Ethan Nguonly, a 22-year-old software engineer, started investing in the stock market with the help of his parents before he was a teenager. Today, his investment portfolio includes close to $135,000 in retirement and brokerage accounts, plus two houses.
But he didn’t get there without making what he now calls his biggest financial mistake.
Between November 2021 and June 2022, Nguonly says he lost about $80,000 by investing in crypto on margin. His losses include $30,000 of his original investment and an estimated $50,000 in unrealized gains. Investing with margin involves using borrowed funds to purchase an asset.
Nguonly says he had already made pretty hefty crypto investments in bitcoin and ethereum of around $40,000, plus a few hundred dollars in altcoins like shiba inu and dogecoin. But as bitcoin’s price went on a tear, he decided to buy more — about $15,000 worth — on margin.
For a moment, Nguonly says he was up about $50,000 as the price of bitcoin reached its all-time high. But at the end of 2021 the crypto market took a turn, and by the summer of 2022 bitcoin’s price crashed over 70%.
“I was investing with some money that I didn’t necessarily have,” Nguonly tells CNBC Make It. “Once the crypto market kind of reversed, my losses were amplified.”
Buying on margin: Know the risks
Investing on margin is a sophisticated strategy that can prove lucrative if your investments continue to perform well. But it amplifies your losses if the market takes a dip.
When you buy on margin, you’re borrowing money from a broker in order to invest more than you otherwise could have. As a result, you can boost your earnings, but are also at risk of losing more if the market goes the other way, as Nguonly experienced. Bitcoin’s price crashed so much he faced a margin call, meaning he had to sell a significant portion of his holdings to cover the cost of the loan.
To make a profit when buying on margin, your investments have to outperform the cost of the loan itself, which is part of why your losses will be greater if your investments depreciate. This can happen with any kind of security, but particularly volatile assets like cryptocurrency may make you more vulnerable to losses like Nguonly’s.
Indeed, investing in cryptocurrency in any capacity has always been risky. Even during the run-up to bitcoin’s November 2021 all-time peak, the investments remained speculative, volatile and mostly unregulated.
While investing is an important factor in building wealth, it always comes with risk. Especially when it comes to crypto, experts recommend only investing what you can afford to lose.
It’s also important to avoid investing techniques you don’t understand, such as options trading or investing on margin.
“Margin accounts can be very risky and they are not appropriate for everyone,” the Securities and Exchange Commission warns in its guide for investors. There are rules, like minimum deposits and borrowing limits, from the Federal Reserve and the Financial Industry Regulatory Authority aimed at ensuring people who open margin accounts know the risks and understand the financial commitment they’re making.
‘Only invest money you have’
Looking back, it wasn’t necessarily the decision to invest in crypto that Nguonly regrets.
While he admits he was probably a little too optimistic about crypto’s value continuing to grow, his critical error was putting too much money — and money that he didn’t have on hand — into the investments.
Without buying on margin he may have still lost a fair amount of money in the downturn, but “by overleveraging myself … that’s why my losses were significantly amplified,” he says.
Nguonly continues to keep some money invested in cryptocurrency, but sticks to historically more established tokens like bitcoin and ethereum versus the more volatile altcoins.
“I still believe in cryptocurrencies as a whole,” he says. “However, I do think that a lot of these altcoins can be very risky and I avoid putting any money towards them.”
The biggest lesson he learned from his $80,000 mistake is to “only invest money you have and don’t go un-leveraged into very speculative investments,” he says.
He still takes some financial risks here and there. But despite having more money to invest, Nguonly says his risk tolerance has decreased as his investment portfolio has grown. He’s currently focused on less speculative investments, like exchange-traded funds and buying real estate.
DON’T MISS: Want to be smarter and more successful with your money, work & life? Sign up for our new newsletter!
Get CNBC’s free Warren Buffett Guide to Investing, which distills the billionaire’s No. 1 best piece of advice for regular investors, do’s and don’ts, and three key investing principles into a clear and simple guidebook.
Read the full article here
