Investors are flooding the crypto market with cash. Young professionals especially are betting their futures on Bitcoin and other emerging financial instruments. 

You can't blame them. The numbers are pretty spectacular.

In October of 2013, Bitcoin sold for $196.02. By October of 2021, a single Bitcoin could command $61,374.28. With the prospects for such high rewards, some investors are willing to speculate it will happen again and assume equally big risks.

Other emerging investment instruments are growing right alongside crypto; non-fungible tokens (NFT), stablecoins, and decentralized finance platforms have all flourished.

With their futuristic orientation, these instruments can make traditional investments such as stocks, mutual funds, and rental property look as outdated as orange vinyl flooring. Is it time to upgrade your investment strategy? Should you invest in NFTs, crypto, or another new instrument? 

Let's take a look at how these emerging investment opportunities could affect your wealth.

Do You Understand the Product?

We agree with the wise saying, “Never invest in something you don't understand”.

When you buy stocks, you are purchasing partial ownership in a company. Buying bonds? You're picking up debt backed by a company's earning power or the taxing authority of a government entity. Mutual funds? You're getting a portfolio of stocks or bonds and other assets.

What about cryptocurrency?

"I have yet to have anyone explain to me in plain English quite what Bitcoin or Ethereum actually are, or how Blockchain works," says Jon Cobb, Director of Trinity Wealth Management, a Christian financial advisor in England.

Cobb believes people are attracted by the past results, not the product. That approach is generally very risky and for most people never a good idea. If you don't understand what you're buying, don't buy it.

Are you Investing or Gambling?

Isn't investing in the stock market the same as putting money on the card table in Vegas?

Investing and gambling share a few things in common. Both involve choice, the prospect of gain, and risk. The similarities end there, though. 

Gamblers have little information and few ways to mitigate risk. The longer you gamble, the lower your odds of winning.

Investors work with a lot of information and can spread money around to minimize their losses. The longer you invest, the higher your chances of making money.

Over time, many stocks pay dividends in addition to growing in value. Savings accounts earn interest. Rental property generates income. Crypto does none of those things. Investors often buy crypto just because they expect the price to rise. In other words, it's a gamble.

"How should a Christian feel about Bitcoin?" asks Greg Phelan, an associate professor of economics at Williams College. "Well, how do you feel about gambling as an investment strategy?"

Risk is Real

Sure, all investment involves risk. 

What is risk? It's just uncertainty about how your investment vehicle will perform. Will it make you richer or poorer than you were before you bought it? 

The level of risk often correlates with the level of reward. Low-risk strategies offer low rewards, and high-risk strategies offer higher rewards.

Doesn't that mean high-risk vehicles such as crypto, NFTs, and venture debt are great ideas?

No, and here's why: Investors manage risk in two primary ways, asset allocation and diversification. Asset allocation means buying some of several different assets, such as stocks, bonds, and real estate for your portfolio. Diversification means buying several assets within an investment class. For example, you buy stocks in more than one company.

Unfortunately, these risk-management strategies don't help with cryptocurrency. The crypto market is speculative, unregulated, unpoliced, and highly volatile. Yes, you can earn a lot of money in this market, but you can lose a lot just as quickly.

Proverbs 21:5 puts it like this: “Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.”

Mind the Innovation Gap

The term innovation gap refers to the space between technological experts and ordinary citizens.

People at the top of the technological food chain understand cryptocurrency, blockchain, and decentralized finance platforms. They invented these products after all. Most of us, however, live far downstream from the high-flying world of FinTech wizardry.

When you hear a technology chief recommend Bitcoin or NFTs, remember that they are probably making money every time Mr. or Ms. America sinks a dollar into these products.

Those people know what they're doing, or at least think they do. Unless you're part of that world, though, you may not. 

What About Mining Bitcoin for Profit?

Bitcoin mining is the process of earning Bitcoin in exchange for running the verifications that build the blockchain.

If you own the required equipment, know what you're doing, and can afford the electricity needed to run a mining operation, this venture can be profitable. Since only 21 million Bitcoins exist — and more than 18 million have been mined already — it's awfully late in the game to start now, though. Plus, mining is a cost-heavy operation that requires serious up-front cash.

Finally, mining Bitcoin is investing in another person's game. About 0.1% of miners own 50% of the mining capacity according to Investopedia. Spend your time developing a rich and rewarding career instead of mining for cryptocurrency.

What Do Stocks and Real Estate Offer That Crypto Doesn't?

Stocks and real estate are tangible assets. Stocks provide partial ownership in a company. Real estate is… well… real. These investment classes are regulated, accessible, and diverse. 

Cryptocurrency doesn't offer anything real. It's a currency — but not really a currency — that has limited use in the real world. The crypto market is an unregulated Wild West right now, and it's tough to recoup your losses. Could things change? Sure they could. Until they do, we recommend you avoid crypto, buy mutual funds, and store them in a tax-sheltered account such as a 401(k) or Roth IRA.

Investing in stocks or mutual funds is a proven way to build wealth and become financially independent. Crypto is not. 

"Don’t knock that 401(k), folks," says plain-spoken Christian financial advisor Dave Ramsey. "It’s the number one wealth-building tool of millionaires! And millionaires don’t build wealth through risky investments like crypto."

Is It Ever Okay to Invest in an Emerging Financial Instrument?

In January 2021, the crypto markets hit a bump that wiped out $150 billion in 24 hours. Investors were selling off coins, and to many, it was probably inevitable.  Of course, traditional investments sometimes lose money, too, but historically the U.S. stock market as a whole has always rebounded - such historic data simply does not exist for the crypto markets.

Again, Proverbs 21:5 reminds us: “Good planning and hard work lead to prosperity, but hasty shortcuts lead to poverty.”

This isn’t to say all crypto is bad or will lead to poverty, but this verse can help keep things in perspective - are you looking to get rich quick? Are looking for the shortcut?

If you are debt free, have a fully-funded emergency account, own your home, and are putting money towards retirement in a 401(k), IRA, or Roth, it's probably okay to play with crypto. 

Just don't gamble your family's financial future on a Dogecoin. 

For help navigating the complex landscape of modern investing, contact your local Christian financial advisor. Cooke Wealth Management can help southern California and Orange County residents create a solid plan that sets up your family for financial success.