Financial blogger The FI Explorer didn’t invest in cryptocurrency as a means of early retirement – but unlike many of the newly minted crypto rich, he set out to retire early.
The FI Explorer, also known as Jason, is part of the FIRE community – financial independence, early retirement – where followers between the ages of 20 and 30 save up to 80% of their income to either retire early or simply to pursue their passions.
During most of his 20-year journey to his FIRE goal of $ 1.64 million – which was selected to have an annual income of $ 65,000 for the rest of his life – Jason has his savings in meaningful investments invests, such as exchange-traded funds, stocks, and gold. But after listening to a Bitcoin-focused podcast in 2015, he decided to risk it and invest around $ 3,000 – or 0.5% of his portfolio at the time – in the cryptocurrency. Bitcoin’s staggering growth since then has resulted in its allocation widening to nearly a third of its portfolio at its peak, helping it exceed its December 2020 FIRE target much earlier than expected.
“That’s unbelievable,” he tells the magazine. “I used to have a painstakingly calculated target with lots of curves and linear projections, but at the end of last year I hit it somehow by accident.”
Although crypto has given some in the FIRE community a shortcut to achieving their goals, it remains controversial – viewed by some as an illegitimate, risky route to financial freedom compared to saving and saving to invest in index funds.
Stories of unexpected profits attract and repel FIRE proponents alike, explains podcaster and blogger Captain FI.
“It’s crazy, and I think that’s what drives a lot of the FOMO in the FIRE community,” he says. “You know, there is jealousy like ‘holy shit’. Naturally. I’m jealous of people who built $ 1.5 million [portfolio] over night.”
“Look, I shouldn’t use the word jealous. I am impressed. I am amazed. But I am also very suspicious or skeptical, because easy come, easy go. I’ve put money into crypto and I’ve seen a net loss so far. “
So can cryptocurrency ever be a meaningful part of an early retirement plan?
What is FIRE?
The central concepts of the anti-consumer movement were first outlined in the 1992 bestseller Your money or your life, but FIRE became popular thanks to the popularity of the “Mr. money moustache“Blog. Written by Canadian-born Peter Adeney, it inspired millions to follow his example by detailing how he pulled out of his job as a software engineer by cutting his expenses to the bone at the age of 30, and the Invested much of his $ 67,000 salary in index funds.
The theory behind FIRE is pretty simple: multiply your annual expenses by 25 to find out how much you need to retire (based on the 4% annual payout rule). Someone who spends $ 50,000 a year needs to amass around $ 1.25 million. Ironically, Adeney now makes a lot more blogging about early retirement than the $ 25,000 in annual income that his $ 600,000 retirement plan would have provided.
FIRE is about achieving this goal sensibly and methodically, explains Captain FI, who recently half-retired from his job as a pilot at the age of 30 after years of saving around 80% of his income.
“Basically, it’s about making some smarter decisions early in life so you can reap the benefits later,” he tells the magazine, comparing it to saving to buy your first home. “Essentially, FIRE just keeps doing this, maybe for another five to ten years, so you can build assets that have cash flow to cover your living expenses.”
While that couldn’t be further from the get-rich-quick mentality of some cryptocurrencies, the key demographics are pretty much the same:
“A lot of the people in the FIRE community are – if we want to stereotype this – 25 to 35 year old white men who work in technology. I don’t know if we’re all anywhere on the spectrum … “
Despite making as much money from Bitcoin as Mr. Money Mustache retired, Jason understands why FIRE supporters are cautious. “The general opinion is very skeptical,” he says. “I think that’s probably healthy in some ways.” He adds:
“The FIRE community has mainly been concerned with low-cost, predictable but well-diversified portfolios and has really emphasized the problem of dollar averaging and long-term savings and compounding [returns]. So, I think cryptocurrency is the opposite of that. At first sight it looks like the kind of scam that people always warn other people about. “
FIRE and crypto are not compatible
Mr. Money Mustache is dead against cryptocurrency. In March he wrote an article about how crypto was just a bubble and that “this whole situation is just the age-old game of stock speculation based on price momentum – which is just another form of gambling”.
Another author who is highly valued by the Australian FIRE community is barefoot investor Scott Pape, who also regularly warns about cryptocurrencies. In a recent column, he argued that crypto relies entirely on the “bigger fool theory” and that “you only win when a bigger fool buys at a higher price”.
“If you let yourself be persuaded into selling your boring index funds and settling down with dogs, I can almost guarantee you will eventually get financial fleas,” he added.
Financial commentator Tom Ellison previously wrote Pape’s “Barefoot Blueprint” and says they discussed crypto internally and decided against it fairly quickly in the interests of consumer protection.
“My views are probably the same as Scott Pape’s,” says Ellison, who later started his own financial education service called The Naked Investor. “And that means: It’s not a currency. It is not a financial investment as defined by Australian law. But there is no doubt that it has brought prosperity to many people. “
Get rich quick
Of course, there have been tons of crypto-based scams to get you rich quick, from Bitconnect-style Ponzi schemes to rug pull scams on Uniswap – aside from the sheer recklessness of inexperienced investors pouring money into memecoins based on the Fact that they contain the same breed of dog as Dogecoin.
However, what sets crypto apart from most get-rich-quick scams is that people get really rich – and fast. So rich that many are able to retire early even if they don’t work toward that goal.
This includes former Oracle database product manager Mike Palmeter, who “accidentally” retired earlier this year. He explains to the magazine that he has been interested in Bitcoin for years but was put off by warnings from critics such as economist Nouriel Roubini, who has insisted a bubble burst for years. But if you have Andreas Antonopoulos ’ Master Bitcoin 2017 convinced him that there was much more to it.
“The very first thing I realized was that this is much bigger and more complex than I can handle. I haven’t had the time to do nearly enough homework, but the price is moving. “
He started investing money as quickly as possible until 50% of his portfolio was in Bitcoin and related assets like Bitcoin mining companies and payment or trading platforms like Circle, Robinhood and Square.
He had made a 170% profit when the price of Bitcoin collapsed in early 2018 and his portfolio plunged to a 50% loss. Palmeter says he was too proud to sell during what is known as the “crypto winter,” so he learned as much as possible about blockchain instead. It made him believe that Bitcoin was “the most valuable application of blockchain technology”. While it was difficult to make an accurate valuation, he was confident that the value would go up:
“I’ve been in college, and my ego, arrogance, and refusal to admit defeat got me to the point where I actually thought I accidentally made the right decision. So I kept it and then started buying more thinking, ‘This is a long-term game.’ “
He also learned his lesson from the 2018 market crash and regularly took profits after every big price spike by rebalancing his portfolio to ensure it was split 50% between Bitcoin investments and 50% high dividend stocks . Even taking the impact of the crypto winter into account, it has achieved an average return of 79.67% every year for the past five years.
In March, after rebalancing Bitcoin from 77% to 50%, he suddenly found that income from his stock dividends was now higher than his after-tax salary, regardless of what Bitcoin did. He resigned from Oracle in April.
“I wasn’t particularly interested in retiring until I realized I wasn’t enjoying my job enough to warrant it. Since I didn’t need the money, why go ahead? Why not just Not Do it? That is freedom.”
Selling is hard
Palmeter is something of an outlier, and anecdotal evidence suggests that while many crypto holders make paper profits that would allow them to retire, few realize those profits. Most hold on because they expect it to get higher – or because they’re so addicted to the game that they don’t want to leave the table. It’s one of the biggest dilemmas with cryptocurrencies: cashing out means losing massive potential, but not selling means risking life-changing wealth.
That happened to so many millionaires on paper in 2017 and never hit the sell button to take profits, and so they watched their millions grow into the thousands https://t.co/rGP3bUzydH
– Lark Davis (@TheCryptoLark) June 21, 2021
Oddly enough, Jason – The FI Explorer – didn’t redeem his Bitcoin after exceeding his $ 1.64 million early retirement goal last year, nor did he retire. (However, he revised his target to $ 1.94 million to account for inflation and other factors). He says he’s happy at his job and has revised his goal towards financial independence rather than early retirement. But he was also bitten by the Bitcoin bug:
“It’s one of the most common questions: Well, why don’t you sell out? Or why don’t you reduce the risk? And that’s really because I believe it has an exciting future. I don’t necessarily want to rely on crypto for my FIRE. So for me, I’m kind of interested in following it and seeing where it leads. “
Jason points out that if he had followed conventional, sensible financial advice on asset allocation and risk reduction, “I would have sold out years ago and left about A $ 500,000 or more on the table.”
Captain FI recently reached his personal retirement goal and now only works two days a week. The 30-year-old has also done it the hard way by investing more than 80% of his income and average dollar cost in index funds. It reels off statistics on how it would take 51 years to retire if you saved 10% of your income and 22 years if you saved 20%. Captain FI did it in just 11 years, and while we are talking, a moving truck shows up to bring his belongings from Sydney back to South Australia, where he will spend his life at leisure. He explains that he used to be a crypto skeptic.
“I was very much against 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 all been very disliked to Bitcoin.”
Oddly enough, it was a bad joke he made when he preferred Bitcoin to chocolate coins on a podcast – at least you can still eat the chocolate when the price drops to zero – that was responsible for its conversion. “I thought it was a weird joke, that I was totally crushed by all the crypto people,” he laughs. “I thought, shit, maybe I better take a look.”
He invited Bitcoin advocate Stephan Livera to his podcast who helped convince him of the potential value of Bitcoin and that it is worth taking this risk. He now has a small cryptocurrency portfolio split between Bitcoin and Ether.
“Crypto – I definitely see it as an asset with an asymmetrical risk profile, right? So yes, there is a risk that it will go to zero. But there is also the risk that it could be 10x or 100x, which is really cool. “
Captain FI intends to eventually use around 1% of its portfolio for crypto. “When it gets massive, it pulls the rest of the portfolio up,” he says, adding:
“I am ready to take a somewhat educated push on it. Because it’s really interesting. It has solid foundations, I can see its application. “
The annuity industry itself appears to be suspicious of crypto. Aside from a new partnership between ForUsAll and Coinbase, it’s hard to find a 401 (k) plan in the US that offers crypto investments. In Australia, the equivalent of a 401 (k) is called a “superannuation” and most funds do not want anything to do with crypto. However, crypto fans can set up self-managed superannuation funds (SMSFs) to manage their own investments – and they do so in increasing numbers.
Caroline Bowler, CEO of BTC Markets, told the magazine that the number of SMSF accounts traded on the exchange has quintupled over the past year and balances have grown exponentially too.
“Where earlier investments of tens of thousands of dollars went into SMSFs, we now see them move into the low hundreds of thousands,” she says, adding that the typical user is not yet retired.
“It would be people in their thirties who are actively taking control because they are familiar with crypto – they are familiar with it, they are comfortable with it.”
Don’t do it, but if you do …
Ellison is a licensed financial advisor who has spent much of the past two decades advising people on retirement planning and has written two books on the subject. His advice often boils down to: “Spend less than you make, […] and put what’s left aside and accumulate it over a long period of time in assets that have a compound value. ”He keeps people referring to the four major asset classes – stocks, real estate, cash, and fixed income – without exception most investments outside of this for risky.
So he definitely thinks crypto is way too dangerous to risk his retirement. “As for my retirement, I would not even remotely consider that, even if there was a chance it would increase a hundred or a thousand fold,” he says, adding:
“If anyone wants to do that, then, as I have already written, it is gambling. It’s just speculation. Whether someone is ready to speculate and risk his future retirement is probably his business. “
He explains that when advising new clients the first thing they do is assess their risk tolerance.
“With all of these risk assessments, nobody really knows how you will feel or react when you’ve lost a lot of money,” he says. “The only way to find out your true risk appetite is still to lose some money or do one of those one-off activities like the crash of 87 or the GFC [global financial crisis], or the crash last year. “
With crypto, you’ll find out your risk tolerance pretty quickly as there are market-wide drawdowns of 30-50% every few months. Bitcoin’s price peaked at $ 65,000 in April and has since halved to hit its current price, which is closer to $ 35,000. And individual coins lose and gain more every week. So it is only suitable for investors who can endure such a stomach twist.
Ellison explains that a sensible approach to high risk or speculative investing is to only allocate a certain percentage of a portfolio.
“For most people, the high-risk, totally speculative part of a portfolio should certainly not exceed 10% – and that’s for an aggressive investor,” he tells the magazine, adding that investors who are more risk averse, the line between 1. could set% and 2%. While he points out that the vast majority of speculative investments fail, when a risk pays off, he encourages investors to take profits rather than hold onto them. Jason gives similar advice:
“Never put in more than you can afford to lose, and probably don’t rely on it to be the vehicle for your FIRE goals because it’s very speculative. I wouldn’t advise anyone to go this route. But I think people do that anyway. “
He adds that there is a difference between being careful with money and ignoring new opportunities:
“I think a lot of it is always a sign that people are being drilled into a really good financial education over the years. And maybe new opportunities will just open up, for which you just have to be open-minded without necessarily becoming a full-fledged believer. “
One of the people who no longer follows Ellison’s investment advice is his son: “I invested him in a stock two years ago and he made five times his money with it. And he sold it a cent from above and invested it in Dogecoin, ”says Ellison, referring to Elon Musk’s favorite memecoin.
Ellison’s son now thinks he’s an investment genius and that his old man should retire and give up the reins. “He says I should just let him take over,” laughs Ellison.