Why Peter Schiff Thinks His Son Is Wrong to Go All In on Bitcoin

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Don't put all your eggs in one basket.

In spite of its recent slump, Bitcoin (BTC) has taken significant steps toward the mainstream this year. You can even use this digital currency to buy your morning coffee at Starbucks.

Bitcoin's progress has led some former skeptics like investor Mark Cuban to change their minds. Cuban is now an ardent crypto supporter. But others, like CEO and chief strategist of Euro Pacific Capital, Peter Schiff, remain firm Bitcoin critics.

Even Schiff's 18-year-old son, who is a big Bitcoin fan, hasn't changed his mind. Schiff recently told Kitco news that his son had "drunk the Kool-Aid."

Why Schiff thinks his son is wrong

Like many Bitcoin skeptics, the famous investor and commentator's objection to Bitcoin is that it has no intrinsic value. He said, "At the end of the day, when you peel the onion and get to what's really there, there's nothing there." Schiff says the only crypto he could get behind was one that was backed by gold.

Whether or not you agree about Bitcoin, his concern that his son has gone all in is well-founded. Schiff said he found it strange that many people on the internet are happy about the decision.

"They're congratulating him for basically having no diversification whatsoever and for putting 100% of basically his personal net worth into a highly speculative and volatile crypto asset."

He continued, "Even the people who believe in Bitcoin would not say that you should have everything you have in it. I mean, what if it doesn't work out?"

Why you shouldn't go all in on crypto

As we've seen in recent months, cryptocurrency is a highly volatile asset, and there are many risks involved.

Here are a few:

  • Some coins will fail. According to Coinopsy, over 2,000 cryptocurrencies have failed since the birth of Bitcoin in 2009. There are currently 10,000 on the market today -- and many of those have yet to deliver on the promises they made. Whether it's through scams, poor management, or loss of traction, many cryptocurrencies will not make it long term.
  • Regulation could change everything. The U.S. is in the process of evaluating how cryptocurrencies should be regulated. It is unlikely to follow China's example and seriously crack down on the whole industry. But it may restrict certain exchanges or certain types of cryptocurrency. And you don't want to be left holding digital currencies you can't access or trade.
  • Your crypto exchange or wallet provider could be hacked or close down. Most large cryptocurrency exchanges now have protections and insurance in place against hacking or theft. But a look at the crypto history books shows that exchange or wallet failure is not uncommon. If it happens to you, you don't want to lose the shirt off your back.

Those risks are just a few of the reasons it isn't a great idea to put everything you have into cryptocurrency. Indeed, it is best to only invest what you can afford to lose.

Diversification matters

Your first priority should be your emergency fund. Before you start to invest any money, whether it's in crypto, stocks, or anything else, make sure you have a cushion to see you through hard times. Ideally, it should be in a savings account that's easy to access if you need it.

Next, think about your investment strategy, your tolerance to risk, and your financial goals. If you are close to retirement, you may be less inclined to make risky investments.

A good rule of thumb is to put less than 5% to 10% of your investment portfolio into high-risk assets like cryptocurrencies. If you want, you can also diversify within your crypto portfolio.

For example, you might keep a solid percentage in bigger -- and safer -- coins like Bitcoin and Ethereum (ETH). Then you could choose to put a smaller amount into other, less established coins. That said, if you don't have time to research them fully, there's nothing wrong with sticking to established currencies.

Whatever way you look at it, diversification makes sense. As Peter Schiff suggests, it isn't a great investment strategy to throw caution to the wind and put all your eggs in one basket and hope it doesn't break.

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