50% in a month! The return on my initial investment now turned positive.
There was a brief moment when I thought of selling my shares. It was a short, wild ride, and I was exhausted. Think about it. These big swings all took place in a tiny seven-month window. If that does not show you just how volatile investing in the cryptocurrency industry is, then nothing will.
Instead of selling, I decided to hold my stake in Coinbase. I felt like Coinbase had finally reached its floor at the end of September and was now on the rise. Besides, I invested in Coinbase because it was one of the leaders in its industry and making money.
Something to Consider
I took courses on stocks and came across an interesting piece of advice. It suggested that you ignore the price you bought a stock or security at when deciding to sell. Fixating on the purchase price tends to cause us to hold onto losers too long and sell winners too soon.
Instead, when deciding to sell a stock, you should look at a company’s prospects and ask yourself: Given what I know about a company, would I buy it now at its current stock price, regardless of what I originally paid for it? If “yes,” then hold. If “no,” then sell.
Is this a perfect science? No way. Nothing about investing is, and that is why every investment firm points out, “Investing involves risk, and you may lose money.” Always remember that.
The Rise of Inflation and the Fall Of Crypto
Whatever forward momentum Coinbase stock had was short-lived. It was getting near the end of 2021, and inflation was rising. You could say It was more like a rocket ship. After over a decade of low inflation, it was finally ready for blast-off.
It was the perfect storm, thanks to the pandemic that resulted in trillions of dollars in stimulus, pent-up consumers, supply chain issues, and labor shortages. On top of all this, you had a Federal Reserve reluctant to increase rates by trying to explain inflation away as transitory.
As inflation started on its journey to outer space, the markets fell sharply, with speculative stocks like Coinbase falling faster. In a matter of a month, Coinbase was back down to the $240 range and just kept going lower.
You think I would have sold by now, but instead, I bought a couple more shares in March 2022 at a share price of $196.20. Why? Because Coinbase’s Q4 2021 earnings blew away expectations.
Coinbase was making money, and quite a bit of it. I felt it had the cash cushion to wait out a prolonged crypto winter, so I was buying Coinbase on the cheap. Besides, legendary investor Cathie Wood was buying, so why not me?
You think I should have learned by then, considering the whiplash I had suffered during this short period of time. Nope. I needed one more punch to knock me out.
A Swing and A Miss and the Final Crash
By now, I am guessing you know what happened after I bought more shares. If you said they went down, you would be correct. It was ugly. Coinbase and Bitcoin went into complete freefall over the next month. The two were tied at the hip. I held out for Coinbase’s 2022 Q1 earnings before making a final decision.
Coinbase reported Q1 earnings on May 10th, 2022, and they were terrible. Coinbase lost over $400 million. It was the first time they had lost money since I owned them. This made me think it was time to exit my position in Coinbase.
The market had been hammered due to high inflation and the Fed’s newfound interest in reigning it in. I still felt Coinbase was a good company, but it operated in one of the most volatile industries I remember.
At that time, shares were trading under $60. I felt its losses would only accelerate, and Coinbase would have to start burning through its cash.
I asked myself: Given what I know about Coinbase and its prospects, would I buy it now at its current stock price, regardless of what I originally paid for it? The answer came back “No.”
Therefore, I sold all my shares the day after Coinbase’s Q1 earnings. I sold my shares at a share price of $55.75. My total loss on Coinbase was 80%. It is by far the worst loss, percentage-wise, that I have ever incurred in a single stock position, and nothing comes close to that loss.
The Silver Lining
It is hard to believe there is a silver lining when losing 80% in an investment, but there is. The silver lining is that I minimized the risk associated with this investment to my overall portfolio. I bought only a handful of shares using the money I designated as “play money.” Therefore, the losses to my overall portfolio were minuscule.
Imagine the outcome if I had bought hundreds of shares or used many of my investment dollars, which could have led to my financial ruin. Many people did just that with cryptocurrency, and I would bet many did not get out at the top. Therefore, I can sleep easy at night, knowing that most of my investments are in passive index funds that I regularly buy in up-and-down markets.
Closing Thoughts: Would I Do it Again?
In the end, this was a big lesson in investing. Always remember that investing involves risk, and you can lose money, possibly all of it.
It is also a lesson in chasing returns and the next hot thing. Just because legendary investors, financial publications, or blogs advocate investing in a security or stock doesn’t mean you should.
It would be wise to make sure you have a sound financial game plan and strategy and to stick to it. Always take the time to research an investment thoroughly and, if needed, consult a financial advisor.
I still think Coinbase is a good company, but it operates in a volatile industry, and the fall of FTX has only added to that volatility.
I do not think crypto is going away; there will be survivors when the dust settles. Coinbase can very well be one of those survivors.
It was a wild 1-year ride.
Would I do it again?
Maybe, but for now, I have had enough excitement.
