Retire early with crypto? Playing with FIRE
Finance blogger The FI Explorer didn’t invest in cryptocurrency in order to retire early — but unlike many of the newly minted crypto rich, he did set out to retire early.
The FI Explorer, also known as Jason, is part of the FIRE community — financial independence, retire early — where adherents save up to 80% of their income throughout their 20s and 30s in order to either retire early or simply follow their passions.
For most of his 20-year journey toward his FIRE target of $1.64 million (USD)— which was chosen to produce $65,000 in annual income for the rest of his life — Jason directed his savings toward sensible investments, like exchange-traded funds, shares and gold. But after listening to a Bitcoin-focused podcast in 2015, he decided to chance it and put around $3,000 — or 0.5% of his portfolio at the time — into the cryptocurrency. Bitcoin’s astonishing growth since has seen the allocation expand to account for almost a third of his portfolio at its peak and helped him sail past his FIRE target in December 2020, much earlier than expected.
“That’s incredible,” he tells Magazine. “Previously, I had a goal that was laboriously calculated with lots of curves and linear extrapolations, but late last year, I kind of hit it accidentally.”
Although crypto has provided some in the FIRE community with a shortcut to reach their goals, it remains controversial — seen by some as an illegitimate, risky path to financial freedom when compared with scrimping and saving to invest in index funds.
Stories of windfall gains attract and repel FIRE proponents in equal measure, explains podcaster and blogger Captain FI.
“It’s insane, and I think that’s what drives a lot of the FOMO in the FIRE community,” he says. “You know, there is jealousy, like ‘holy shit.’ Of course. I’m jealous of people that have built a $1.5 million [portfolio] overnight.”
“Look, I shouldn’t use the word jealous. I’m impressed. I’m amazed. But I’m also highly suspicious, or skeptical, because easy come, easy go. I’ve put money into crypto, and I’ve seen a net loss so far.”
So, can cryptocurrency ever be a sensible part of an early retirement plan?
What is FIRE?
The central concepts of the anti-consumerist movement were first outlined in the 1992 bestseller Your Money or Your Life, but FIRE came to prominence thanks to the popularity of the “Mr. Money Mustache” blog. Written by Canadian-born Peter Adeney, it inspired millions to follow his lead by detailing how he retired from his job as a software engineer at the age of 30 by cutting his spending to the bone and investing the bulk of his $67,000 salary into index funds.
The theory behind FIRE is pretty simple: Multiply your annual expenses by 25 to work out how much you need to retire (based on the 4% annual withdrawal rule). Someone who spends $50,000 per year will need to amass around $1.25 million. Somewhat ironically, Adeney now earns vastly more from blogging about early retirement than the $25,000 in annual income his retirement savings of $600,000 would have provided.
FIRE is all about moving sensibly and methodically toward this goal, explains Captain FI, who recently semi-retired at age 30 from his job as a pilot after saving around 80% of his income for years.
“It’s basically about making a few smarter choices early on in life so that you can reap the benefits later on,” he tells Magazine, likening it to saving up to buy your first home. “Essentially, what FIRE does is you just keep doing that, maybe for another five to 10 years, so that you can build up assets that have cash flow to cover your cost of living.”
While that couldn’t be further from the get-rich-quick mentality of some in crypto, the key demographic is pretty much the same:
“A lot of people in the FIRE community do tend to be — if we’re going to stereotype — 25- to 35-year-old white males that work in tech. I don’t know whether we’re all somewhere on the spectrum…”
Despite making as much money from Bitcoin as Mr. Money Mustache retired with, Jason understands why FIRE followers are wary. “The common take is highly skeptical,” he says. “I think that’s probably healthy in a way.” He adds:
“The FIRE community has largely been around low-cost, predictable, but well-diversified portfolios, and really has emphasized that issue of dollar-cost averaging and saving over a long period and compounding [returns]. So, I think cryptocurrency is the antithesis of that. It presents at first blush like the kind of get-rich scam that people are forever warning other people about.”
FIRE and crypto don’t mix
Mr. Money Mustache is dead against cryptocurrency. In March, he wrote a piece about how crypto was just a bubble and how “This whole situation is just the age-old game of stock speculation based on price momentum — which is in turn just another form of gambling.”
Another writer held in high esteem by the Australian FIRE community is the Barefoot Investor, Scott Pape, who also regularly warns against cryptocurrency. In a recent column, he argued that crypto relies entirely on the “greater fool theory” and that “You only win when some greater fool buys in at a higher price.”
“If you’re persuaded to sell your boring index funds and lay down with dogs, I can almost guarantee you’ll eventually end up with financial fleas,” he added.
Financial commentator Tom Ellison used to write Pape’s “Barefoot Blueprint” and says they’d discussed crypto internally and decided against it pretty quickly in the interests of consumer protection.
“My views probably align with Scott Pape’s,” says Ellison, who subsequently founded his own financial education service called The Naked Investor. “And that is: It’s not a currency. It’s not a financial investment under the terms of the Australian legislation. But there’s no doubt that it has created wealth for a lot of people.”
Getting rich quickly
There have of course been countless crypto-based get-rich-quick scams, from Bitconnect-style Ponzi schemes to “rug pull” scams on Uniswap — leaving aside the sheer recklessness of inexperienced investors tipping money into memecoins based on the fact that they feature the same breed of dog as Dogecoin.
But what separates crypto from most get-rich-quick scams, however, is that people genuinely do get rich — and quick. So rich, in fact, that many find themselves in a position to retire early even without working toward that goal.
This includes former Oracle database product manager Mike Palmeter, who “accidentally” retired earlier this year. He explains to Magazine that he’d been interested in Bitcoin for years but had been put off by the warnings of critics like economist Nouriel Roubini, who has been insisting it’s a bubble about to pop for years now. But reading Andreas Antonopoulos’ Mastering Bitcoin in 2017 convinced him there was much more to it.
“The very first epiphany that I had is that this is way bigger and way more complex than I can handle. I haven’t had the time to do nearly enough homework, but the price is moving.”
He began investing money as fast as he could until 50% of his portfolio was in Bitcoin and related investments, such as Bitcoin mining companies and payments or trading platforms including Circle, Robinhood and Square.
He’d made a 170% profit when Bitcoin’s price cratered at the start of 2018, plunging his portfolio to a 50% loss. Palmeter says he was too proud to sell during what came to be known as “crypto winter,” so instead, he learned as much as possible about blockchain. It left him convinced that Bitcoin was “the highest value application of blockchain technology.” Although difficult to accurately value, he was confident it would grow in value:
“I studied, and my ego and my arrogance and refusal to admit defeat brought me to a place where I actually thought I’d accidentally made the right decision. So, I kept it, and then I started buying more because I thought, ‘This is a long-term play.’”
He also learned his lesson from the 2018 market crash and took profits regularly after each big price increase, rebalancing his portfolio to ensure it was split 50% toward Bitcoin investments and 50% toward stocks providing high dividends. Even with the effects of crypto winter factored in, he has made an average return each year over the past five years of 79.67%.
In March, after rebalancing the Bitcoin proportion from 77% back to 50%, he suddenly realized that the income from his stock dividends was now greater than his salary after taxes, regardless of what Bitcoin was doing. He resigned from Oracle in April.
“I had no particular interest in retiring right up until the day I realized that I wasn’t enjoying my job enough to justify doing it. Since I didn’t need the money, why keep doing it? Why not just not do it? That’s freedom.”
Selling up is hard to do
Palmeter is something of an outlier, and anecdotal evidence suggests that while plenty of crypto holders do end up with paper profits that would enable them to retire, few end up realizing those gains. Most hold on, expecting it to go higher — or because they’ve become so addicted to the game that they don’t want to leave the table. It’s one of the biggest dilemmas with cryptocurrency: Cashing out means losing out on massive potential upside, but not selling means risking life-changing wealth.
This happened to so many in 2017, millionaires on paper and never hit the sell button to take out profits, and thus they watched their millions become thousands https://t.co/rGP3bUzydH
— Lark Davis (@TheCryptoLark) June 21, 2021
Curiously enough, Jason — The FI Explorer — didn’t cash in his Bitcoin after he crossed his $1.64 million target for early retirement last year, nor did he retire. (He did, however, revise his target upward to $1.94 million to account for inflation and other factors). He says he’s happy in his job and has revised his goal toward financial independence rather than early retirement. But he’s also been bitten by the Bitcoin bug:
“It’s one of the most common questions: Well, why don’t you sell out? Or why don’t you de-risk? And that’s really because I do think it’s got an exciting future. I don’t necessarily want to rely on crypto for my FIRE. So for me, I’m sort of interested to follow it and see where it goes.”
Jason points out that if he’d followed the conventional, sensible financial advice around asset allocation and de-risking, “I would have sold out years ago and left about A$500,000 or more on the table.”
Captain FI recently hit his personal retirement target and now works just two days per week. The 30-year-old did it the hard way too, by saving more than 80% of his income and dollar-cost averaging into index funds. He reels off stats about how it would take 51 years to retire by saving 10% of your income, and 22 years if you save 20%. Captain FI did it in just 11 years, and as we chat, a moving van shows up to take his stuff from Sydney back to South Australia where he’ll live his life of leisure. He explains that he used to be a crypto skeptic.
“I was very against cryptocurrencies because I didn’t understand them,” he tells Magazine. “My idols in the investment community — Warren Buffett, Charlie Munger and Kevin O’Leary — were all very dismissive of Bitcoin.”
Curiously enough, it was a bad joke he made about preferring chocolate coins to Bitcoin on a podcast — at least you can still eat the chocolate when the price goes to zero — that was responsible for his conversion. “I thought that was a bit of a funny joke that I got absolutely smashed by all of the crypto people,” he laughs. “I was like, shit, maybe I better look into it.”
He invited Bitcoin proponent Stephan Livera onto his podcast, who helped convince him of Bitcoin’s potential value and that it was a risk worth taking. He now has a small cryptocurrency portfolio split between Bitcoin and Ether.
“Crypto — I definitely see it as an asset with an asymmetric risk profile, right? So yes, there’s a risk that it’s going to go to zero. But also, there’s a risk that it could, you know, 10x or 100x, which is really cool.”
Captain FI intends to eventually allocate around 1% of his portfolio to crypto. “If it does go massive, then that will drag the rest of the portfolio up with it,” he says, adding further:
“I’m willing to take a somewhat-educated punt on it. Because it is really interesting. It has solid fundamentals, I can see the application of it.”
The retirement industry itself seems wary of crypto. Apart from a new partnership between ForUsAll and Coinbase, it’s difficult to find a 401(k) plan in the United States offering crypto investments. In Australia, the equivalent of a 401(k) is called “superannuation,” and most funds don’t want anything to do with crypto. However, crypto fans are able to set up self-managed superannuation funds (SMSFs) to manage their own investments — and are doing so in increasing numbers.
BTC Markets CEO Caroline Bowler tells Magazine that the number of SMSF accounts trading on the exchange grew fivefold last year, and balances have grown exponentially too.
“Where previously we would have seen investments come in in the tens of thousands of dollars for SMSFs, we’re now seeing it move into the low hundreds of thousands,” she says, adding that the typical user isn’t near retirement age.
“It would be people in their thirties who are actively taking control because they are crypto conversant — they’re familiar with it, they’re comfortable with it.”
Don’t do it, but if you do …
Ellison is a licensed financial advisor who has spent much of the past two decades advising people on retirement planning and has written two books on the topic. His advice often boils down to “spend less than you earn, […] and put aside what’s left, and accumulate that over a long period of time in assets that compound in value.” He invariably directs people to the four main asset classes — stocks, property, cash and fixed interest — and believes most investments outside these are risky.
So, he definitely thinks crypto is far too hazardous to gamble your retirement on. “In terms of my retirement, it’s not something I would consider remotely, even if there was a chance that it was going to go up a hundredfold or thousandfold,” he says, adding:
“If somebody wants to do that, then as I’ve written before, that’s gambling. It’s pure speculation. Whether somebody is prepared to speculate and risk their future retirement, I guess that’s a matter for them.”
He explains that one of the first things advisers do when they take on new clients is assess their risk tolerance.
“With all those risk assessments, nobody really knows how you’re going to feel or react when you’ve lost a lot of money,” he says. “The only way to actually find out your real risk tolerance is still to lose some money or go through one of those once-in-a-decade activities like the ‘87 crash or the GFC [global financial crisis], or last year’s crash.”
You’ll find out your risk tolerance pretty quickly with crypto, given that marketwide 30%–50% drawdowns happen every few months. The price of Bitcoin peaked at $65,000 in April and has since almost halved to reach its current price, which is closer to $35,000. And individual coins lose and gain more than that every week. So, it’s only really suitable for investors able to tolerate such a stomach-churning ride.
Ellison explains that a sensible approach for highly risky or speculative investments is to allocate only a certain percentage of a portfolio to it.
“For most people, the highly risky, totally speculative part of a portfolio certainly shouldn’t exceed 10% — and that’s for an aggressive investor,” he tells Magazine, adding that investors who are more risk-averse might set the limit between 1% and 2%. While he points out that the vast majority of speculative investments fail, if a gamble does pay off, he encourages investors to take profits rather than hold on. Jason gives similar advice:
“Never put in more than you can afford to lose, and probably don’t rely on it as the vehicle for your FIRE goals because it’s very speculative. I’d never advise anybody to follow that pathway. But I think people are doing that anyway.”
He adds that there’s a difference between being cautious with money and being closed off to new opportunities:
“I think a lot of that is always a sign of a really good financial education being drummed into people over years and years and years. And it’s maybe just that new possibilities are opening up which you just need to have an open mind about, without necessarily becoming a full-blown believer.”
One person who is no longer taking Ellison’s investment advice is his son: “I put him into a stock two years ago, and he made five times his money on it. And he sold it one cent from the top, and he put it into Dogecoin,” Ellison says, referring to Elon Musk’s favorite memecoin.
Ellison’s son now thinks he’s an investment genius and that his old man should retire and hand over the reins. “He says I should just let him take over,” laughs Ellison.