If you’d somehow made it through 2021 without thinking about crypto, after this year’s Superbowl, there’s no hiding from it. But looking past the headlines and celebrity endorsements, is blockchain technology the right investment for you?
Volatility – Bitcoin and other cryptocurrencies have been in the news for recent volatility as well as clever marketing. The largest and most widely known digital currency, Bitcoin, is down over 20% as of February 24, 2022, but this volatility is nothing new.
Diversification – Even if you’re right about the staying power of the underlying technology, that doesn’t mean you’ll have a successful investment experience. As crypto has become more mainstream, Bitcoin has lost market share to Ethereum and other newer offerings. With thousands of cryptocurrencies currently available, choosing the right one can be daunting. Unlike traditional equities, in which you can invest in a portion of each company in the S&P 500 relatively cheaply and easily through ETFs and mutual funds, diversification in crypto is difficult for individual investors.
You may own it indirectly – Cryptocurrencies may not be the most or even only lucrative approach to benefit from the underlying technology. Some companies you may already own such as Apple, Amazon, Walmart, and JP Morgan have blockchain operations.
Expected Returns– Even if bitcoin is held for decades, the owner may never receive more, and it is not certain that bitcoin offers investors positive expected returns moving forward. Before putting all your eggs in one blockchain basket, it’s best to consider what your goals and tolerances are. For many, the allure of crypto lies in the spectacular capital gains that previous investors were able to participate in. However, the future expected return for cryptocurrencies is unclear. The risk and uncertain returns of crypto can feel more like speculation rather than investing.
Income? – If you’re interested in generating interest while holding digital currency, there may be some options, though it can get complicated. Until recently, cryptocurrencies did not provide expected future flows of income. With recent innovations, there is an option to generate interest via crypto, though the process does include some complexities that require research and forethought. Additionally, while the rates are typically higher than you’d typically receive from a savings account, it is not FDIC insured.
Weighting – If after thorough research you find that a cryptocurrency is meeting a need not fulfilled by your current allocation, the next step becomes determining how much weight to give it. The total value of bitcoin in circulation is less than half of a percent of the aggregate value of global stocks and bonds, so its weight in a diversified portfolio may be relatively small.2
Diligence – If you’ve weighed all the tradeoffs and decide you do want to allocate a portion of your portfolio to blockchain technology, make sure to stay thoughtful. The regulations around crypto are evolving and careful investors should remain attentive. The IRS wants to know about your digital currency transactions, so make sure to report it or risk facing an audit. Be cautious of getting scammed as crypto and NFT thefts are becoming more prevalent. Finally, don’t forget your key – which acts as your password to access your digital assets. Dimensional’s webcast with Professor Marco Di Maggio, fintech and cryptocurrency expert, dives into some of the intricacies to be aware of before jumping in (link).
Bottom-line– Blockchain technology represents innovation as well as uncertainty. A goals-based approach using stocks, bonds, and traditional currencies has helped many investors grow their wealth and achieve their goals for decades. If you’ve decided digital currency is the right decision for you, approach it thoughtfully and set appropriate expectations.
1Per Marketwatch, as of February 24, 2022.
2Per The Wall Street Journal the crypto market hit a $2.97 trillion market value in November 2021 according to CoinMarketCap. Per The Wall Street Journal the end-of-day market value of bitcoin was $41,910 USD as of March 9th, 2022.
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