Missing news or information about the rising prices of bitcoin and other digital currencies over the past few years can be difficult for beginners looking to invest.
Many may have thought that if you bought bitcoin in early April 2017, you could now receive a return of up to 3,700 percent in just four years.
But there can also be a lot of price drops during that time.
If we bought a digital currency in mid-April this year, we could lose more than half of our investment in just four months.
So if you are interested in investing with cryptocurrencies you should know a few things. Reporting from CNN , Friday (9/24/2021), the following things must be considered before making this decision:
1. Cryptocurrency investment is highly speculative
In general, there is no intrinsic value that underlies most cryptocurrencies . Unlike stocks, for example. Investors cannot track the growth potential of companies that sell physical products and services that own shares. Nor do they track the value of natural resources as traditional commodities do.
(One exception is so-called stablecoins such as tether, USD Coin, and binance USD. These are cryptocurrencies that are pegged to the value of US dollars, euros, and other forms of fiat money, which makes them more volatile than unpegged cryptocurrencies. )
Also, bitcoin is not accepted as legal tender anywhere. Except in El Salvador, which in early September 2021 adopted it as the national currency alongside the US dollar.
So by investing in digital currency today, “your only source of return is betting that someone else will be willing to pay more for (it) in the future than you did,” says a certified Financial Planner based in Minnesota, USA, Matt Elliott.
But the US financial services firm said the move was a fair bet given the growing mainstream interest in cryptocurrencies. This is especially so with some of the larger currencies like bitcoin, which has a market cap worth nearly half of the total crypto universe.
“But it is a fair bet to assume that many cryptocurrencies will die, as many companies do in the internet age,” explains New York-based Financial Analyst Ryan Sterling.
“Instead, we could see returns of 10 times in the next five years. That said, we wouldn’t be surprised if they were worthless in five years,” Sterling said.
2. Don’t bet if you can’t afford to lose
While not a big fan of cryptocurrencies, Sterling sees it as something that, even in very small doses, can help clients gain more diversification, as they perform very differently than stocks and bonds.
Sterling advises interested clients to invest no more than 2 percent of their liquid portfolio in digital currencies.
In other words, they should only invest a fraction of the money they have above and beyond home equity, as well as retirement and education savings.
“By investing 2 per cent, they feel like they are participating, but not so much as to cause problems,” Sterling said.
Meanwhile, Elliott advises having no more than 5 percent of our total savings dedicated to any type of speculative investment, including crypto, but only if we have little or no debt and are willing to risk losing what we put in.
Arizona-based certified financial planner Christine Papelian thinks that direct exposure to cryptocurrencies is too volatile for her clients, who are primarily investing for retirement.
But he reminds clients that they may already have some indirect exposure to crypto assets through investing in technology companies that invest in blockchain technology , which enables the world of cryptocurrency trading to function.
3. Very Little Protection
Other factors to consider are: Direct ownership and transactions with crypto assets are largely unregulated and offer very little consumer protection.
“We just don’t have enough investor protection in crypto finance, issuance, trading, or lending. … (I’m) more like the Wild West … This asset class is full of fraud, and abuse in certain applications,” the SEC chairman said. Gary Gensler in a written statement to the US Congress.
Rules on how to report and pay taxes on crypto assets are also in their infancy.
But the current regulations get very complicated if we decide to buy something with the cryptocurrencies we have. Rules and regulations regarding digital money are likely to increase in the future. And it can affect the price positively or negatively.
4. Have a lot to find out
Unless you’re comfortable with buying cryptocurrency outright and storing it in a secure digital wallet, there’s an easier way to get access.
Sterling typically invests clients’ money through third parties such as Grayscale, which is currently the world’s largest digital currency asset manager.
If you don’t work with a financial advisor, you can also gain indirect exposure by buying shares in Grayscale funds and other third-party crypto investment products on the over-the-counter secondary market, through some of the major retail trading platforms, such as Schwab.com and Fidelity. com .
The company’s most popular fund – the Grayscale Bitcoin Trust (GBTC) – will likely become an ETF, if and when the SEC approves a bitcoin ETF in the United States.
But in the meantime, the church will comply with the same SEC reporting and disclosure requirements that the ETF operates under today, said Grayscale CEO Michael Sonnenshein.
In both cases, pay attention to the fees, which are much higher than the cost of index funds.
5. Consult with Close Friends, Spouses, or Family
“The most challenging client conversations I’ve had that involve investing in crypto are with a partner, usually with a child or two, and without a technology background,” says New Orleans-based certified financial planner Mike Turi.
Even when partners agree to have a high risk tolerance, one partner may prefer to risk money on more tangible speculative investments, such as a small biotech company or a friend’s startup, Turi said.
The best advice? “Planning always comes first.
Start with the client’s plan and end with how cryptocurrency investing affects their current path.
In her experience, Turi says, the best way for couples to make informed decisions together is much more powerful than starting with the question – ‘Is bitcoin a good investment?