Cryptocurrency: Should I invest?

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

[BOOK] Cryptocurrency Investing for Dummies

The Latest Investment Craze: Non-Fungible Tokens

Over the past month nonfungible tokens, or NFTs, have been all over the news. Saturday Night Live even got involved.

 What are they?

NFTs are cryptographic assets that are on the blockchain with unique identification codes and metadata that distinguish them from each other. Since they are unique, they cannot be traded or exchanged at equivalency, which differs from cryptocurrencies such as Bitcoin, which are identical to each other and therefore can be used in transactions (i.e. you can now buy a Tesla with Bitcoin).

 Why buy an NFT?

People are spending millions of dollars on NFT collectibles including artwork, digital images, sports cards, GIFs, music, video games, and other forms of creative art. By purchasing an NFT, you have a secure certificate of ownership over a digital object. As a collector, you are hoping that the value of the purchased item increases in value. For those that still remember the non-blockchain days, think of NFTs as a modern form of purchasing and collecting baseball cards. You buy them for your personal enjoyment and they may/may not appreciate in value.

 How to buy:

NFT’s can be bought on a variety of platforms, such as Nifty Gateway, Rarible, Open Sea, and The Sandbox. Each platform has an online gallery where you can browse, purchase, or bid on items in a similar fashion as an auction house. A purchase or winning bid is paid for with cryptocurrency. A digital wallet is necessary to store your purchase.

 Final thoughts:

NFT’s are relatively new. The current market is largely speculative and as with all markets, prices will fluctuate. In the modern and digital world we live in, NFTs will be another option for artists, creatives, and others to monetize their work, for collectors to purchase direct with fewer intermediaries, and for brands to establish their presence in the growing metaverse. Some further reading: