3 Rich Dad Lessons for Crypto Investors
It was around this time last year that we saw Bitcoin climb to an all-time high around $20,000 per coin and saw gains in the 1000% range.
The growth during this time sparked a crypto-rage that triggered consumer interest in both buying and trading. I did radio shows with experts, I wrote articles around this topic, and I even invested in cryptocurrency.
But as we all know, what goes up, must come down.
Last week, Bitcoin fell below $5,000 for the first time in 13 months.
If you are unfamiliar with Bitcoin or cryptocurrencies, it is predicted by experts to be the future of the world’s financial system.
Naysayers, on the other hand, believe that crypto is a trend and will eventually disappear. Some see it as an investment that you should buy and hold, and some see it as a currency that will eventually replace the dollar.
In an article written by FinTech, it explains that “the use for Bitcoin for commercial payments has dropped dramatically this year, even as the original coin starts to fulfill one of the basic features of any payment currency: stability.”
When an Asset Is in a Bubble — Know Your Fundamentals
Personally, I still prefer to invest in gold. I don’t know if cryptocurrencies will be around in 30 years, but I know that gold will.
But a lot of people in the Rich Dad community have asked about how to invest in cryptocurrencies.
To be clear, I’m not recommending investing in cryptocurrencies, and I’m not saying you shouldn’t either. I’ve simply believed and always taught that if you don’t understand something, you should study it before you invest in it.
Rich Dad Fundamental #1:
The Difference Between Asset and Liability
When I was a kid, my rich dad taught me a very simple lesson. An asset is anything that puts money in your pocket and a liability is anything that takes money out of your pocket.
In essence, cryptocurrency is not an asset because it does not put money in your pocket. In fact, whether you use debt or your own money, it takes money out of your pocket when you buy it.
Because it is exploding in value, many people feel rich, but they are not. Bitcoin and other cryptocurrencies are not useful for commerce yet, so the only way to realize value is to sell. Only then, if you make a profit, do they become an asset.
It’s this simple definition of an asset that also led me to teach decades ago that your house is not an asset. People howled in protest when I did so, but they shut up pretty quickly when the housing market crashed.
I’m not saying that cryptocurrencies will crash like the housing market did, but they might. What I am saying is that it’s financially dangerous to think you’re wealthy when you’re really “invested” in liabilities that aren’t giving you any cash flow.
Rich Dad Fundamental #2:
Invest for Cash Flow
The beauty of investing in assets is that they produce cash flow. So, for instance, if you invest in a rental property (as opposed to your personal residence), you can collect rent to realize a profit each month. So, regardless of whether the property goes up or down in value, you make money. Or if you build a thriving business, you will realize cash flow each month in the form of your business profits.
Rich dad taught me that the reason why most people fail financially is because they assume they are investors just because they put money into assets hoping they grow in value; things like stocks, bonds, and mutual funds. But the rich put their money into assets that produce immediate returns in the form of cash flow. They then can use that cash flow to invest in even more assets.
Everyone else simply sits on their money watching it (hopefully) grow in small amounts—unless the markets crash like they did in 2008. Then they lose everything. My fear is the same might happen for the uneducated folks jumping into the cryptocurrency markets.
Rich Dad Fundamental #3:
Debt: the Good vs. the Bad
When I was young, I spent 90 days in a real estate course where we had to evaluate 100 investment properties. At the beginning of that class, there were a lot of students. At the end, there were only six of us. It was grueling work, but one of the best educations I’d ever received.
When I finished the class, I found the property I was looking for. It was a one-bedroom condo in foreclosure on the beach in Maui. It was only $18,000 and required 10% down. I put that down payment on my credit card and financed the rest through the bank.
While this is not a strategy I would endorse for most people, it was fundamentally different that putting something like cryptocurrency on a credit card. Why? Because even with the bank loan and my credit card debt, my condo was cash-flowing. That made it an asset, and it also made my debt good.
One of the biggest secrets the rich know has to do with debt — they understand the difference between the good kind and the bad kind.
Simply, good debt allows you to purchase assets that cash flow. Debt, when it is bad, is used for liabilities like TVs and cars. It loses you money each month.
When you couple good debt with OPM (Other People’s Money), things get really powerful. Essentially OPM is like what I did with my credit card to purchase the Maui condo, only at a much lower interest rate and with flexible deal structures.
For instance, using venture capital money is a form of OPM that many entrepreneurs use. Personally, I raise equity for my real estate investments using OPM.
In the end, I can give you the fundamentals required to get there. From there, your success depends on going out and doing, learning from both failures and success.
My hope is that by understanding the fundamentals, those failures won’t be nearly as big as they could be—and those successes will come much more often.
Editor, Rich Dad Poor Dad Daily