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It’s pretty much impossible to avoid almost daily headlines declaring that Bitcoin is the gold of the new world of digital assets. Nobody wants to miss out on a gold rush, but Bitcoin isn't gold and neither are rival protocols such as Ethereum. However, similar to gold mining, crypto mining involves expending energy to acquire something that, depending on the coin's inflation schedule, may have finite availability.
As of April 2021, there were more than 9,000 cryptocurrencies that facilitate peer-to-peer transfers of data and value. Where does this leave the individual who believes in the future of these crypto-assets but can't figure out how to invest in them?
Is This Investing or Gambling?
That's the question a lot of people were asking in 1999 during the height of the dotcom bubble. There are many factors to consider and plenty of good articles to educate yourself about the technology behind Bitcoin. But who can advise you on whether to buy in?
Don’t expect any Bitcoin buy, hold, or sell recommendations from your financial advisor. Even among investment advisors who like alternative assets that tend to move independently of the S&P 500 Index, you'll be hard-pressed to find a financial advisor willing to suggest putting a chunk of your portfolio into any of the cryptocurrencies. Most wealth managers are steering clear, because they mostly see this rush as just another new fad in the financial space that has to play itself out before there can be any real guidance.
With Bitcoin ascending to new highs, plenty of individual investors want to jump in. But make no mistake: It may be a thrill, but putting your money on a wild ride without any real basis for understanding how it works is not investing.
Even Advisors Who Understand Crypto-Assets Aren't Betting on Them – Yet
One Boston-based financial advisor notes that when clients ask how they can invest in Ripple, for example, it's often that they've heard how much money they could make. The problem with this way of thinking, he explains, is that cryptocurrencies are so risky that investing in them right now is rather like gambling.
A better way to think about cryptocurrencies is to focus on the technology behind them: the blockchain. More or less, the blockchain is a distributed ledger. Bitcoin is the most well-known cryptocurrency because it was the first viable one, and then it began trading around the globe. Blockchain technology was originally developed with payment processing in mind, but in reality, there are a lot of truly solid potential uses for it. Some of the possibilities include digital identity, tokenization of data, data management and secure audit trails.
Although this advisor is deeply knowledgeable about crypto-assets, he can’t—and says he won’t—provide any recommendations as to whether to buy or to sell any digital currency. He's not alone in this way of thinking. The reason: An advisor's job is not to sell transactions, but rather to manage their clients' money and their expectations. He explains how the broad concept behind blockchain technology works and what it's actually trying to accomplish, and points out the challenges. He wants to protect his clients, sometimes from themselves, so he screens out the noise in the market and steers them away from some of the many scams that have cropped up.
Here's What Your Financial Advisor Can Do
In an ideal world, you'd turn to your financial advisor, ask about adding some cryptocurrencies to your portfolio and discuss which ones and how much. In the real world, the vast majority of advisors don't even recognize them as an investable asset class; therefore, many are not able to talk about them intelligently. So where can you go for real advice about investing in Bitcoin, Ethereum or any other cryptocurrency you're considering? You can always fall back on the less-than-5% rule, a simple guideline that dictates not putting more than 5% of your portfolio into any high-risk category. Even then, at this point, you'll have to get a little creative in your quest for crypto investments if you're working with most financial advisors.
There is more than one way to participate in cryptocurrencies, however, and not all of them involve actually buying the digital assets directly. Some knowledgeable advisors would rather take one of these indirect approaches instead of actually owning Bitcoin or any other cryptocurrency.
Your financial advisor might go for one or more of the following alternatives:
- Bitcoin-related stocks and companies with exposure to blockchain
- Bitcoin futures
- Cryptocurrency-focused hedge funds
Remember: Like betting on a horse race, the amount of money you’re willing to risk on cryptocurrencies should be limited to the amount you can afford to lose. Of course, the high amount of risk associated with crypto-assets doesn't automatically mean that they're not an investment because there are plenty of so-called "real" assets that come with loads of risk, as well.
Still, if cryptocurrencies do take their place among conventional investments, then so-called "real" advisors will have to catch up with those who waded into the fray long before them.
How to Buy Crypto – and Get Your Money Back Out
If you've spent time studying blockchain technology and you want to invest in it for what it is—and not as just another investable asset—you may have to do the heavy lifting and buy the cryptocurrency yourself. To do so, you need a digital wallet (such as a Bitcoin wallet) in which to store your cryptocurrencies securely.
To convert any cryptocurrency into cash, look for an exchange that supports trading the currency you want to purchase, such as San Francisco-based Coinbase, one of the more well-known exchanges. This digital currency exchange allows you to buy and sell Bitcoin, Ethereum and Litecoin in many preferred local currencies. Not all digital exchanges support all cryptocurrencies and/or all fiat currencies (the technical term for dollars, euros, yen, and the like). Start with well-known names such as Coinbase, Kraken or Gemini and do your homework before sinking any of your cash in. However, even the best crypto exchanges are not entirely without blemish. Examine freezing/closing of accounts, outages and its close ties with some traditional banking establishments.
ValueWalk crypto expert Venkat Swamy suggests two exchanges for consideration. "Gemini pretty much mirrors all the positives of Coinbase," he explains. "Your cash balances are covered by a FDIC insurance which is considered a huge positive in the cryptoworld. But once the cash is converted to digital assets, there is no insurance."
For investors who want to cast a wider net as far as types of cryptocurrencies, Swamy suggests Kraken. "You can trade [multiple] cryptos on Kraken, but the approval process involves three plus levels and each level is tougher than the previous one," he says.
To buy or sell cryptocurrencies, all you need to do is log into your account on the exchange you have selected, either in its mobile app or on its website. For maximum security, you may want to set up your own cryptocurrency wallet to hold the currency, rather than use one provided through the site. Before starting, you'll want to learn the safest ways to store your bitcoin and other cryptocurrencies.
Of course, if you can find an advisor to educate you and filter out most of the noise, start there.
Pam Krueger is the founder of "WealthRamp," co-host of "MoneyTrack" on PBS and national spokesperson for The Institute for the Fiduciary Standard.