Why Ramit Sethi Believes Crypto Investors 'Get Quiet' When the Market Slows

Has Bitcoin become part of your identity?

Ramit Sethi's straightforward approach to money has won him a huge community of fans. The author of the best-selling book "I Will Teach You To Be Rich" has a popular website and also runs courses on managing your money, career, and business. The popular finance guru thinks a lot of money is about psychology rather than math. And that psychology is why he thinks crypto investors go silent when the market is down.

Ramit Sethi's views on cryptocurrency

Sethi isn't a vocal Bitcoin (BTC) critic per se. But he is critical of the way some people invest in crypto. Sethi says he makes "intentional" decisions about his investments, which means never investing in something just because you're scared of missing out.

1. Only investing in crypto

Sethi explains that he has no problem with people putting 5% to 10% of their portfolio into what he calls "fun investments." The important thing is to make sure you buy Bitcoin as well as a sensible mix of other, safer, assets. "When people put all their money in one investment, that’s not investing -- that’s speculation," he says.

Sethi claims many people who buy crypto don't hold any other investments. For him, that's where it gets dangerous. As he points out on his website, "When I’ve asked some Bitcoin investors how they think about their overall portfolio, diversification, asset allocation, a few have had good answers. Most have no answer at all."

2. Allowing crypto to define you

Another concern Sethi has about crypto investors is their mindset. He thinks that rather than seeing Bitcoin as an investment, some Bitcoiners have made it part of their identity. As a result, when prices fall, they double down on their belief. This stops them from considering that they could be wrong and selling an asset that may not perform well in the long term.

In a recent tweet, Sethi drew comparisons with the behavior of cryptocurrency investors and a Washington Post article about the way people behave when they've been victims of fraud. "One reason that crypto speculators get very, very quiet when they lose 70% of their money," he wrote.

The article quotes a psychologist who explores the way that being conned can destroy a person's sense of self. Sethi seems to be suggesting that the crypto community goes quiet because the dramatic drop in prices contradicts their beliefs and as a result, challenges the way they see themselves.

What crypto investors can learn from Ramit Sethi

It's a bit extreme to suggest that everybody who bought crypto has been conned and is now suffering some kind of identity crisis. But it is true that there's a fine line between holding on to an asset you believe will perform well in the long term and blindly holding on to a failing asset because you don't want to admit you were wrong.

Does that mean you should sell your crypto? That's not an easy question to answer, but generally speaking, falling prices are not in and of themselves a reason to sell. What's important is to look at the fundamentals and try to objectively consider why you bought crypto in the first place. For example, I am cautiously optimistic about Bitcoin because I think it could transform the way we use money and I can see several billion dollar industries -- such as international money transfers -- that Bitcoin could impact. Those reasons still hold true, so I am not selling my Bitcoin.

However, I also know that there are many factors that could stop it from achieving its potential. For example, we could see stricter regulatory controls or other technological advances that overtake or undermine blockchain. It is a new and relatively untested industry. As a result, I only invest money I can afford to lose and I manage the risk I'm taking on. My crypto investments are part of a wider portfolio of less risky assets.

Bottom line

It's worth reiterating Sethi's points about diversification. Even if you think crypto can perform well in the long term, it doesn't make sense to go all in on a single asset class, especially a high risk one. Crypto can play a part in a balanced portfolio, but if it's the only thing you own, you could be in trouble if the whole market collapses.