A man pushes a wooden block with a green check mark on it forward. A block with a red X is seen in the background.

A man pushes a wooden block with a green check mark on it forward. A block with a red X is seen in the background. Getty Images

You’ve read stories about celebrities, like Elon Musk and Mark Cuban, who supposedly are cashing in on Bitcoin. You’ve seen ads for companies that claim to offer a “safe and easy way” to buy it. You probably even know a few people who have dabbled in it.

But beyond the frothy headlines and its reputation as the Wild West of the monetary marketplace, crypto is slowly emerging as a viable element of many people’s long-term investment strategies. More than one in five investors with assets between $250K to $2.5M+ said they have 6% to less than 10% of their total investments in Bitcoin and crypto, according to a new survey by Wealthramp. This is even higher among Millennials, with 43% of this investor age group owning up to 10% in digital currencies.

The first thing to ask before jumping on the crypto bandwagon is, most importantly, why do you want to invest in it?

Some people own Bitcoin as a way to make a political statement. Or maybe it’s because you believe you can make a decent profit if you buy it right now. A big attraction to owning cryptocurrencies is just the fact they are new and exciting investment opportunities.

If these are your reasons, then you might want to get your feet wet as a crypto dabbler. Open an account with an online crypto exchange and fund it with “fun money” you can afford to lose.

But if you’re really serious about treating crypto as a real investment, you’ll want to understand what makes it unique.

How does Bitcoin work?

Bitcoin, Ethereum and other cryptocurrencies are real in the same way that a digital image or video is real. Yes, they only exist in cyberspace, but then again, so does this article.

Two factors make cryptocurrency different from other kinds of currencies.

  • First, because it takes a huge amount of computing power to create crypto, there is a finite supply available to consumers. The more people who want to own a share of the crypto pie, the higher the price rises.

  • Second, crypto isn’t “backed” by the full faith and credit of a government. That’s why it has a great appeal among people who are opposed to government regulations. However, the flipside of this lack of oversight is a lack of formal protections for consumers.

In many ways, investing in crypto is like investing in baseball cards or Beanie Babies, in that their value only reflects consumers’ ever-changing sentiments about their collectability. While some cryptos do have value in terms of the transactional processes they enable, price swings in general are driven solely by supply and demand. And like most investments, those who get in and out first tend to profit the most.

So, what makes cryptocurrency something more than a digital Ponzi scheme? The blockchain. Without getting into details, blockchain is a groundbreaking open-source cyber-technology that records every single cryptocurrency transaction in a way that can’t be deleted or altered.

When you buy into Bitcoin, your purchase will be recorded on the blockchain (but your privacy will be protected). As the blockchain becomes more widely used for mainstream transactional purposes, the more likely bitcoin and other cryptos will play a role in serving as the monetary tokens for these exchanges.

Is Bitcoin safe to buy?

While you can use Robinhood and other online brokers apps to trade crypto directly, none of the established discount brokers like Fidelity and Schwab let you do it — with them you can only invest in crypto futures or ETFs that invest in crypto futures.

Today, most people buy and sell crypto directly using crypto exchanges like Coinbase. But it’s important to understand that, unlike banks and brokers, currency exchanges aren’t legally required by the FDIC, FINRA or the SEC to guarantee the full return of crypto stolen from your account, although most do carry crime insurance to protect a portion of digital assets they hold in storage. This is worth considering, since in 2020 alone, hackers stole $3.8 billion in crypto in 122 separate attacks, a third of which were aimed directly at blockchain users. Between March and May of 2021, hackers stole crypto from more than 6,000 Coinbase accounts. Around the world, dozens of hacked crypto exchanges have gone bankrupt after losing everything to cybertheft and embezzlement, leaving consumers with little or no resource.

Could this happen in the U.S.? Time will tell. Knowing all these risks, if you still believe in the long-term investment potential of crypto, then your next step is to figure out how to use it responsibly.

Is your crypto strategy a hedge for inflation or a sideways stock market?

It’s important to understand the impact even a small allocation to crypto may have on your overall investment strategy. While it adds a degree of diversification beyond stocks and bonds, it’s not a risk mediator. Why? Because crypto is inherently volatile. Its huge price swings are driven solely by fear and greed, rather than by quantifiable business, economic or geopolitical factors.

And once you decide to add it, how do you choose among the hundreds of cryptos out there? Unlike stocks or bonds, there’s no formal research available to help you figure out which digital currency offers the best “bank for your buck.”

That’s why if you’re serious about crypto as a long-term strategic investment, you may want to work with a qualified fee-only fiduciary financial adviser who has expertise with digital currencies.

Not only will such an adviser have access to research that makes evaluating cryptos something more than a wild guess, but they also have sophisticated financial modeling tools that can hypothetically illustrate its potential long-term impact on your portfolio under various return scenarios. Keep in mind that none of these models can in any way predict future results.

If you really want to invest in crypto, most financial advisers who have knowledge of crypto recommend that it comprise no more than 5% of your portfolio. And that’s only if you have a long time horizon (20 years or more) and a moderate to high appetite for risk. (For more, please read How Much Bitcoin Should I Own? A Mathematical Answer.)

Future of cryptocurrency in 2022 and beyond

Since at the moment crypto isn’t regulated by the SEC or FINRA, advisers can’t use institutional brokerage and custodial platforms to purchase and hold it on your behalf. That’s why most simply offer guidance to clients on how to make their own self-directed crypto purchases.

However, some fee-only financial advisers are test-driving the first generation of applications that do enable them to purchase and manage crypto for their clients. Once the SEC and FINRA finalize the rules of the road for crypto investing, we should see a stampede by Fidelity, Schwab and other custodians to add crypto trading to their platforms. This will be critical, since one of the key responsibilities of advisers will be to constantly monitor crypto values and rebalance portfolios when price swings push crypto allocations out of their target ranges.

Crypto isn’t a passing fad. It’s here to stay, and crypto investing will eventually be regulated to offer the same level of protection for consumers as investments in securities, mutual funds and ETFs.

If you’re considering making a substantial investment in crypto right now, it is worth your time to work with a qualified fee-only financial adviser who can help you figure out how to harness its potential in a thoughtful and responsible way.

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