Retire early with crypto? Playing with FIRE – Cointelegraph Magazine

In the next five years, the finance world will be dominated by a currency that is created and governed by a decentralized network. Yes, Blockchain is the future – and not just because it has been a top-10 buzzword for the past year.

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Financial blogger The FI Explorer didn’t invest in cryptocurrencies to retire early – but unlike many freshly minted crypto wealthy people, he did make it his goal to retire early.

The FI Researcher, also known as Jason, is part of the FIRE community – financial independence, early retirement – whose followers set aside up to 80% of their income for 20-30 years to retire early or simply follow their passions.

For most of his 20-year journey toward his FIRE goal of $1.64 million (USD) – chosen to generate an annual income of $65,000 for the rest of his life – Jason channeled his savings into conservative investments like exchange-traded funds, stocks and gold. But after listening to a podcast about bitcoin in 2015, he decided to take the risk and invested about $3,000 – or 0.5 percent of his portfolio at the time – in the cryptocurrency. Bitcoin’s dizzying growth since then has seen its share of the wallet rise to nearly a third at its peak, and helped it exceed its FIRE target in December 2020, much sooner than expected.

It’s incredible, he told the magazine. I used to have a goal that was carefully calculated with lots of curves and linear extrapolations, but at the end of last year I happened to hit it.

While cryptocurrencies have enabled some members of the FIRE community to quickly achieve their goals, they remain controversial – some see them as an illegal and risky path to financial freedom, compared to the frugality and savings of investing in index funds.

Stories of unexpected victories attract and repel FIRE followers in equal measure, says podcaster and blogger Captain FI.

It’s crazy, and I think that’s what’s causing the FOMO in the FIRE community, he says. You know, there’s jealousy, like, holy shit. Yes, of course. I envy people who have built a $1.5 million portfolio overnight.

Look, I shouldn’t have used the word jealous. I’m impressed. I’m surprised. But I’m also very suspicious or skeptical because it’s easy to come, easy to go. I have invested in cryptocurrencies and I see a net loss so far.

So could cryptocurrencies be a smart part of an early retirement plan?

What is FIRE?

The basic concepts of the anti-consumer movement were first laid out in 1992 in the bestseller Your Money or Your Life, but FIRE was boosted by the popularity of the Mr. Money or Your Life blog. Silver Mustacheknown. Canadian-born Peter Adeny’s book has inspired millions to follow his example. He describes how he quit his job as a software engineer at age 30, how he minimized his expenses, and how he invested most of his $67,000 salary in index funds.

The theory behind FIRE is pretty simple: Multiply your annual expenses by 25 to determine how much you need for retirement (based on the 4% APR rule). Someone who spends $50,000 a year should amass about $1.25 million. Ironically, Adeni now earns far more writing about early retirement on his blog than the $25,000 a year his $600,000 retirement plan would have earned him.

FIRE is a smart, methodical step toward that goal, says Captain FI, who recently quit his job as a pilot at age 30 and has set aside about 80% of his income over the years.

It comes down to making smart decisions early in life so you can reap the benefits later, he tells the magazine, comparing it to saving for your first home. Essentially, FIRE is about continuing to work for maybe another 5-10 years to build assets with cash flow to cover current expenses.

While this is no further removed from the thinking of some cryptocurrencies, the core demographics are pretty much the same:

Most members of the FIRE community are – if you want to use a stereotype – white men between the ages of 25 and 35 who work in technology. I don’t know if we’re all on the spectrum….. are on the spectrum.

Although Jason makes as much money from bitcoin as Mr. Money Mustache does with his pension, he understands why FIRE supporters distrust him. General opinion is very skeptical, he says. I think it’s useful in a way. He adds:

The FIRE community places a strong emphasis on low-cost, predictable but well-diversified portfolios, with an emphasis on dollar-cost averaging, long-term saving and compounding [of income]. So I think cryptocurrencies are the opposite of that. At first glance, it looks like a get-rich-quick scam that others are constantly being warned about.

 

BRAND and crypto-currencies not combined

Sir, I want to thank you for your support. Money Mustache is vehemently opposed to crypto-currencies. In March, he wrote an article about how cryptocurrencies are just a bubble, and how the whole situation is just the secular game of stock market speculation based on price momentum, which in turn is another form of gambling.

Another respected author in the Australian FIRE community is Scott Pape, Barefoot Investor, who also regularly warns against crypto-currencies. In his recent column, he claimed that cryptocurrencies are entirely based on the greater fool theory, and that you only win if a greater fool buys them at a higher price.

If you are convinced to sell your boring index funds and lie down with the dogs, I can almost guarantee you will end up with financial chips, he added.

Financial commentator Tom Ellison, who wrote Pape’s book, Barefoot Blueprint, says they discussed cryptocurrencies internally and decided pretty quickly to drop them in the interest of consumer protection.

My point is probably the same as Scott Pape’s, says Ellison, who then founded his own financial information service, Naked Investor. And this: It’s not money. Under Australian law, this is not a financial investment. But there is no doubt that it has brought prosperity to many people.

 

Get rich quick

Of course, there are plenty of cryptocurrency profiteers out there, from Bitconnect-like Ponzi schemes to Uniswap-like scams – not to mention the utter foolishness of inexperienced investors investing in Memcoins on the basis that they are of the same breed as Dogecoin.

But what sets cryptocurrencies apart from most fraudulent enrichment schemes is that people get really rich from them – and fast. In fact, they are so rich that many find the strength to retire early without even working to achieve this goal.

Words to Live By from The Simpsons (Source: FX)

Among them is former Oracle database product manager Mike Palmeter, who accidentally retired earlier this year. He tells the magazine that he has been interested in bitcoin for years, but was put off by warnings from critics like economist Nouriel Roubini, who has claimed for years that it is a bubble about to burst. But reading Andreas Antonopoulos’ book Mastering Bitcoin in 2017 convinced him that it was much more than that.

The very first revelation I had was that it was much bigger and much more complicated than I could handle. I haven’t had time to do my homework yet, but the price is moving.

He started investing money as fast as he could until 50% of his portfolio was invested in bitcoin and related investments, such as companies that mine bitcoin and payment or exchange platforms like Circle, Robinhood and Square.

He made 170% profit when the price of bitcoin crashed in early 2018 and his wallet lost 50%. Palmeter says he was too proud to sell during the so-called crypto currency winter, preferring to learn as much as possible about blockchain. He was convinced that bitcoin is the most valuable application of blockchain technology. While it is difficult to accurately estimate costs, he said he is confident they will rise:

I learned, and my ego, arrogance, and refusal to admit defeat led me to a place where I truly thought I had inadvertently made the right decision. So I kept it and started buying more because I thought: It’s a long-term game.

He also drew lessons from the 2018 stock market crash and regularly locks in profits after each significant price spike, rebalancing his portfolio to 50% bitcoin investments and 50% dividend-paying stocks. Even with the impact of the cryptowinter, it has achieved an average annual return of 79.67% over the past five years.

In March, after taking his shareholding in bitcoins from 77% to 50%, he suddenly realized that the dividend income from the shares now exceeded his after-tax salary, no matter what the bitcoins do. He resigned from Oracle in April.

I didn’t really want to retire until I realized I didn’t like my job enough to justify it. If I didn’t need the money, why would I keep doing it? Why don’t you just do it? That’s freedom.

 

Selling is difficult

Palmeter is something of an exception, and anecdotal evidence suggests that many cryptocurrency holders make profits on paper that would allow them to retire, but few actually end up making those profits. Most stay because they are waiting for the price to go up – or because they are so addicted to the game that they don’t want to leave the table. This is one of the biggest dilemmas of cryptocurrencies: To go out is to lose huge potential profits, but not to go out is to risk a fortune.

It happened to so many people in 2017, millionaires on paper, but they never pressed the sell button to take profits, and so they watched their millions turn into thousands https://t.co/rGP3bUzydH

– Lark Davis (@TheCryptoLark) June 21, 2021

Oddly enough, Jason – an FI researcher – did not cash in his bitcoins after reaching the $1.64 million early retirement limit last year, and he did not retire. (However, he raised his target to $1.94 million to account for inflation and other factors.) He says he is happy in his job and has shifted his focus from early retirement to financial independence. But he was also bitten by the bitcoin virus:

This is one of the most frequently asked questions: Why don’t you sell yourself? Or why not reduce your risk? And it is, because I think it has an exciting future. I don’t necessarily want to depend on cryptocurrencies for my FIRE. So I’m interested to follow this case and see where it goes.

Jason notes that if he had followed the normal, sound financial advice on asset allocation and risk mitigation, I would have sold my business years ago and left about A$500,000 or more on the table.

 

Captain FI

Captain FI recently reached his personal retirement goal and now works only two days a week. This 30-year-old has done it the hard way by saving over 80% of his income and investing his dollar expenses in index funds. He cites statistics showing that it takes 51 years to retire if you save 10% of your income, and 22 years if you save 20%. Captain FI succeeded in doing so in just 11 years. As we talk, a van arrives to transport his belongings from Sydney to South Australia, where he will live in peace. He explains that he used to be a cryptoskeptic.

I was very opposed to cryptocurrencies because I didn’t understand them, he tells the magazine. My idols in the investment community – Warren Buffett, Charlie Munger and Kevin O’Leary – have been very dismissive of bitcoin.

Oddly enough, he made an unfortunate joke on a podcast that he preferred chocolate coins to bitcoin – at least you can still eat chocolate when the price drops to zero – and that became the reason for his appeal. I thought it was a funny joke that I was absolutely shot down by all the cryptocurrencies, he said with a laugh. I thought so: Maybe I better go check.

He invited bitcoin advocate Stephan Leaver on his podcast, who helped convince him of bitcoin’s potential value and the risk it’s worth taking. He now has a small portfolio of cryptocurrencies split between bitcoin and Ether.

Cryptocurrencies – I consider them assets with an asymmetric risk profile, right? So yes, there is a risk that it will drop to zero. But there’s also the risk of it becoming, you know, 10x or 100x, which is very cool.

Captain FI plans to eventually invest about 1% of his portfolio in cryptocurrencies. If it becomes mainstream, it will take the rest of the portfolio with it, he said, adding further:

I’m ready to practice that. Because it’s really interesting. It has a solid foundation, I can see its application.

Bitcoin maximizer Stefan Livera has joined the Captain FI podcast.

Retire early with crypto? Playing with FIRE – Cointelegraph Magazine

Retirement benefit plans

The annuity industry itself seems to be wary of cryptocurrencies. Aside from the new partnership between ForUsAll and Coinbase, it’s hard to find a 401(k) plan in the United States that offers crypto investments. In Australia, the equivalent of a 401(k) is called a superannuation, and most funds want nothing to do with cryptocurrencies. However, cryptocurrency enthusiasts can – and increasingly do – set up self-directed pension funds (SMSFs) to manage their own investments.

Caroline Bowler, CEO of BTC Markets, told the magazine that the number of SMSF accounts trading on the exchange has increased fivefold in the past year, and balances have also grown exponentially.

Where investments in SMSFs used to be in the tens of thousands of dollars, they are now in the hundreds of thousands, she says, adding that the typical user is not close to retirement age.

It will be people aged 30 or older who are actively taking control because they understand cryptocurrencies – they are familiar with them, they are comfortable with them.

 

Don’t do it, but if you do it….

Mr. Ellison is a licensed financial advisor who has spent much of the last twenty years advising people about retirement planning and has written two books on the subject. His advice often boils down to this: Spend less than you earn… Save what’s left and accumulate it over time in assets that grow in value. He has always focused his clients on four broad asset classes – equities, real estate, cash and fixed income – and believes that most investments outside of these categories are risky.

Therefore, he definitely believes that cryptocurrencies are too dangerous to risk his retirement. As for my retirement, it’s not something I would even remotely consider, even if there was a chance it could be multiplied by a hundred or a thousand, he said, adding:

If someone wants to do it, it’s a gamble, as I wrote before. This is pure speculation. I think it is up to each individual to decide if they are willing to speculate and risk their future retirement.

He explains that one of the first things advisors do when they take on new clients is to find out what their risk tolerance is.

With all those risk assessments, no one really knows how you feel or how you react when you lose a lot of money, he says. The only way to know what your true risk tolerance is is to lose money or experience one of those events that only happens once in a decade, like the 1987 crash, the global financial crisis, or last year’s crash.

You’ll determine your risk tolerance with cryptocurrencies pretty quickly, as declines of 30-50% occur in the market every few months. The price of bitcoin peaked at $65,000 in April and has since halved to its current price of nearly $35,000. And individual coins lose and gain more than that amount every week. So it’s only for investors who can make it through such a demanding process.

Ellison explains that the prudent approach to risky or speculative investments is to allocate only a certain percentage of the portfolio to them.

For most people, the risky, fully speculative part of a portfolio should certainly not exceed 10% – and that’s for the aggressive investor, he tells the magazine, adding that more risk-averse investors can set a limit of between 1% and 2%. While pointing out that the vast majority of speculative investments fail, he urges investors, when the game pays off, to lock in profits rather than hold them. Jason offers similar advice:

Never invest more than you can afford to lose, and probably don’t rely on this type of investment to achieve your FIRE goals, as it is highly speculative. I wouldn’t advise anyone to go down that road. But I think people do it anyway.

He adds that there is a difference between being careful with money and being closed to new opportunities:

I think a lot of that is a sign of a very good financial education that people have had for years and years. And maybe it just opens up new possibilities that one should approach with an open mind without becoming a convinced believer.

Someone who no longer listens to Ellison’s investment advice is his son: I put him in stocks two years ago and he made five times his money on that. He sold it for a penny more and invested in Dogecoin, Ellison said, referring to Elon Musk’s favorite memcoin.

Ellison’s son now thinks he’s an investment genius and thinks his father should retire and hand over the reins. He tells him to take over, Allison laughs.

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