OK. So you’ve made some money on Bitcoin. Or Ethereum. Or Litecoin. Maybe a little, maybe a disgusting amount that you can’t stop ogling on Coinbase — and after ogling you must lie down with a cold compress so you don’t faint with glee. And you’re wondering — do I let it ride? Well, no, you shouldn’t. And no, our opinion won’t change even if Bitcoin eventually goes up to a bazillion and one dollars per coin.
Why? Let’s start by letting you in on a secret: we don’t know what’s going to happen with Bitcoin. We don’t know if it’s going to move up or down, create massive fortunes or erase them in a matter of minutes. (Hint, if it’s like any wildly speculative investment it’ll probably do both). There are people we trust in both camps when it comes to the value of Bitcoin. A lot of minds we respect think it'll supplant the US dollar as the base currency of trade. A lot of other people think it's the digital age equivalent of 17th century tulip mania. (Spoiler for C students of history: the lesson of the tulip craze was not “the value of tulips is just gonna go up forever!”)
Which side of the argument does Wealthsimple fall on? We think it’s very important, as a company geared toward helping people make wise investment decisions for the long term, not to have any opinion whatsoever on how high something like Bitcoin will go. Because we think sound investment philosophy is never based on speculation. It’s based on being boring, thinking long-term, being dispassionate, staying diversified, and getting excited about compounding. Another way to say it is Modern Portfolio Theory.
If you’ve suddenly found yourself sitting on some Bitcoin that’s gone up in value, here’s what we think you should do with it.
Sell Your Bitcoin Over Time
This isn’t because we think Bitcoin is doomed. We hasten to repeat: we don’t know, and it’s not our expertise. But a wise man once tweeted (like, a few minutes ago) “no one went broke selling too soon.”
If you're wondering if the time is right to sell — our advice is to not wonder that. The smartest thing you can do for the long-term is: never try to time the market.
If you happen to be the guy who was given a tinfoil hat by officemates after you invested some real money in “space bucks” a few years back, you’re having the last laugh now. You’re rich! Or at least richer! We know what it feels like, because lots of Wealthsimple staffers have dabbled in it. Hey, we're a technology company, so we're bound to have some team members who are fascinated by blockchain.
But we don’t think you should change long-term investment strategies.
Our advice has always been consistent: to mitigate risk, you should never bet more money than you can afford to lose on any one speculative investment or stock. So we think it’s time pull most of your winnings off the table and put them in a less speculative investment like a diversified mix of the low-fee passive funds.
Even if It Keeps Going Up, A Lot of People Will Lose Their Shirts
This is true for all investments — it's why the best thing to do is automate your investments so you're not tempted to veer from the wise financial path you've chosen.
As our own Portfolio Manager Daniel Tersigni put it best to us: “Even if the Bitcoin bulls of the world turn out to be right and Bitcoin were on a ten or even twenty year rise, there's a good chance that many of the retail investors currently buying it won't enjoy that success. Even if it appreciates in the long-run, there will be huge downturns along the way. And investors are emotional — when big dips happen, a lot of people who bought simply because it was rising will lose their courage and could lose a lot of money.”
If You Want to Keep Some Bitcoin, Make it 5% or Less of Your Portfolio
If you want to stay invested in Bitcoin — because you think it’s going to increase in value or because you just want to hedge against extreme FOMO — we’d give you the same advice we give clients for all types of risky investments: risk no more than 5% of your entire portfolios on gambles (i.e. speculative investments) like this. That way, you’ll still feel good if the ascent continues but won’t suffer catastrophically if it crashes.
The other reason to sell is that if you’ve made a bunch of money on Bitcoin the proportions of your portfolio are all out of whack. And you’re going to want to rebalance it.
Yep. We Said it. Rebalance Your Portfolio
This is sacred to us and our investing philosophy. Some investments are going to do better than others in the short-term. That’s just the way it is — the world is unpredictable and things grow unevenly. To keep the balance you need, it’s time to take those profits and invest them in other places.
For instance, if you’d bet 5% of your portfolio on Bitcoin three years ago, you’d have done quite well. Congratulations. But that investment now represents a much greater percentage of your overall portfolio. Which means you’ll need to make sure you maintain a good level of diversification by shifting it to other investments in your portfolio. Rebalancing is something Wealthsimple does for its bond and equity portfolios, for instance, automatically and without any charges.
Get Ready to Pay Taxes on Your Earnings
In the UK, gains and losses from buying and selling Bitcoin are considered capital gains (or losses). That means if you make a profit when you sell your stake, you’ll pay taxes (18% or 28%, depending on your personal tax rate). But in some cases, if you buy and sell quite a bit of bitcoin, the government can consider your profits to be business or trading income — and not capital gains. Then those profits will be taxed at the same rate as the rest of your income.
If you're unsure what the tax treatment is, it's time to head to a tax professional. An ounce of prevention (paying for a tax professional now) is worth a pound of cure (paying for a tax professional after you get audited).
A lot of people are going to be tempted not to report any of their BTC gains. It’s true that cryptocurrency markets do not report transactions to the HMRC in the way investment houses report stock sales, so the government might well not find out about all the loot you’ve made (unless, of course, you convert your BTC into cash which hits your bank account). First, you'd be wise to think this might change soon. HMRC has already confirmed that they are going to look into BTC trading in more detail. But more importantly, we think it’s important to behave morally — not to mention legally! Planning for your future should not include a stay at a minimum security prison.
And What if You Think Now is the Perfect Time to Buy?
We get it. There’s a craze going on out there. And now that your high school friends, your favourite bartender, and the guy who grooms your labradoodle have bragged about their gains, maybe you’ve decided your time has come. As long as you’re on the right track financially, we think it's fine for people who are interested in investments like these to put their money in. As long as it's no more than 5% of your portfolio. Though the very fact that Bitcoin is now the favourite investment of the FOMO crowd means that much of the new cryptocurrency investment is flowing in from a less-sophisticated class of investors. Those are the conditions that create classic illustrations of the “greater fool theory” — to get in, people are willing to put up stupid money anticipating that there’s someone out there who will be willing to take it off their hands for even stupider money.
But that’s up to you. We think a boring, conservative mix of perfectly diversified low-fee investments is probably the safer, and in the long-term, wiser way to go.
All investing should be considered long-term. While stock markets have typically trended upwards over the long term, your investments can go up and down, and you may get back less than you invest.
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