You can learn how long you are comfortable holding onto an investment by figuring out in advance how much income you need to live on each year. Then build a portfolio that will generate at least as much income as you need.
The best way to do this is to look at the historical record. The usual techniques for figuring out how well a stock or bond portfolio has done in the past don’t work so well with crypto assets.
In particular, they won’t tell you how long you need to hold on to them before they will make you money, because there is no historical record of crypto assets. Some things that seem safe now may turn out to be a mistake tomorrow, and other things that seem risky now may turn out to be a good investment.
So instead we have to estimate how long it will take for an asset to make its money back for us in terms of the daily interest rate it is expected to pay..
The most important thing to consider when you are making an investment is how long you are comfortable holding onto it. How long will it take you to recover your principal? How long will it take to double your money, assuming some kind of exponential growth in value?
As with any investment, the more you know about the company or the industry, the better. But if you can’t tell whether the company is profitable or not and don’t understand what it does, then you shouldn’t invest in it. And if you have too much information about a company or an industry and don’t know what to do with it, then you should probably avoid it.
For example, I invest in crypto currencies because I think they may be the next big thing. Unlike some people who dismiss crypto currencies as not having any intrinsic value because they cannot understand them and therefore cannot predict their future growth, I believe that crypto currencies could become a major part of our future economy. If they do grow like I think they will—and I believe they will—they will create wealth several times greater than the net worth of Bill Gates, the founder of Microsoft.
It’s hard to estimate the future, and even harder to estimate how long you’ll want your money. The uncertainty is what makes investing risky.
So it’s tempting to hold onto even bad investments for as long as possible, hoping that something will turn up. But there’s a better way to find out how long you should hold on.
Imagine that an investment is a person (a stock). You have a small margin of safety: you have to pay only $100,000 of the $1 million invested. You lose $100,000 of your own money, but if you don’t sell the investment and it turns out to be worth a million dollars five years later, you’re still halfway in.
Now imagine that instead of being $1 million it’s just $10,000. If you didn’t sell it, but five years later it turned out to be worth ten times as much at $1 million, you’d still be halfway in. That’s because with investments you can’t get back what you lose; if they go down in value, they’re gone forever; but if they go up in value they’re still yours. If they’ve doubled in value over five years but lost everything during the bad times, then the next time they double
A typical investment manager will tell you to keep your money in a stock for 10 years. There are two problems with that advice. The first is that it assumes you can afford to take the risk of not getting a return for 10 years, which is unlikely. The second is that even if it were true, it would be useful only if you knew when to get out.
If you invest in the stock market, you should know how long you’ll be comfortable holding on to your money, and then get out before it gets too old. But there’s no easy way to figure out how long, or even whether, things will continue to go well. You can’t just look at past performance: that’s just luck.
It’s pretty hard to do what they do at Vanguard, which is to say they can’t tell a client how much money he or she should have invested at any single moment in time. But they can tell him or her when the right time was last year or last decade or last century. And so they try to make sure the returns he or she gets this year will not look too different from the returns he or she got last year or last decade or last century. It’s like driving a car ahead of its time: he who knows
There are two basic ways to make money in financial markets: to predict what will happen and to speculate. Either way, you need a stand-in for an uncertain future. That stand-in is risk, and the amount of risk you can take depends on how long you are willing to hold onto your investments.
The ideal investment would be one that could pay off even if the economy collapsed tomorrow. But it doesn’t exist. So the best investment you can make is the one that will pay off no matter what happens. Why? Because in the event of a genuine meltdown, the people who were holding onto their investments immediately will have lost all their money, while those who sold them before it happened will have made a killing.
What this means is that, if there’s nothing else in your portfolio that you can sell in a crisis, sell everything else and just keep holding onto your stocks.
Let’s say you had to pick a single cryto to buy today. What would you do? If you’re like most investors, you’d look at the performance and try to figure out whether it was a good buy or not. But that’s not how to pick a crypto for long-term investing.
You should do the opposite: compare crypto performance with the odds of the crypto holding up over time. Are crypto returns so high, or so low, that they must be a bubble? How much volatility is there in crypto prices? Is it easy or hard to tell whether someone is manipulating prices, and if so, how is it being done?
You also have to ask what you think about this particular crypto as an investment. What are its prospects for growth? What’s its special feature, if any? For example: how will its use change over time?
A cryptocurrency is a digital currency that exists only in cyberspace. There is no way to get it, hold it, or spend it, and there are no banks or banks’ clearing houses managing the transactions. The main reason you can’t get, hold, or spend it is that they are not backed by anything real.
If you have bitcoin and want to spend it, you go online, find someone to trade it with, and trade it for something real. If you have a credit card and want to buy something with it, you go online and use your credit card with some website that lets you pay things online. In both cases the transaction happens in real time. It doesn’t take days or weeks to process; in fact minutes are probably too long.
The blockchain on which bitcoin depends is a public ledger of all bitcoin transactions going back to January 2009. It makes possible the decentralized payment system without which bitcoin wouldn’t work. No one has ever been able to counterfeit a bitcoin because there is no such thing as counterfeiting bitcoins.