As originally appeared in The Jerusalem Post on January 18, 2018.
In my role as a financial advisor, I come across all kinds of really bad investment ideas. When I was in the US a few months ago I met with a lady who had sold her business for a nice amount of money-low 7 digits. She was telling me that she had met someone who was trying to convince her to put all of her newfound money in oil-wells. Now, oil-wells may be a great investment, but for a lady looking to retire to put all of her money in oil-wells?
Last week I sat with an elderly brother and sister who were about to receive money from a property they sold. We had actually met months ago when they decided to list the property, and I told them that they had to sit with an accountant to see what their tax situation would be and if they could do anything to limit that tax exposure. Well fast forward and they never met with an accountant, and are due to receive the money in less than 2 weeks. Now they want to follow up with ways that they can lower their tax bill including doing an “exchange”. Again I told them to speak to an accountant but it’s pretty clear that it’s going to be too late for them to do anything.
Much to my chagrin, I see too many people make financial mistakes. That being said the winner of this week’s “Dumb investment idea of the week” goes to all those buying Bitcoin or other cryptocurrencies with a credit card.
I am not at all one of those who poo poo digital currencies. I actually think that it’s the future of money. As Jamie Hopkins of Forbes writes, “Digital currencies are already here and represent a huge market. Airline miles, hotel stay points, and credit card points are digital currencies. Many of them are not dollars, but rather a company-directed digital currency that can be redeemed for value, but only so long as the company can fulfill its promise. They are not backed by any government, gold, silver, or cash reserves. Instead, they are promises that the currency has value, and they do have value. So much value in fact, that the IRS has taxed airline miles in a few instances as income (although their current position is that you don’t have to report them in most instances today). We use digital currencies on a daily basis and younger generations are growing up with digital currencies as the norm while physical dollars are more of an outlier.”
But to buy Bitcoin or Ripple or any other currency with your credit card is a dumb idea. First of all, as I always say, “if you don’t have the money for something; don’t buy it!” Second, by purchasing with a credit card you are paying double-digit interest rates to purchase the cryptocurrency.
Remember the housing bubble?
Loan marketplace LendEDU reports that nearly 18 percent of people who buy Bitcoin do it on a credit card. Doesn’t that sound like the sub-prime debacle? People buying on credit just assuming that the price will never drop. All great until the price drops. Keep in mind that Bitcoin has dropped by more than 40% since hitting its all-time high just about a month ago! Yikes.
Regarding the similarity to the mortgage meltdown of the previous decade, Annie Nova of CNBC quotes Angela Walch, an associate professor at St. Mary’s University School of Law who studies cryptocurrencies. “People took on debt — mortgages — with the expectation that house prices were only going to go up. When the bubble popped, housing prices actually fell, and people’s assets weren’t enough to cover the debt they owed. We’ve seen how using debt to buy speculative investments can be problematic, the consequences were dire.”
Be smart with your money. The way to grow your nest egg is to save, plan and invest smartly. Don’t borrow money at absurdly high-interest rates in the hope of getting rich.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. (www.prginc.net). Member FINRA, SIPC, MSRB, FSI. For more information, call (02) 624-0995 visit www.gpsinvestor.com or email email@example.com.