If you are trying to build a diverse portfolio, you probably find it hard to follow the most common advice to “invest only in what you know.”
Given that all institutional investors and big banks started taking it seriously – it would be wise to have at least a minor involvement in crypto in your portfolio. After all, it is impossible not to notice the swift rise in bitcoin prices over the past several years, and the same goes for many different digital currencies.
For example, had you bought bitcoin in early April 2017, you could have seen almost 4,000% return in just four years. However, if you purchased in mid-April 2021, you would have lost more than half your investment in just four months.
There were and still are many price plunges, but if you are serious about investing regardless – here is what you should consider before taking a leap.
It is a highly unpredictable and speculative investment
The most important thing to understand is that most cryptocurrencies do not have an intrinsic value (there is no definite measure of their worth).
For instance, unlike a stock, they do not track the growth potential of a real company selling actual products and services. And they do not follow the value of a natural resource the way a traditional property does.
It is essential to understand what cryptocurrency is and, more importantly – what it is not
None of the cryptocurrencies are accepted as legitimate tender anywhere. The only exception is El Salvador because they approved bitcoin as their national currency (along with the US dollar) at the beginning of September 2021.
With all that being said, your crypto investment return depends solely on a bet. Only if someone is willing to pay more for it in the future, your investment will return. Since all options are in the game – just like you could experience ten times return in the next few years, it is equally possible for cryptocurrencies to become completely worthless.
If you can not afford to lose, you should not bet at all
Investing in crypto is a dangerous game, but also it might help you get more diversification as it behaves completely different than any other stock. It would be wise to invest just a tiny percentage of your liquid holdings in cryptocurrencies.
Can IRS tax bitcoin and other digital currencies?
The answer is – yes, they can, and that is one more reason to invest smaller amounts that should be enough for you to participate but not enough to cause any problems. One more thing to keep in mind is that you should be prepared to lose everything you put in crypto and any other uncertain investment.
There are not many protection methods that you can rely on
Since crypto is not accepted nor approved, possessing crypto assets guarantees no consumer protection, and it is very unregulated. Also, there are no clear rules and regulations when it comes to reporting and paying taxes yet. That is expected to change in the future, which might cause price changes.
How to get into possession of cryptocurrency?
Grayscale is the largest crypto asset manager at the moment that allows you to invest your money in a bitcoin trust. However, if you are working independently, without a financial advisor, you can also buy Grayscale shares. The same goes for other crypto trading platforms. Either way – you should pay attention to fees that are significantly larger than average fund fees.
It would be wise to talk with your spouse before making any move
Investing in crypto should be a mutual decision. Even if you are both willing to take the risk, maybe you are not thinking of the same type of risk. However, the best possible advice is to be honest with each other and plan your future together.