On investing in digital currencies

Not long after I wrote my previous post, a friend suggested we pool funds to invest in digital currencies. I did not accede but I shared with him my investment thought process that is applicable to more or less any asset class. It starts with understanding where the return and risk will come from. It is better than explaining a child where do mommy and daddy come from. 

Returns in an asset class can come from price growth, asset income, or both. For instance, if you bought digital currencies, your return can only come from price growth. Given they are like cash in your pocket or piece of gold. They do not earn any interest income. In contrast, if you bought a bond your return can from both price growth and interest earned.     

Risk in asset classes can come from permanent loss or inadequate return or both.  Inadequate return will occur if the price growth you expected did not materialise, or worse, the price falls below your purchase price. Permanent loss in digital currencies can occur from theft or some system failure that causes your digital currencies to disappear.  

If you are still thinking of investing in digital currencies, your thought process must be like that of my friend – "the idea of losing $250 doesn’t scare as me much as not risking to $250 to become a millionaire". The point is that if you make investment decisions based on the fear of missing out. You are not investing. You are speculating. 

PS – Richard Feynman said it best, the first principle is that you must not fool yourself—and you are the easiest person to fool.