The surging value of cryptocurrencies, such as Bitcoin, are creating a lot of attention from investors these days. It’s so hot right now that there are reports of 10-year-olds buying it and advising their parents to get in on the craze.1
Despite the emergence of cryptocurrency only in the past decade, many investors are wondering if the exploding prices in crypto should change how they invest their money.
What is cryptocurrency?
Unlike traditional currency, there is no central bank issuing cryptocurrency, and there is virtually no regulation. Cryptocurrencies are unique in that they are made by computers and then stored in a digital wallet. All transactions are made online and recorded on a blockchain, a public ledger that requires no intermediary such as a bank.2
Bitcoin was the first and most widely recognized cryptocurrency. As opposed to currencies such as the US dollar, it has a finite supply of 21 million tokens, with more than 18.5 million in circulation. Bitcoin has been on a wild ride since launching in 2009, dropping as low as $13.40 in 2013 to surpassing $60,000 in 2021.3
Is it smart to invest in cryptocurrency?
There is not enough data or history to determine whether Bitcoin and other cryptocurrencies are viable to hold as a long-term asset. And, unlike stocks, owning cryptocurrency doesn’t give you a right to share in the income of an underlying business. However, investors who enjoy the thrill of speculation may find these investments hold some appeal. Certainly, watching an asset go from a few dollars to over $60,000, as Bitcoin did, will grab investors’ attention.
The mania is reminiscent of the dot.com craze in the late 1990s when stocks were doubling or more on the day of their Initial Public Offering.4 For instance, Akamai Technologies’ stock price rose over 400% on the first day of trading in 1999!
Before diving in to investing in crypto, you should understand the risks and costs. First, you should prepare for much wider fluctuations in priced than stocks or most other investments. Just in the last 12 months, Bitcoin has traded between $13,556 and $66,923 which makes stock investing look like child’s play.5 For comparison purposes, the Dow Jones has traded between $27,513 and $36,088 over the same period.6
In general, you will also find it more difficult to liquidate a crypto position than traditional assets. Similar to investing in gold, you are speculating that someone else will pay a higher price than you paid. Stocks and bonds, on the other hand, have expected earnings and income, providing more guidance on potential investor returns.
Lastly, it can be expensive to buy cryptocurrencies directly. For example, Coinbase, a widely used platform to buy and sell crypto, charges 2.49% on all transactions. These expenses can really add up when compared to buying most stocks and exchange-traded funds, which have close to zero transaction costs.
Most people will find that they don’t need to invest in cryptocurrencies to achieve their future financial goals. However, if you are determined to try crypto investing, you shouldn’t put more in these digital assets than you are prepared to potentially lose. Just like putting a significant amount of your net worth into any one stock is a bad idea, you shouldn’t put more than a very small percentage into cryptocurrencies.
Perhaps the most important thing you should do with the cryptocurrency craze is to consult with your financial and tax advisors. Having someone to keep you focused on the reason you began investing in the first place is always a good place to start when making investment decisions.
Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. There is no guarantee investment strategies will be successful and investing involves risks, including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision and there is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.