With Crypto ETFs getting a lot of buzz in the news lately, a common question is: "How do I invest in crypto or add it to my overall portfolio?"
Today we're going to walk through my approach as a Certified Private Wealth Advisor® designee.
We'll start with a primer on Crypto Assets, then dive into the assumptions, considerations, opportunities, and investment vehicles to incorporate Crypto assets into your portfolio.
An Abbreviated Primer
An Analogy: You can think of Crypto Assets like VISA gift cards. After paying a small fee for the card, you decide how much value (aka money) you want to store on the card. You can then use the card to buy things or give it to someone. The major difference is the "card" is on the internet, your phone, or computer.
Defining Crypto Assets: Also known as digital assets, tokens, coins, and virtual currencies, Crypto assets use a range of technology like cryptography, distributed ledgers, smart ledgers, etc. to store value. They exist electronically and use a peer-to-peer system.
Examples of Crypto Assets:
Cryptocurrencies: These are digital or virtual currencies that use cryptography for security. Bitcoin (BTC) is the most well known, but many others exist. Ethereum (ETH), Litecoin (LTC), Dogecoin (DOGE) are just a few others.
Altcoins: These are "Alternative Coins" to Bitcoin that emerged after Bitcoin saw success. These include Ethereum, Litecoin, etc.
Blockchain: Just like an accounting ledger that records transactions, the blockchain does the same thing. Transactions and info are called blocks. Each block is linked together in a chain of custody. Since the blocks are linked together and often open to the public for review, blocks cannot be altered or forged.
Non-Fungible Tokens (NFTs): Typically pieces of art or music, NFTs are unique digital items that are stored within the a respective blockchain. Just like a painter may make 100 original copies or versions of a work of art, the NFT creator chooses exactly how many originals to create. These originals are identified by a unique ID number, and can be purchased or sold just like original physical paintings.
Assumptions
Volatility: To date, Cryptocurrencies have been inherently volatile, meaning their prices swing constantly.
Growth Potential: Due to the emerging market and recent approval of crypto-ETFs, they have the potential for substantial long-term growth.
Regulatory Landscape: The regulatory environment has been volatile. Originally, they were not under the jurisdiction of a particular regulatory body and there was hesitance to bring them under a regulatory body. Coinbase was the first crypto-trader to go public and aggressively request regulatory guidance and approval.
After the "crypto meltdown" a couple years ago, two things have happened:
Regulators are paying close attention and are taking action to regulate them.
Large institutions are now creating regulated investment vehicles, like ETFs, to create a more streamlined way for investors to participate.
Market Maturity: As a whole, the Crypto market is young, with many of the assets trying to find their use case and place within the market.
Considerations
Risk Tolerance: Given their volatility to date, crypto assets may not be suitable for all investors. Your risk tolerance levels will determine the extent to which these assets should be incorporated into your overall portfolio.
Diversification: Crypto assets can be used to further diversity your portfolio, but this should be done in accordance with your risk tolerance. Additionally, as time goes on, it's likely you can further diversity your crypto holdings as new cryptocurrencies and ETFs come to the market.
Due Diligence: Thorough research on each asset is important given the newness of the asset class, the differences in blockchain technology, and the use cases of each cryptocurrency.
Security: Crypto assets have a unique security risk. Since the coins operate outside the system of central banks, there's no real way to get the assets back if stolen. What's more, if you're storing crypto directly on your phone, computer, or other platform, it's unlikely you'll recover access to your assets if your account is compromised or if you lose the password to your crypto wallet.
Opportunities
Innovation and Growth: The underlying blockchain technology offers potential to transform several sectors, such as finance, supply chain management, and cybersecurity. The challenge here is the infancy of the technology and its current ability to be a competitive viable option.
Market Inefficiencies: The infancy of the crypto market means it's not as liquid as the public exchanges. Not only does this mean there's meaningful liquidity risk, it also makes it challenging for informed investors to trade at the speed and volume desired.
Global Access: Despite being illegal in many countries, the reach of crypto assets is global and active 24/7.
Investment Vehicles
Direct Investment: You can purchase crypto directly or through exchanges, making it possible to hold onto the actual asset.
Crypto Funds: Investment products like index funds, ETFs, and hedge funds offer an increasingly easier way to participate in the Crypto market. It also can help incorporate Crypto into your overall portfolio and manage exposure.
Blockchain Equities: For accredited investors and qualified purchasers, there's the opportunity to invest directly in a companies that are involved in blockchain technology. While this has it's own unique risk profile, it may be an option for reducing short-term volatility and increasing long-term gains if the company is successful.
Decentralized Finance (DeFi): DeFi platforms are another unique opportunity to participate. Typically used for lending and borrowing, these platforms/options have a unique risk profile that should not be underestimated.
How A Financial Advisor Can Help With Crypto Integration
An advisor who understands your overall financial profile, risk tolerance, and goals can help incorporate crypto assets through:
Education and Awareness - They can explain fundamental concepts, different crypto assets, how they fit into the monetary ecosystem, and educate you on the risks of incorporating crypto assets.
Strategic Investment planning - Advisors can help you diversify your portfolio to include crypto assets in a way that compliments your existing portfolio, and determine the optimal allocation of crypto assets by considering market conditions, future growth potential, your goals, etc.
Ongoing Monitoring & Rebalancing - Advisors can keep you informed on rapidly evolving crypto market and potential impacts on your investments. They'll also regularly review and rebalance your portfolio to keep holding in line with your investment policy statement.
Security & Compliance - They can help you choose reputable wallets and exchanges, keep secure records in case a wallet key is lost, and ensure your crypto investments comply with the evolving regulatory landscape.
Estate Planning & Philanthropy - An overlooked aspect of crypto investing is keeping track of wallets and holdings for philanthropy and estate planning. Advisors can help maintain the appropriate records for charitable giving and estate planning needs.
Comments