Personal Finance

If you own bitcoin, Buffett's cryptocurrency predictions are scary. How to cope

Key Points
  • When you could lose 30 percent of your investment in one day, stress seems inevitable.
  • This unique asset requires unique fortitude.
Warren Buffett thinks cryptocurrencies will end badly
Warren Buffett thinks cryptocurrencies will end badly

Billionaire investor Warren Buffett says cryptocurrencies are headed for trouble.

"We'll never have a position in them," Buffett, chairman and CEO of Berkshire Hathaway, told CNBC's "Squawk Box" Wednesday morning. "I can say with almost certainty that they will come to a bad ending."

If those ominous words aren't enough to stress investors out, earlier this week, the popular cryptocurrency ripple plunged almost 13 percent and bitcoin shed nearly 8 percent of its value.

Owning an asset that's been called both a fraud and the future can be an emotionally intense experience.

When bitcoin lost 30 percent of its value on Dec. 22, for example, one post on Reddit read: "I just re-financed my house to get in. I'm freaking out." Another user offered support to the frantic: "If anyone's actually depressed or suicidal, come to r/SuicideWatch. We love to listen and talk there."

It's the 24-hour cycle of cryptocurrencies that can wear on people's nerves, said Jim Smigiel, CIO of absolute return strategies at SEI Investments Co.

"With other speculative investments, like private equity and venture capital, you can't check your phone every five minutes," he said. With cryptocurrencies, "You're able to track the minute-by-minute value of it."

"Looking at something with such high volatility all the time is not conducive to an investor's mental health," Smigiel said.

Iconic investor Warren Buffett on bitcoin, his health and the state of markets
Iconic investor Warren Buffett on bitcoin, his health and the state of markets

Here's how to keep calm on the cryptocurrency roller coaster:

Look away

Bitcoin's volatility is part of what makes it irresistible, said Willemien Kets, associate professor at the University of Oxford's Department of Economics.

"We know from social psychology that the best way to get people hooked on something is to give them a reward on a very uncertain time frame," Kets said.

Don't fall into the trap. Checking the value of cryptocurrencies constantly is unproductive, Kets said.

"You can't do anything about the price movement itself," she said.

Instead she recommends people decide on a price point at which they'll sell — say, if the asset drops below $10,000 — and set their phone to alert them at that threshold.

An attendee wearing a t-shirt decorated with a bitcoin rocket illustration and the words 'To the Moon' checks his smartphone at the CrytoSpace conference in Moscow, Russia, on Friday, Dec. 8, 2017.
Andrey Rudakov | Bloomberg | Getty Images

Jack Tatar, co-author of "Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond," pointed to another reason why constant phone checks are futile.

"It's very hard to realize the gains you see on your phone," Tatar said. "These markets are not as liquid as the stocks and bond market. You can check your phone and see you're up to $30,000, but if you wan't to realize that gain, you probably won't be able to do that."

That's because it can take days for a cryptocurrency transaction to complete, during which the value can change substantially. Despite his advice, Tatar admitted he, too, can't look away.

"My son has tried to tell me to take a few days off," he said. "But I just can't."

Buy to hold

When people buy and sell in a dizzied cycle, they miss the bigger picture of cryptocurrencies and the blockchain technology on which it's traded, said financial advisor Ric Edelman, founder and executive chairman of Edelman Financial Services.

"There's no question that digital currencies are the future," Edelman said. "You should be prepared to own it for years."

He said his decision to hold bitcoin for years has paid off.

"I've watched it go from $1 to $1,000, back to $200 and then to $16,000," he said.

Although he acknowledged that such ups and downs are intolerable for some people.

"If owning this asset is causing you to stare at the ceiling at night, you shouldn't own it," he said. "There's more to life than money."

I've watched it go from $1 to $1000, back to $200 and then to $16,000.
Ric Edelman 
financial advisor 

Peter Ayton, who studies behavioral decision theory at the City University of London, said it's hard to expect people to be rational with cryptocurrencies. Many people who've been seduced by bitcoin are individuals who might not fully understand what they're buying, he said.

"When you have something as volatile as bitcoin, it doesn't lend itself to long-term strategic thinking," Ayton said.

Diversify beyond bitcoin

Michael Sonnenshein, investments director at cryptocurrency firm Grayscale, said people might be less anxious if they're not banking on just one cryptocurrency.

Fortunately, you don't have to: There are currently some 2,000 cryptocurrencies to chose from. And more investment firms are looking into establishing index funds for cryptocurrencies. For example, Grayscale is soon launching a "basket of digital currencies," in which investors' money will be spread across five digital currencies.

Diversifying is useful for another reason, Edelman said: "It's so early, we don't know which cryptocurrencies will survive."

Invest only what you can afford to lose

Tatar said people must restrict how much of their investments go to cryptocurrencies.

"You're seeing too many people jumping in and betting the ranch, and just saying 'yee-haw!'" he said. "They're not disciplined enough to realize they have to stay within their asset allocation models."

"Re-balancing" your investments is essential with cryptocurrencies, he said, because of their tendency to rapidly change value.

"If you've invested 20 percent of your portfolio into bitcoin, and all of a sudden you check and, lo and behold, your bitcoins have increased so much that they're now 35 percent of your portfolio, you can rebalance and go back to your asset allocation," Tatar said. "That should protect you from some of that volatility."

You're seeing too many people jumping in and betting the ranch, and just saying Yee-Haw!
Jack Tatar 
co-author, Cryptoassets: The Innovative Investor's Guide to Bitcoin and Beyond

It's not just the owners of cryptocurrencies who are stressed, Smigiel said. Recently, he finds himself consoling his clients who haven't bought any bitcoin, ripples or ethereum.

"We also see anxiety on the flip-side — the people who feel they are missing out," he said. "And so you're anxious either way."

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