Investing can be complicated, and we often hear questions about which types of assets are worth pursuing. Questions about stocks and bonds seem downright boring compared to some of the debates we see about cryptocurrency.
It makes sense — cryptocurrency is an extremely complicated topic. It’s easy to find wildly differing opinions from all types of financial professionals. Plus, there are plenty of self-titled “experts” online who are happy to share their advice about which crypto asset you should invest in.
So that’s the real answer? Is it safe to invest in cryptocurrency? Is this new asset the investment of the future, a complete scam, or something in between?
This post isn’t going to tell you objectively whether investing in cryptocurrency is the right move for your financial situation. It’s best to work with a certified fiduciary when it comes to investing your money, especially in something as complicated as crypto.
But having a basic understanding of this asset can help you decide whether it’s something you want to consider or avoid altogether. So let’s take a look at this cryptocurrency and get a better understanding of all the variables.
What Exactly is Cryptocurrency?
The Oxford Dictionary defines cryptocurrency as, “a digital currency in which transactions are verified and records maintained by a decentralized system using cryptography (which, you could call coding, in a sense), rather than by a centralized authority.” Many cryptocurrencies are based on blockchain technology and can be used to make secure online transactions without going through any third-party systems.
Although some retailers accept cryptocurrency for purchases, these assets are more commonly used for trading and investing. You can purchase cryptocurrency from an exchange or put it in your online “wallet.”
Bitcoin is probably the most well-known cryptocurrency, but it’s definitely not the only one. Other popular cryptocurrencies include Ethereum, Tether, and, yes, even Dogecoin. There are nearly 23,000 different publicly traded cryptocurrencies, many of which are essentially worthless.
What’s the Allure of Investing in Cryptocurrency?
If people aren’t really using cryptocurrency to make purchases, why is it such a popular investment? Many people believe that blockchain technology will be extremely important in the future, so it’s important to get involved now.
Some experts think that decentralized currency will be the standard in the future because it’s secure and not tied to a particular country’s currency. Bitcoin and cryptocurrencies were created out of a lack of trust and frustration that a country’s currency could be manipulated by their government or leaders.
Additionally, some people believe that cryptocurrency is a good investment because demand will skyrocket at some point in the future. While that did in fact happen with Bitcoin, you probably won’t end up a billionaire because of your investment in Shiba Inu coin.
Regulation and Potential Downside of Cryptocurrency
If you’ve spent any time researching cryptocurrency, you’ve probably seen some wild stories about people who have made tons of money — or lost everything — by investing in crypto and/or losing their keys to their online wallet. Because cryptocurrency is so new, and often misunderstood, it’s particularly volatile. And while all investments are unpredictable to some extent, there’s a bigger concern with crypto: It’s unregulated.
Unlike many other types of investments, cryptocurrency isn’t subject to federal regulations yet. The SEC and the courts are grappling with how to categorize and regulate cryptocurrencies and what oversight is needed. Other governing bodies and even companies are trying to determine what general guidelines are acceptable related to cryptocurrencies and what recommendations would be seen as a breach of fiduciary duty.
As financial planners, one of the most interesting aspects of Bitcoin and cryptocurrencies is how widespread it is within the population. In a recent survey, it was estimated that 40% of Americans own some form of cryptocurrency, which is estimated to be over 90 million people. With such a widespread adoption of cryptocurrency, it’s hard to imagine this simply going away.
Regulators, governing bodies, and financial institutions will need to figure out how to regulate and supervise the appropriate use of cryptocurrencies to ensure investor protection. Crypto was fundamentally built to operate outside of the current structure, and now the current structure is trying to figure out how to integrate crypto into it, and as one may expect, it is a bumpy road.
What Are the Possible Benefits of Cryptocurrency Investments?
When talking to people about the benefits of cryptocurrency, there are several clear camps and intentions behind why they want to invest in crypto. Figuring out their motivation behind wanting to invest in cryptocurrencies can help provide clarity as to the benefits they are getting from owning cryptocurrencies.
The first is a larger play at what could be in the future. If there is a widespread currency collapse or massive movements in who we trust with our currencies and overall financial structures in the future, cryptocurrencies are seen as a solution to many of those issues. Some view cryptocurrencies as an investment in an “end of the world as we know it” future situation. Often times ideology or philosophical reasons are the primary drivers in wanting to own Bitcoin or cryptocurrencies.
Even if someone may not hold a philosophical conviction about cryptocurrency, many simply see it as the future and want to get in on it now.
The second benefit area that many claim is using cryptocurrencies as a diversifier to an already diverse investment portfolio. Often as financial planners, we look at how well diversified investments are, which may include large and small cap stocks, different types of bond funds, real estate, potentially commodities, and now potentially cryptocurrencies. One of the big questions for financial planners today is how to categorize cryptocurrencies within a financial plan — is it another asset class? If so, should it be rebalanced accordingly?
As most of you reading this have only lived in the United States your whole life, we are fortunate only to have known of a stable currency. We have not seen the economic turmoil that we see in other countries related to their currencies. We see massive inflation in some countries, currencies being devalued at staggering levels, and the financial uncertainty many people operate in every day in other countries because of their currencies. If you do live in another country, cryptocurrencies, especially “stable coins,” could be a way to bring stability to your financial situation.
Consider the Risks Before Investing — in Anything
There still is a lot we don’t know about cryptocurrencies and where they will be in the future. It may be what the future financial landscape is built on — and blockchain technology may change the world.
So, should you invest in cryptocurrency? There’s not a hard-and-fast answer — it’s crucial to work with an experienced financial planning professional to determine which investments are right for you. If you do decide to purchase or mine cryptocurrency, it’s a good idea to find a CPA with specialized knowledge to make sure you don’t run amuck in your tax situation.
Investing Is About Balancing Risks and Rewards
We hear a lot about cryptocurrency these days, but it’s not the only investment option out there. And it’s not the only one with significant risks (and potential rewards). Investing by definition is all about taking some level of risk.
A portfolio with several different types of assets can offer some protection against the market’s unpredictability. But remember, deciding what to invest in is only half the battle. You also need to determine the amount of your investment.
Whether you’re brand-new to investing or looking to expand your existing portfolio, Guiding Wealth can help. Our team of CFP® professionals has the knowledge and insight to help you build an investment plan that aligns with your goals and accommodates your personal risk tolerance. To learn more about working with us, schedule a consultation online.
