Crypto’s place in a portfolio:
Cryptocurrency has an identity crisis. Depending on who you ask, some view it as a security (like a stock), a commodity (like gold/oil), or a currency (like the US Dollar). Instead of adding to the semantics, we at wHealth Advisors take a more macro approach to crypto and view it simply as an “alternative asset.”
Besides cryptocurrency, some other examples of alternative assets are real estate investment trusts (REITs), art/collectibles, venture/angel/private equity investing, and commodities – to name a few.
Alternative assets can certainly have a place in the portfolio, however we always suggest minimizing personal expectations for investment returns. If you assume your alternative investment goes bust, how much does that hurt you (emotionally, financially etc.)? Does the loss impact your future goals, or is it just another blip on the radar? Similar to gambling, when it comes to alternative assets, only consider risking money that you are comfortable losing.
Depending on individual preferences/circumstances, an allocation of 0-10% of the overall portfolio to alternative assets can make sense. Additionally, and perhaps no surprise, but alternative assets are best suited for those with longer time horizons and/or higher tolerances for taking risk.
So, should cryptocurrencies such as Bitcoin be a part of your portfolio?
For starters, investing in crypto is incredibly speculative. As we have seen over the past few weeks, a single tweet by a person of influence can spark extreme volatility. When taking a step back, there’s an argument to be made that cryptocurrency – and really, blockchain technology as a whole – is in its infancy a la the internet in the 80s/90s.
In some ways this is promising: the space will evolve, new entrants will emerge (and thus create new opportunities), and transactions will become more and more cost/energy efficient.
On the other hand, the larger and more mainstream this technology and way of transacting becomes, the more scrutiny it will be under (by domestic regulatory agencies and sovereign nations alike).
Before investing in cryptocurrencies, it is important to begin with the basics:
- Have an emergency fund that is funded with 3-6mths (or more!) of living expenses.
- Pay off any high interest debt.
- Invest at least 15% of your gross income towards your long-term future (utilizing diversified mutual funds & ETFs).
- Invest in your human capital i.e. your skills/career.
If, after satisfying the basics, you are willing to take on higher levels of risk and believe cryptocurrencies may be the next big thing, consider asking yourself the following questions:
- How much am I willing to risk (i.e. between 0-10% of overall portfolio)?
- What’s my endgame? How long will I hold? Or, at what target price will I sell?
- Do I have a rudimentary understanding of cryptocurrency and blockchain technology?
If the answer to the last question is no – begin there.
Some resources to begin self-educating:
[PODCAST] Invest Like the Best: Chris Dixon and the potential of blockchain technology
[PODCAST] The Tim Ferriss Show: Balaji Srinivasan on the future of Bitcoin and Ethereum