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What’s your take on cryptocurrency?

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Dear Nimi,
I am a young man, leading and overseeing operations & projects of a start-up company. I have three questions for you. Before I started my work, I laid down in my budget that 20% of my salary would go into investment and 20% into savings. I have often kept to the investment plan and I haven’t quite got a grasp of the savings plan yet. I know I have not been disciplined enough about saving but I want to know how I can be more effective and the methods I can use.
– Mr. O
I am very impressed that you have made saving and investing a priority. There are huge advantages of investing young. Time allows you to take risks as you can ride market volatility. Those who begin to invest later in life are often more cautious about investing.

By investing early, you can take advantage of compound interest. Investing early allows you to develop disciplined spending habits. When you are older with greater resources, the potential is enormous.

A most effective way to save is to “pay yourself first” by putting your savings on autopilot. This involves setting up a regular direct debit or automatic transfer from your current to an interest-bearing account or an investment account such as a Mutual Fund account.

There are money market accounts, mutual funds, and other investments that make it easy for you to set aside a specific amount on a regular basis. Brokerage houses, banks and insurance companies have simplified the process so you can easily have your finances automated.

Question 2 – In your article a while back, you advised Sarah to have an emergency fund of about six (6) months of her income. As simple as it sounds, please ma, I seem to be unclear with it. Or do you mean if her salary is 200k, she should have an emergency fund of about 1.2m saved somewhere?

An emergency fund helps to cushion the effect of an unexpected event, such as the loss of a job, a debilitating illness or other expense. Ideally one should try to build savings of up to six months of expenses. Track your expenses for a month to ascertain how much you spend. If 6 months seems steep, start with a 3-month cushion; the key is to have easily accessible funds to tide you over challenging times. It is not advisable to invest for the long term when you have little or no short-term savings or are servicing expensive debt.

Question 3 – I stated that I have kept to investing 20% of my income and I invest it in Bitcoin Mining, with a registered company in Nigeria from Switzerland.I would want to ask you what your take is on cryptocurrency.

Let me start by saying that I am a relatively conservative investor and tend to invest in investments that are regulated and that I understand. It is important to understand your risk tolerance before you invest. Bitcoins and crypto-currencies are relatively new technologies and have not been tested over the long term; this makes them high-risk investments and not for the risk-averse.

Here are some of the potential risks:

Regulatory Risk: Bitcoins are not issued or backed by any governments. Because they are not regulated, they can be used unscrupulously for black market transactions, money laundering, tax evasion and other illegal activities. As a result, governments may seek to regulate, restrict or ban the use and sale of bitcoins.

Security Risk: Bitcoin exchanges are purely digital and as with any virtual system, are at risk from hackers, and operational glitches.

Insurance Risk: Bitcoin accounts are not insured by any government agency; there is no source of protection or appeal if there is a problem; further there is no third-party payment processor it is purely a transaction between a willing buyer and seller.

Market Risk: As with any investment, Bitcoin values fluctuate. Indeed, the value of the currency has been volatile even in its short existence.
Diversification is a fundamental principle of investing to protect yourself from the decline in your entire investment. Even if your risk appetite is high, it is not advisable to put all your eggs in one basket, particularly a high-risk investment such as this. If you wish to invest 20% of your income, consider spreading the funds across other asset classes and not only in bitcoins.

By spreading your money across various instruments or asset classes, if one performs badly at least you have money in other assets, it’s not just a matter of whether or not you should invest at all, it is about how much you put into such an investment.

You owe it to yourself to educate yourself as best you can with the information available; learn about cryptocurrencies, what affects them, as well as their advantages and disadvantages.

Whilst Bitcoins face much negative scrutiny, they are being adopted widely for a variety of reasons including the following: Anonymity and privacy, no boundaries, no payment limits, speed of transactions and so on. This does not take away from the fact that this is a high-risk value proposition and one must protect oneself accordingly.

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