The Coinbase Cryptocurrency Exchange App, which was shown on the screen of an iPhone on February 12, 2018.
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Coinbase went public on the Nasdaq exchange on Wednesday, and you likely have at least one friend pointing out the news as a sign that cryptocurrencies are here to stay.
Many people are probably wondering what the development means and if they should do something about it with their money.
Here’s what you need to know.
What is Coinbase anyway?
Why is that a big deal?
Coinbase is the first major cryptocurrency start-up to go public on the US stock exchange.
Proponents of digital currencies say that the development shows that cryptocurrencies will ultimately redefine the way money is handled – and that a lot of money must be made in space along the way.
More practically, now that Coinbase is public, mainstream investors who may not have been able to purchase the volatile digital coins directly can purchase a cryptocurrency company registered with the Securities and Exchange Commission. And it’s important to know that in the case of Coinbase, individuals are more likely to invest in a company than a digital currency.
In general, financial advisors warn everyday investors not to put money into a company they cannot afford, regardless of the hype. Instead, they suggest that most people invest in funds that track the entire market in order to spread their risk.
Here’s why: in the long run, those who selected and own around 30 stocks have only a 40% chance of trading like the market as a whole, according to an analysis of Vanguard data by Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.
And between 1986 and 2017, the stock market rose more than 2,000%. The median of the share rose by only 7% during this period.
“A stock has a higher risk and a lower expected return than the entire market,” said Roth.
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Financial experts also advise against investing too much of your resources in a company that is going public.
While it may seem exciting to be an early investor in a company with a lot of fanfare, data finds that most IPOs lose money within five years. (Coinbase actually goes public through a direct listing, a slightly different process than an IPO, but they both produce the same result, with stocks being available to the public.)
Besides that …
It makes sense if you are intrigued by the craze for cryptocurrencies, or even jealous when you hear that friends make a big profit out of it. Bitcoin’s price has soared to over $ 60,000 from $ 7,000 a year ago, and other digital coins have had their own spikes.
As long as you know the risks and don’t invest more than you can afford to lose (because you could lose it all), experts say it’s okay to put some money in a business or cryptocurrency.
Around four years ago, Roth invested around $ 200 in Bitcoin through Coinbase. It has increased over 1,500% since then.
“I’m not against telling people that they can have 1% to 2% of their portfolio in digital currency,” he said.
Although he has no plans to buy shares in Coinbase, he said, “Outside of my index funds they have to buy.”