{"id":7963,"date":"2021-06-29T09:25:46","date_gmt":"2021-06-29T13:25:46","guid":{"rendered":"https:\/\/cointelegraph.com\/magazine\/?p=7963"},"modified":"2021-07-07T19:15:26","modified_gmt":"2021-07-07T23:15:26","slug":"retire-early-with-crypto-playing-with-fire","status":"publish","type":"post","link":"https:\/\/cointelegraph.com\/magazine\/2021\/06\/29\/retire-early-with-crypto-playing-with-fire","title":{"rendered":"Retire early with crypto? Playing with FIRE"},"content":{"rendered":"

Finance blogger The FI Explorer didn\u2019t invest in cryptocurrency in order to retire early \u2014 but unlike many of the newly minted crypto rich, he did set out to retire early.<\/b>
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\nThe FI Explorer, also known as Jason, is part of the FIRE community \u2014 financial independence, retire early \u2014 where adherents save up to 80% of their income throughout their 20s and 30s in order to either retire early or simply follow their passions.<\/p>\n

For most of his 20-year journey toward his FIRE target of $1.64 million (USD)\u2014 which was chosen to produce $65,000 in annual income for the rest of his life \u2014 Jason directed his savings toward sensible investments, like exchange-traded funds, shares and gold. But after listening to a Bitcoin-focused podcast in 2015, he decided to chance it and put around $3,000 \u2014 or 0.5% of his portfolio at the time \u2014 into the cryptocurrency. Bitcoin\u2019s astonishing growth since has seen the allocation expand to account for almost a third of his portfolio at its peak and helped him sail past his FIRE target in December 2020, much earlier than expected.<\/p>\n

\u201cThat\u2019s incredible,\u201d he tells Magazine. \u201cPreviously, I had a goal that was laboriously calculated with lots of curves and linear extrapolations, but late last year, I kind of hit it accidentally.\u201d<\/p>\n

Although crypto has provided some in the FIRE community with a shortcut to reach their goals, it remains controversial \u2014 seen by some as an illegitimate, risky path to financial freedom when compared with scrimping and saving to invest in index funds.<\/p>\n

Stories of windfall gains attract and repel FIRE proponents in equal measure, explains podcaster and blogger<\/a> Captain FI.<\/p>\n

\u201cIt\u2019s insane, and I think that\u2019s what drives a lot of the FOMO in the FIRE community,\u201d he says. \u201cYou know, there is jealousy, like \u2018holy shit.\u2019 Of course. I\u2019m jealous of people that have built a $1.5 million [portfolio] overnight.\u201d<\/p>\n

\u201cLook, I shouldn\u2019t use the word jealous. I\u2019m impressed. I\u2019m amazed. But I\u2019m also highly suspicious, or skeptical, because easy come, easy go. I\u2019ve put money into crypto, and I\u2019ve seen a net loss so far.\u201d<\/p><\/blockquote>\n

So, can cryptocurrency ever be a sensible part of an early retirement plan?<\/p>\n

What is FIRE?<\/h4>\n

The central concepts of the anti-consumerist movement were first outlined in the 1992 bestseller Your Money or Your Life<\/i><\/a>, but FIRE came to prominence thanks to the popularity of the \u201cMr. Money Mustache<\/b>\u201d blog. Written by Canadian-born Peter Adeney, it inspired millions to follow his lead by detailing how he retired from his job as a software engineer at the age of 30 by cutting his spending to the bone and investing the bulk of his $67,000 salary into index funds.<\/p>\n

The theory behind FIRE is pretty simple: Multiply<\/a> your annual expenses by 25 to work out how much you need to retire (based on the 4% annual withdrawal rule<\/a>). Someone who spends $50,000 per year will need to amass around $1.25 million. Somewhat ironically, Adeney now earns vastly more from blogging about early retirement than the $25,000 in annual income his retirement savings of $600,000 would have provided.<\/p>\n

 <\/p>\n

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Fan tokens: Day trading your favorite sports team<\/a><\/h3>\n
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What it\u2019s like when the banks collapse: Iceland 2008 firsthand<\/a><\/h3>\n
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Crypto City: Guide to Tokyo<\/a><\/h3>\n
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Before NFTs: Surging interest in pre-CryptoPunk collectibles<\/a><\/h3>\n
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Bitcoin ledger as a secret weapon in war against ransomware<\/a><\/h3>\n
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FIRE is all about moving sensibly and methodically toward this goal, explains Captain FI, who recently semi-retired at age 30 from his job as a pilot after saving around 80% of his income for years.<\/p>\n

\u201cIt\u2019s basically about making a few smarter choices early on in life so that you can reap the benefits later on,\u201d he tells Magazine, likening it to saving up to buy your first home. \u201cEssentially, what FIRE does is you just keep doing that, maybe for another five to 10 years, so that you can build up assets that have cash flow to cover your cost of living.\u201d<\/p>\n

While that couldn\u2019t be further from the get-rich-quick mentality of some in crypto, the key demographic is pretty much the same:<\/p>\n

\u201cA lot of people in the FIRE community do tend to be \u2014 if we\u2019re going to stereotype \u2014 25- to 35-year-old white males that work in tech. I don\u2019t know whether we\u2019re all somewhere on the spectrum\u2026\u201d<\/p><\/blockquote>\n

Despite making as much money from Bitcoin as Mr. Money Mustache retired with, Jason understands why FIRE followers are wary. \u201cThe common take is highly skeptical,\u201d he says. \u201cI think that\u2019s probably healthy in a way.\u201d He adds:<\/p>\n

\u201cThe FIRE community has largely been around low-cost, predictable, but well-diversified portfolios, and really has emphasized that issue of dollar-cost averaging and saving over a long period and compounding [returns]. So, I think cryptocurrency is the antithesis of that. It presents at first blush like the kind of get-rich scam that people are forever warning other people about.\u201d<\/p>\n

<\/h4>\n

FIRE and crypto don\u2019t mix<\/h4>\n

Mr. Money Mustache is dead against cryptocurrency. In March, he wrote<\/a> a piece about how crypto was just a bubble and how \u201cThis whole situation is just the age-old game of stock speculation based on price momentum \u2014 which is in turn just another form of gambling.\u201d<\/p>\n

Another writer held in high esteem by the Australian FIRE community is the Barefoot Investor, Scott Pape, who also regularly warns against cryptocurrency. In a recent column, he argued<\/a> that crypto relies entirely on the \u201cgreater fool theory<\/a>\u201d and that \u201cYou only win when some greater fool buys in at a higher price.\u201d<\/p>\n

\u201cIf you\u2019re persuaded to sell your boring index funds and lay down with dogs, I can almost guarantee you\u2019ll eventually end up with financial fleas,\u201d he added.<\/p>\n

Financial commentator Tom Ellison used to write Pape\u2019s \u201cBarefoot Blueprint\u201d and says they\u2019d discussed crypto internally and decided against it pretty quickly in the interests of consumer protection.<\/p>\n

\u201cMy views probably align with Scott Pape\u2019s,\u201d says Ellison, who subsequently founded his own financial education service called The Naked Investor. \u201cAnd that is: It\u2019s not a currency. It\u2019s not a financial investment under the terms of the Australian legislation. But there\u2019s no doubt that it has created wealth for a lot of people.\u201d<\/p>\n

<\/h4>\n

Getting rich quickly<\/h4>\n

There have of course been countless crypto-based get-rich-quick scams, from Bitconnect-style Ponzi schemes to \u201crug pull\u201d scams on Uniswap \u2014 leaving aside the sheer recklessness of inexperienced investors tipping money into memecoins based on the fact that they feature the same breed of dog as Dogecoin.<\/p>\n

But what separates crypto from most get-rich-quick scams, however, is that people genuinely do get rich \u2014 and quick. So rich, in fact, that many find themselves in a position to retire early even without working toward that goal.<\/p>\n

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Words to live by from The Simpsons (Source: FX)<\/figcaption><\/figure>\n

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This includes former Oracle database product manager Mike Palmeter, who \u201caccidentally\u201d retired<\/a> earlier this year. He explains to Magazine that he\u2019d been interested in Bitcoin for years but had been put off by the warnings of critics like economist Nouriel Roubini, who has been insisting it\u2019s a bubble about to pop for years now. But reading Andreas Antonopoulos\u2019 Mastering Bitcoin<\/i> in 2017 convinced him there was much more to it.<\/p>\n

\u201cThe very first epiphany that I had is that this is way bigger and way more complex than I can handle. I haven\u2019t had the time to do nearly enough homework, but the price is moving.\u201d<\/p>\n

He began investing money as fast as he could until 50% of his portfolio was in Bitcoin and related investments, such as Bitcoin mining companies and payments or trading platforms including Circle, Robinhood and Square.<\/p>\n

He\u2019d made a 170% profit when Bitcoin\u2019s price cratered at the start of 2018, plunging his portfolio to a 50% loss. Palmeter says he was too proud to sell during what came to be known as \u201ccrypto winter,\u201d so instead, he learned as much as possible about blockchain. It left him convinced that Bitcoin was \u201cthe highest value application of blockchain technology.\u201d Although difficult to accurately value, he was confident it would grow in value:<\/p>\n

\u201cI studied, and my ego and my arrogance and refusal to admit defeat brought me to a place where I actually thought I\u2019d accidentally made the right decision. So, I kept it, and then I started buying more because I thought, \u2018This is a long-term play.\u2019\u201d<\/p><\/blockquote>\n

He also learned his lesson from the 2018 market crash and took profits regularly after each big price increase, rebalancing his portfolio to ensure it was split 50% toward Bitcoin investments and 50% toward stocks providing high dividends. Even with the effects of crypto winter factored in, he has made an average return each year over the past five years of 79.67%.<\/p>\n

In March, after rebalancing the Bitcoin proportion from 77% back to 50%, he suddenly realized that the income from his stock dividends was now greater than his salary after taxes, regardless of what Bitcoin was doing. He resigned from Oracle in April.<\/p>\n

\u201cI had no particular interest in retiring right up until the day I realized that I wasn\u2019t enjoying my job enough to justify doing it. Since I didn\u2019t need the money, why keep doing it? Why not just not<\/i> do it? That\u2019s freedom.\u201d<\/p>\n

<\/h4>\n

Selling up is hard to do<\/b><\/h4>\n

Palmeter is something of an outlier, and anecdotal evidence suggests that while plenty of crypto holders do end up with paper profits that would enable them to retire, few end up realizing those gains. Most hold on, expecting it to go higher \u2014 or because they\u2019ve become so addicted to the game that they don\u2019t want to leave the table. It\u2019s one of the biggest dilemmas with cryptocurrency: Cashing out means losing out on massive potential upside, but not selling means risking life-changing wealth.<\/p>\n

 <\/p>\n

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This happened to so many in 2017, millionaires on paper and never hit the sell button to take out profits, and thus they watched their millions become thousands https:\/\/t.co\/rGP3bUzydH<\/a><\/p>\n

— Lark Davis (@TheCryptoLark) June 21, 2021<\/a><\/p><\/blockquote>\n