Bitcoin was all the rage when its value surged in 2017, positioning early investors for a hefty profit. Though the price of this particular cryptocurrency has dropped gradually over the past few years, the excitement left investors wondering whether these types of investments were a smart move. Here are a few things you should know when considering cryptocurrency as an addition to your portfolio.
1. Understand the concept of cryptocurrency and its history.
The famed investor, Warren Buffett, said it best, “Never invest in a business you cannot understand.” While cryptocurrency is not a business in the way that we’re familiar with, the sentiment still rings true. Research different types of cryptocurrencies, the history of their value, and any other information that you can get your hands on. Because cryptocurrency has always been digital, many are unsure of what it is and how it fits into the financial world, making it a serious risk for those who are uninformed.
We can quickly grasp the concept of investing in businesses because it’s all we’ve ever known, and companies have intrinsic value. But cryptocurrency is the new kid on the block when we compare it to the age of other investment opportunities. Understand cryptocurrency fully before ever considering it, and invest with caution.
Tip: Begin your research with Bitcoin to follow cryptocurrency’s story from the beginning.
2. Consider the risk of investing in cryptocurrencies.
Investing in the stock market is a risk. Investing in cryptocurrency is a risk. However, there is one big difference between these two: the stock market has been around longer, we know more about it, and we have a lengthy history of trends to refer back to. Though we can’t predict the future of any investment, cryptocurrency is a bit more of a gamble. It has been volatile since its beginning—making it an investment decision that many are leery of, regardless of potential gain.
Beyond the lack of trend history, one must also consider that cryptocurrencies are not regulated in the way that stocks are. At its base, cryptocurrency is simply computer code, and anyone can create a cryptocurrency for a range of reasons. However, stocks are reviewed and audited by the government and exist in a slightly more standard form, having been created to raise funds for a company.
3. Be willing to lose your investment.
We are not suggesting that losing your investment is a guarantee, just that cryptocurrency carries a severe amount of risk. One thing to understand about cryptocurrencies like Bitcoin is that its volatility can serve you well or drain your investment. In late 2017, Bitcoin shot up to around $20 thousand and, as of October 2020, had fallen to around $13 thousand dollars.
Unlike Bitcoin, we understand the stock market well enough to have confidence that it will likely keep growing, and that patience with our stock investments can typically lead to growth—we cannot speak to the value of Bitcoin with that same confidence.
4. Consult your advisor about how cryptocurrency fits into your strategy.
If you are interested in investing in Bitcoin or another cryptocurrency, talk to your advisor about how that fits into your long-term strategy. It is not wise to devote a large portion of your portfolio to cryptocurrency. Still, a small percentage may be a diversification opportunity that you and your advisor can explore together.
Please contact your advisor with further questions about Bitcoin and other cryptocurrency investments to determine how they work with your unique financial situation.
Contact us today to schedule a consultation.
