Safer Cryptocurrency Trading: How to Avoid a Scam

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This video was recorded on Nov. 2, 2021.

Alison Southwick: This is Motley Fool Answers. I'm Alison Southwick, joined as always by Robert, it's getting cold outside, Brokamp, personal finance expert here at The Motley Fool. Hey Bro.

Robert Brokamp: I have used the space heater in my basement here once or twice. I totally agree with your burr assessment.

Alison Southwick: In this week's episode, we learn a thing or two from Motley Fool Analyst, Eric Bleeker about avoiding crypto scams. Bro talks to the coffeehouse investor who bruise up some folksy wisdom on finding financial harmony, and we answer your question about what's stocks to sell when you need the cash, all that and more on this week's episode of Motley Fool Answers. What if I told you that I have an investing opportunity that combines food delivery with cryptocurrency. It's like Uber Eats or DoorDash meets everything amazing about crypto that you don't quite understand enough to ask intelligent questions about. We're going to call it CryptoEats because that's actually a solid name, and we're going to need T-shirts printed, press release, let's plan a big launch party, and invite TikTok influencers who will then promote us and we're also probably going to need to charter a jet to get out of town A-S-A-P. Because by the way, this is all really just elaborate scam, and we're going to rip people off to the tune of about half a million dollars in a just a few minutes of launching our coin. It's a lot of upfront effort, but it'll be worth it, and yes, that's really a thing that happened. According to Vice, the CryptoEats scammers, mocked up a logo, got TikTok influencers to promote it and want to wear it swag on the video. They apparently threw a party and announced the Eats Token through a press release that was distributed through sites like Yahoo News. After a week or so of what Vice describes as a concerted influencer led hyped fest, the scammers then completely disappeared minutes after launching the Eats Token and pulling in around $500,000 for their efforts. Apparently, it's called a rug pull and it can be common in crypto. I asked Eric Bleeker, an analysts with the Motley Fool to explain.

Eric Bleeker: Well, Alison, simply put, a rug pull is when developers abandon a project and make off with the proceeds. Why are rug pulls on the rise? For one, we've had a lot of growth in decentralized exchanges i.e., as opposed to something like Coinbase, which is a centralized exchange and [...] new listings. It's easier to list and draw attention to projects without scrutiny on these peer to peer exchanges. Now, it's very timely we're talking about rug pulls because a notable one just took place. Some malicious developers saw the popularity of Squid Game, and like the CryptoEats scam, they built up popularity, they claimed it was a play to earn game, which is a type of game gaining popularity in the crypto space around it and once liquidity had floated in and in their case, more than the half million you described, think about two million, they pulled the rug and the proceeds are gone.

Alison Southwick: Globally as cited in Bloomberg from 2019-2020, the number of victims to scams like CryptoEats and other ponzi schemes has jumped 48 percent to more than seven million people totaling billions of dollars stolen. One giant ponzi scheme that just came to light in South Africa is estimated to have stolen $3.6 billion worth of Bitcoin from victims. But I have to wonder, is the threat of actually getting ripped off by an outright crypto ponzi scheme or rug pull, anymore a threat than just getting burned by investing in the more established but still nascent, highly volatile, highly unregulated, and at times head scratching, weird waters of crypto?

Eric Bleeker: Since its earliest days, crypto has seen scams of, let's just call it pretty profound magnitude. The original was the Mt. Gox exchange, which was handling about 70 percent of all Bitcoin transactions in 2014 and said 850,000 Bitcoin were lost or stolen and it's now believed they were in fact stolen. That one incident is about $50 billion at today's prices. It's on the level of someone just stealing the entire [inaudible 00:04:09] out one moment. The fact is even the most bullish crypto enthusiasts, they'll tell you that most projects will be worthless. There's simply no barrier to entry in this market and coupled with that, the rise of things like Shiba Inu which is a meme currency that's meant to be a counterweight to Dogecoin. Rising in that really intensifies greed and people looking for the next big thing. Is the risk of losing your money investing in crypto high? Of course it is. Now, I will note that consumer applications for crypto from Coinbase to crypto.com and beyond have really improved their security in recent years and they offer access to projects with more stability like Bitcoin or Ethereum, which admittedly are still quite volatile.

Alison Southwick: What should you do to stay safe out there?

Eric Bleeker: Well Alison, I think what I just said, start small, invest in more well known cryptocurrencies and get a feel whether this is right for. You're going to know, how will you handle swings in the market a lot better actually owning tokens yourself and seeing the ups and downs. There was a new story earlier this week about trade that turned $8,000 in one of the of the meme coin Shiba Inu into more than 5 billion and whenever you have those headlines, you're going to see a lot of people trying to hop on the next big thing early, and it's no coincidence that the latest rug pull happened right after that Shiba Inu rise while interest in the spaces absolutely soaring. My best advice on staying safe would be simply avoid the tiniest cryptocurrencies, it's an outrageously risky space and if you really want to get involved, invest very small amounts and do things like visit communities on Reddit, for example, for the token to see if concerns are being raised because if they are, there's definitely red flags, that should warrant your attention.

Robert Brokamp: Have you ever wished you could just sit down with a wise soul at a coffeehouse who would then dispense all kinds of wisdom about money and life. Well I have the next best thing, a new book, The Coffeehouse Investor's Ground Rules, save, invest, and plan for a life of wealth and happiness. The author is Bill Schultheis, who is also the founder of SoundMark Wealth Management in Kirkland, Washington. Bill, welcome to Motley Fool Answers.

Bill Schultheis: Robert, it's great to be on your show.

Robert Brokamp: This is your second book, with the first being the original Coffeehouse Investor, first published in 1998 and had some revisions. Let's start with the name. Where does it come from? And what does it mean to be a coffeehouse investor?

Bill Schultheis: Robert, I spent the first 15 years of my professional career working as a stockbroker at Salomon Smith Barney in downtown Seattle, and hated every day of it. I just wasn't a salesman and ultimately got out of the business and in connecting with my friends and figuring out what I was wanting to do with the rest of my life, I would keep on coming back to some simple principles that I would share with these folks that I would meet at a coffeehouse in downtown Seattle. It was basically, hey, ignore the stock market. Hold for the long term. Focus on what you can control, which is you're saving if you're working and spending if you're retired, and what this does is it allows you to focus on things that are more meaningful in your life, like your careers, your jobs, and your passions. Really it was that group of folks I met at the coffeehouse that inspired me to write my book.

Robert Brokamp: So a big part of it is index funds. You are huge advocate of indexing and it certainly makes sense. The numbers are there, the average tip, certainly the average actively managed mutual fund does not beat a comparable index fund. In fact, I think only 10-30 percent due over the long term. Then the odds are in favor of indexing, but you make a good point in that it's not just the odds, it's the amount of time that you spend trying to outperform an index fund. It's important question that to say, is it worth the time to try to do that when you can just buy an index fund and get the markets return?

Bill Schultheis: Robert, it's interesting because I do advocate index funds in my first book specifically. But the second book that came out 20 years later was of stories of people who embraced the coffeehouse principles of, don't put all your eggs in one basket, there is no such thing as a free lunch and save for rainy day. The story is really not buy index funds, the story is capture a good chunk, the lion's share of the markets return, as John Bogle would say, your fair share, and then focus on things that you can control. You can do that whether you invest in index funds, whether you invest in actively managed funds, or whether you build a globally diversified portfolio of individual stocks. As you know, that's becoming more and more of a reality with these direct index fund opportunities, where you can build your own index type fund. Really what it does is, it allows people to focus on those things in their financial planning that are in their control, not in the daily ups and downs of the market.

Robert Brokamp: When you talked about planning, of course, that covers a lot of ground. But one of the components of that is really just figuring out where you want to be and how much you need to save to get there.

Bill Schultheis: It's pretty simple if you're 35-year-old. Let me back up a second, Robert. For most of us, we all have the same objective. We have the same goals. We want to be involved in an engaging career, or career that gives meaning to our lives. At some point we're going to have to, or want to, or need to retire, step away from earned income. Then our goal is to maintain our retirement years with a lifestyle similar to the one that we had grown into while working. When you put that into your financial plan it's if you're working ballpark, how much should you be saving? If you're retired, how much should you be spending so that you don't outlive your portfolio? That's what it comes down to. That's what I tried to get the reader of my first, and especially my second book to focus on as they pursue their short and long-term financial goals.

Robert Brokamp: A big part of it is spending. Even if you're still working, you are focused on your saving. You have to first make sure you keep your spending intact or in line. It's a lesson you learned because when you quit Smith Barney, you decided to live very modestly. I think it was $700 a month or something like that. I thought it was interesting that you talked about your grandparents who lived through the depression and you still have the spending ledgers that they have. Talk to us a little bit about the importance of really looking at your money and focusing on what kind of value you get for the money that you're spending.

Bill Schultheis: Well, Robert, I encourage folks to focus on two things and be aware of two things. One is at the end of the year, have some type of system, whether it's QuickBooks or quicken or mint.com or whatever tool you have, so you have a ballpark idea of where your money is going. What that does is it allows you to look for opportunities to maybe save a little bit more, but more importantly, it allows you clarity on are you spending money on things that bring meaning to your life? A good example is eating out. I like to eat out with the rest of them. It's fun to get together with friends and go out and have a nice dinner. But when I start calculating how much I spend eating out, it allows me to say, hey, do I really want to spend that much money eating out, or would it be better directed toward things that I enjoy more like working in my wood shop, playing golf, traveling, things like that? It's interesting because with all the technology of online trading, in my opinion, one of the best resources from a technology standpoint for saving is the automatic payroll deductions that happened in your workplace. Now you can have automatic deductions from your checking account, put into your savings account, or your investment accounts so that you never really have to sit down and say, I've got to work out a budget this month, am I going to work? You save first, you save automatically. It's amazing how, I've seen it, not only in my own life, but with coffeehouse investors, how that automatic savings just builds up over time. It's just mind-boggling. That's the story that I want to share with the reader, whether that reader is 20-years-old, 30-years old, 60 years or 70-years-old. Put that savings and that spending on automatic as much as you can and then go out and live your rich life.

Robert Brokamp: Since you are the Coffeehouse Investor and you live close to Seattle, the home of Starbucks, I got to ask, what's your take on the whole latte factor, the belief that the person who buys coffee every day is basically peeing tens of thousand dollars away?

Bill Schultheis: Robert, I don't buy that. Well, number 1, study show that for a large percentage of people, when they go in to buy at Starbucks, that's their breakfast in the morning. It's not as if they're just wasting money willy nilly, they are using it to get them through the day. But the second thing is, just be aware of how much you're spending. I can tell you at ballpark, over the past year, about how much money I spend at Starbucks because I found an easy way to keep track of that. If that brings meaning to my life, then more power to me, just have that awareness at the front of your financial decision-making.

Robert Brokamp: You have a chapter entitled Women Winning in Wealth. What's your primary message you wanted to send with that chapter?

Bill Schultheis: The message that I want to share in that chapter, Women Winning in Wealth, and it's the same message that I give to readers and followers of the Coffeehouse Investor at my website, www.coffeehouseinvestor.com, is that you have got this investing thing down packed. Building a globally diversified portfolio of either index funds or actively managed funds that have low turnover and are tax efficient, you've got this investing thing down. Now you can focus on the financial planning issues that matter most of all, which is not only getting food on the table, but also looking estate planning of long-term Care planning, insurance planning, those things in your life that you are going to need to address in the future if you aren't addressing them now. In writing that chapter, I wanted, not only women, but everyone to come away with the idea that, hey, I've got this investing thing down cold, and now I can focus on things that are important.

Robert Brokamp: You talk about how humans are inclined to want more, and often that translates as people thinking they need more money, more wealth, another market-beating stock, something like that. But really probably what were yearning for is other things, more security, more community, more creativity, more meaning. I think that's really the main takeaway that you are trying to make with your book.

Bill Schultheis: Absolutely. That we are yearning for more and we are yearning for fulfillment and more happiness. It's a Catch-22 because in our heart we know that money can't buy us happiness. Yet we live in a culture where it is consumer-driven, where money can buy you happiness. I'm not criticizing our consumer-driven culture. Capitalism is the best form of an economic system that has ever been formed. What I'm suggesting and encouraging the reader to do is look for opportunities to live their rich life in a way that gives meaning to their life in their communities, their schools, their families, and especially in their own self.

Robert Brokamp: As a financial advisor, surely you must see examples of people who have a lot of money, but they're not any happier than some of your clients who don't have nearly as much. You've talked in your book about the story of a high school principal who's about as happier as anyone could be.

Bill Schultheis: It's just been a great journey over the last 20 years, and really my second book, The Coffeehouse Investor's Ground Rules, is a compilation of stories of folks that I've engaged with over the last 20 years that are living their rich life because they found that whatever it is in their life that gives meaning to their existence. For a lot of retired folks, it's living their rich life by sharing a message of their rich life with their children and now their grandchildren. For people who are involved in their communities, in their careers, it's being present to those who you're working with. The message that I've tried to share with my reader in The Coffeehouse Investor's Ground Rules is that's how you live your rich life. It's not the simple empty pursuit of a larger bank account.

Robert Brokamp: Final question. I first interviewed you back in 2005 and at the time you said you were 44 and that you had planned to retire around 60.

Bill Schultheis: Yeah.

Robert Brokamp: Well, if I have my math correct, you're now around 60. So how's your retirement plan looking?

Bill Schultheis: Robert, I don't think I'm ever going to retire. I just have this passion for sharing The Coffeehouse message with others. I can't tell you how gratifying it is when I get emails from folks across the nation saying, hey Bill, I came across your book 18 years ago and it's had a profound impact on my children's life, my life, and now my grandchildren's life. I look at that email and I say, it's nothing really that I've done. They're simply embracing the three principles of don't put all your eggs in one basket, there is no such thing as a free lunch, and save for a rainy day. They're taking those principles, they're embracing it in their life, and they're sharing it with others. As my friend and your friend Larry Swedroe often says, hey, we're changing the world, one investor at a time, and that's a journey that I never want to step away from.

Robert Brokamp: Again, our guest has been Bill Schultheis, the author of The Coffeehouse Investor's Ground Rules: Save, Invest, and Plan for a Life of Wealth and Happiness. Bill, thanks for joining us.

Bill Schultheis: Thanks, Robert. It's been a terrific opportunity to share the Coffeehouse message.

Alison Southwick: [MUSIC] It's time for [inaudible 00:18:56] Answers. This week's question comes from Peter. Peter writes, "We are in the process of buying a new house for our growing family. While we have a large savings account, we will likely need to dip into our stocks to cover part of the closing costs. My portfolio is heavy with Alibaba and Upstart along with some other losers and winners. Do you think I should sell some of my winners for profit, eat some of my losses on the losers, take evenly from the pile or rethink my strategy entirely?"

Robert Brokamp: Well Peter, first of all, I would say, given today's interest rates so certainly an argument to be made that you should borrow as much as you can, which allows you to invest as much as you can. I think the current rate on the 30-year mortgage is a tad over three percent according to Freddie Mac. So theoretically, all you need to do is invest and earn above that three percent over the long term to make borrowing more worth it. That said, I certainly think it makes sense to avoid PMI as much as possible. Those are some initial thoughts. Also, since you mentioned closing costs, if this were a refinance, what you could do is you could roll those refinance costs into the mortgage. Generally speaking, that's much more difficult when you're buying a home. However, there is something called the seller credit or concession. Basically, you're paying a little bit more for the house and then the seller covers the closing costs. So that's also something to consider if you are comfortable taking on that extra debt, and I would say that's something you have to be comfortable with. I personally love the idea of having a mortgage free retirement so that's where I'm headed. But if you like the idea of borrowing more so that you can invest more, those are some options. I would also say to take a look at everything you're paying for when it comes to closing costs. Make sure you're paying everything. Everything that's on that list of things is something you have to pay for and that it isn't negotiable, some things you will, like taxes and stuff like that. But there are other things like title insurance. Depending on your state, you might be able to negotiate that or shop around. 

What's probably being thrown on your closing cost statement was just came from your broker and they might have some sort of partnership with someone and they might be putting on basically a gold-plated policy. Well, you may be able to shop around and get a lower cost policy. You might even be able to get a reissue policy if the home was bought or financed in the last five years. So just take a look at your closing costs and see if there are any ways to bring those down. I will point out that you can withdraw up to $10,000 from an IRA for a first-time home purchase and avoid the 10 percent early distribution penalty. That's per person so each spouse could do it if they both have IRAs. This only applies to IRAs, not 401(k)s or 403(b)s or anything like that, and it just gets you out on that 10 percent early distribution penalty if you're not yet [inaudible 00:21:41] . It doesn't get you out of taxes. So I actually generally don't think this is a good idea for most people and probably not something for Peter to consider. But I'm just making everyone aware that this option exists. Let's say Peter does get to a point where he does have to sell some stocks. Whenever you come to the point where you have to raise cash, that's a great time to look at your portfolio and see what's out of balance. In what cases are you overweight? It could be a broad asset class where you feel like maybe you just have too much in stocks or too much in any other asset classes. It's a chance to pare back. A couple of other foolish rules of thumb are that anytime you have more than 30 percent of your portfolio in a single sector, then it's time to consider maybe paring back. Then there's how much you should have in one single stock. I think most financial planners would say at most five percent. 

We at The Motley Fool probably are more comfortable with saying 10-15 percent, but that really is pushing it. It depends on your experience as an investor. It depends on your risk tolerance. It depends on the company. I'd be much more comfortable having 10-15 percent of my portfolio in Berkshire Hathaway as opposed to maybe the latest meme stock. You didn't say if you belong to any Motley Fool services, Peter, but if you do those are also good resources for evaluating stocks in where they're ranked on the various lists and the services. Most of our services have discussion boards so you get some feedback there as well. We just talked in the previous segment about how the vast majority of actively managed mutual funds don't beat irrelevant index funds. So if you have any actively managed funds, this certainly would be a time to evaluate those and maybe pare those back if they've been underperforming. You mentioned losses and yes, lots of people will do some tax-loss harvesting. You sell the investment at a loss, that loss offsets any capital gains and then up to $3,000 of ordinary income. If the loss is greater than $3,000, you can carry it forward to future years. Something to certainly consider, just know that if you do any tax-loss harvesting, you can't buy that investment back for another 30 days. Then I'll just mention a thought experiment that I've mentioned on the show before and that is look at each of your investments and just ask yourself, if you didn't own it would I buy it today. Anytime you say no, that's certainly a candidate for something to pare back on or get rid of. Just some other tax tips to consider, if you're selling part of a holding that you've accumulated over multiple purchases, maybe deliberately or due to dividend reinvestment, you can identify the shares you're selling to manage the tax consequences. So if you expect to be in a higher tax bracket in the future, then maybe you should consider [inaudible 00:24:16] today and selling the shares with the biggest gains. On the other hand, if you want to keep this year's tax bill to a minimum, then sell the shares with the highest cost basis. Peter, those are some thoughts. I hope they help and congrats on the new house and the growing family.

Alison Southwick: Well, that's the show. It's edited pumpkin spicely by Rick Engdahl. Our email is [email protected]. From Robert Brokamp, I'm Alison Southwick. Stay Foolish, everybody.