Coinbase went public on Wednesday on the Nasdaq exchange, and you probably have at least one friend pointing to 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 anything about it with their money.
Here’s what you need to know.
What is Coinbase anyway?
Coinbase, a start-up founded in 2012 in San Francisco, allows people to buy and sell around 90 different cryptocurrencies.
The company, which has made CNBC’s Disruptor 50 list three times, has more than 1,700 employees and 56 million verified users, according to its website.
Why is this a big deal?
Coinbase is the first major cryptocurrency start-up to go public on the U.S. stock market.
Proponents of digital currencies say the development shows that cryptocurrencies will eventually redefine the way we handle money – and that there’s a lot of money to be made in the space along the way.
More practically, now that Coinbase is public, mainstream investors who may have been skittish to directly buy the volatile digital coins can buy a cryptocurrency company registered with the Securities and Exchange Commission. And it’s important to know that in the case of Coinbase, individuals are investing in a company rather than a digital currency.
Should they?
Generally, financial advisors caution everyday investors against putting money they can’t afford to lose into any one company, regardless of the hype. Instead, they suggest most people invest in funds that track the entire market to spread out their risk.
Here’s why: in the long run, those who’ve selected and own around 30 stocks only have a 40% chance of doing as well as the overall market, 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 soared by more than 2,000%. The median stock, meanwhile, rose just 7% over that period.
“One stock has greater risk and a lower expected return than owning the entire market,” Roth said.
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Financial experts also advise against putting too much of your resources into a company going public.
Although it may seem exciting to be an early investor in a company with a lot of fanfare, data finds that most initial public offerings lose investors money within five years. (Coinbase is actually going public through a direct listing, a slightly different process than an IPO but both lead to the same result, with shares available to the public.)
That being said…
It makes sense if you’re intrigued by the cryptocurrency craze, or even have some jealousy hearing about friends making a big profit off of one. The price of Bitcoin has swelled to more than $60,000, up 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 into one company or a cryptocurrency.
Around four years ago, Roth invested around $200 in Bitcoin through Coinbase. It’s up over 1,500% since.
“I’m not against telling people they can have 1% to 2% of their portfolio in the digital currency,” he said.
Though he doesn’t plan to buy any stocks of Coinbase, he said, “outside of my index funds, which will have to buy it.”
