Should Crypto Factor Into Your Asset Allocation & Financial Planning Strategy?
By Maura Schauss, CFP® at Washington Wealth Advisors
The conversation around cryptocurrency has become an ongoing talking point for economists, financial advisors, and investors alike as everyone looks for ways to grow their long-term portfolios while also trying to combat inflation. We thought we’d take this opportunity to provide an educational piece on cryptocurrencies, ad we believe knowledge is empowering.
It shouldn’t be surprising that cryptocurrency is at the forefront of this discussion. Since the advent of Bitcoin in 2009, cryptocurrencies have gone from being a relatively obscure and niche area of finance to a mainstream alternative investment with huge inflation-busting potential. Bitcoin hit an all-time high of $68,000 per token in November 2021 and as of August 18, 2022, it closed at $23,212.74.
While not all the cryptocurrencies out there are priced that steeply, they all experience extreme volatility and risk. It’s always best to do your due diligence before diving in headfirst.
Here are some things to consider about crypto before deciding if it’s the right investment for you.
Cryptocurrency (commonly called “crypto”) is a digital asset that is stored in a computerized database ledger and uses strong cryptography and encryption keys to secure transaction records.
Cryptography, the backbone of cryptocurrency, works to hide the information associated with a transaction so that only the sender and the receiver can decode and understand it (read more on cryptography here).
This makes cryptocurrency transactions almost entirely anonymous and allows individuals to exchange assets without the use of a middle man (e.g., a bank or broker). Cryptocurrencies, such as Bitcoin, use a collection of computers that run the cryptocurrency code and store transactions in blockchains.
Unlike typical currencies, such as the U.S. dollar or the British pound, cryptocurrencies are not backed by any country or centralized bank but are under decentralized control instead. They are also designed to be free from government manipulation and control, and in general remain entirely digital, and therefore intangible.
The few common cryptocurrencies include:
- Bitcoin: The first decentralized cryptocurrency, originally released in 2009. Bitcoin remains the most widely known and most valued cryptocurrency, with about $438 billion market capitalization as of August 5, 2022.
- Ethereum: Launched in 2015, Ethereum allows users to create decentralized apps that anyone can access, but are highly secure due to the nature of the Ethereum blockchain. It is powered by a worldwide network of computers that require majority consensus before the blockchain can be altered. As of August 5, 2022, Ethereum has a market cap of about $204 billion.
- Binance Coin: Originally powered by the Ethereum blockchain, Binance Coin is now the native cryptocurrency of the Binance Exchange. With 1.4 million transactions per second, Binance Exchange is the largest cryptocurrency exchange in the world. As of August 5, 2022, Binance Coin has a market cap of about $50 billion.
As it lacks guaranteed value, purchasing crypto carries inherent risks. Several investment alerts have been issued by American regulators, including the SEC and FINRA, among others. And it is still a new investment with a very short and rather volatile history.
Despite its speculative nature and year to date drop in value, crypto is growing in popularity. If there is room in your portfolio for more high-risk, high-reward investments, cryptocurrencies may be the right choice for you.
Some experts suggest allocating no more than 5% of your portfolio to crypto as a way to hedge against inflation and diversify market risk. Since crypto is not correlated with other common asset classes like stocks and bonds, it can actually help protect your portfolio from the volatility of the market. It sounds counterintuitive, but crypto can be a great hedge against downside risk as long as it is not overallocated in your portfolio.
At Washington Wealth Advisors, we are taking a conservative approach and only allocating approximately 1% to 3% of certain client portfolios to crypto investments.
If you are considering crypto, make sure you’re not investing more than you’re prepared to lose. It’s also important to only invest in crypto if you plan to keep the investment for a long time period. This is because the large short-term price fluctuations can cause the value of your investment to vary dramatically from day to day. Over time, however, you should see steady growth.
The most common way to invest in crypto is to buy the coins directly. But that is not the only option. Investors can increase their exposure to cryptocurrency through several other types of investments, including:
- Crypto futures: These are a type of derivative investment that uses leverage in an attempt to increase returns. Futures are much more speculative in nature and will subject your portfolio to more volatility. There is a potential for higher returns, but also a potential for much higher losses.
- Crypto funds: Like other funds, crypto funds invest across multiple types of cryptocurrencies. Investing in a crypto fund will give you exposure to a range of investments in the digital asset space.
- Crypto exchange or broker stocks: Rather than buying cryptocurrency directly, you can invest in companies or products that derive their value from crypto, like crypto exchanges. This will give you some exposure to the value of the asset without actually owning it.
- Blockchain ETFs: Similar to investing in a crypto exchange, purchasing a blockchain ETF allows you to invest in companies that will benefit from increased development and innovation of blockchain technology, the backbone of all cryptocurrencies. Keep in mind that these companies have a wide range of business interests that encompass much more than just crypto. Choosing this investment will provide you diluted exposure to the crypto market.
If you’d like more information about investing in cryptocurrency, it’s wise to consult with a financial professional who can take your overall financial plan into consideration. Washington Wealth Advisors is here to help answer your questions. Call our office at 703.584.2700 or email firstname.lastname@example.org or schedule a meeting with us.
IMPORTANT WASHINGTON WEALTH ADVISORS DISCLOSURE INFORMATION
Washington Wealth Advisors is a fee-only registered investment advisory firm serving busy families, executives, women building wealth, and small business owners. We provide Wealth Advisory Services—financial planning coupled with asset management—guided by a personalized investment strategy based on each client’s unique goals. Our fiduciary approach, independent advice, and proactive investment management help to support our clients’ overall financial peace of mind.