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Adding Cryptocurrency to Your Portfolio

Cryptocurrency will shape our world in the coming decades. It's worthy of consideration as a high-risk asset in your investment portfolio.

By Tyson Romanick, CFA

The way that mainstream investors think about cryptocurrency has evolved radically in the past decade. In the very early days, investors ridiculed Bitcoin and other early cryptocurrencies as magic internet money. Few people beyond select computer programmers grasped the very interesting programming that made Bitcoin possible.

Tyson Romanick, CFA®, assistant vice president and portfolio manager at Baker Boyer Bank in Walla Walla, WA, joined Baker Boyer in 2019 after a 14-year career in mutual funds and financial analysis. He works with clients daily to develop their investment strategy and ensure they are working towards their overall financial goals. He has a positive outlook on cryptocurrency and studies the subject diligently, staying on top of the crypto market as it develops.

Tyson Romanick

During the past decade, however, thoughtful investors have come to better understand the powerful ideas and technologies that cryptocurrency is based on. It’s not unlike the 1990s, in the early days of the internet. We all knew the internet was likely to become a powerful force shaping the way we live, but it was difficult to predict at the time specifically how our lives would change and which new companies would drive that change.

The same is true of cryptocurrency today. There is very little doubt that the technologies supporting cryptocurrency will shape our world in the coming decades. For this reason alone, cryptocurrency is worthy of consideration as a high-risk asset in your investment portfolio. Like the early days of the internet, the return potential is very large, but so is the associated risk. There will be cryptocurrencies that are extremely successful and there will be those that disappear altogether. So, what should you consider when adding cryptocurrency to your portfolio?

Crypto Landscape and 2022 Projections

Cryptocurrency is becoming a more mainstream investment, as increasing numbers of retail and well-known institutional investors add the asset to their portfolios. The trend is supported by a University of Chicago study that finds more than one in ten Americans invested in cryptocurrency in the past year. Before diving into the world of crypto, however, there are nuances that investors should be aware of.

Trust in cryptocurrency as a reliable investment is one barrier the market is facing, but with institutional names in finance increasingly making plans to buy, offer, or hold cryptocurrency, trust is building steadily.

There are many things happening right now that are benefiting the digital coin space. With Fed balance sheets growing and inflation creeping up, the gold market has remained relatively sedentary and has not seen much growth. This may be due to many investors moving their gold assets into cryptocurrency. If this is indeed a trend that continues, much of the steady demand for gold and other precious metals as stores of value and inflation hedges could be transferred to demand in the cryptocurrency market.

As trust in crypto strengthens, more institutions will begin to develop plans to adopt the currency and, as a result, more money will be flowing through the market. Currently, uses of cryptocurrency online are relatively limited, but as there are more opportunities and uses for crypto to purchase goods and transfer value, demand will likely rise. The ongoing transition of wealth to millennials and Gen Z is a positive development for cryptocurrency, since younger Americans are showing considerably more interest in the asset than older generations. According to a Bankrate survey, around 49% of millennials note that they are comfortable with investing in crypto assets, such as Bitcoin, compared to only 22% of baby boomers. As these generations begin to manage more money, we will likely see a steady increase in the adoption and use cases of crypto.

My last reason I believe cryptocurrency is here to stay is in the number of computer scientists and programmers that are leaving traditional technology jobs for the cryptocurrency space. This New York Times article documents the conundrum for tech executives that are trying to retain this highly-skilled workforce. Much of what is driving the exodus from traditional tech is the idea that crypto is the future of finance and the internet.

Overall, my personal stance on the crypto market is positive as we kick off 2022. The market will continue to grow as we have seen in recent years and there will be even more opportunity for investors to profit. The key to getting more investors interested in the possibilities of crypto is education. As individuals learn the ins and outs of the market, we will see them become less hesitant to take advantage of a potential future upside.

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Getting Started in Crypto Investing

Understanding any potential pitfalls of crypto investing is crucial when you are just getting started. Keep in mind that this is not regulated by the Securities and Exchange Commission nor is it FDIC-insured. This means that if something happens to your crypto or you are roped into a scam, there is no one that can retrieve what you lost. Be alert and aware of the different ways people can get a hold of your passwords and other important information related to your accounts. Also, be wary of the trading platforms that are less secure. It is probably safer to stick with the larger and more established ones, but whichever you choose, be sure to investigate its security procedures, specifically how your crypto and any sensitive information is stored.

You also have to be careful of the currencies in which you invest. Some can be extremely volatile, while others don’t have sound protocols and established uses, or even started as a meme such as Dogecoin. There are even coins that are scams, so you should have an understanding of the specific coin and its protocols before you invest. To be safer, stick with the more established options, like Bitcoin. Bitcoin is one of the safer options in the crypto world with its security protocols and decentralization, and is the largest and most established, as well. It is a great starting point for crypto investors.

Crypto Options for Investors

  • The easiest and least intimidating option is to hold your crypto directly. One way to do this is through a custodian like Coinbase, Gemini, or Square. You can buy it through one of these custodians. They function as the broker and put in your trade, similar to buying stock. This is the best option for most investors but requires the investor to pay more attention to their account and make decisions on when to buy and sell. 
  • Alternatively, you can go through a broker and hold it in your own wallet. The pitfall is there is greater potential for you to lose the key to your crypto wallet, since there is no way to get it back if you lose it. In a worst-case scenario, you could lose all of the money that you have accumulated. 
  • A third option is an investment vehicle called a “closed end trust.” In this instance, buying is similar to a mutual fund, where you have a money manager overseeing your crypto investments for you. This is beneficial if you would rather have a professional pay attention to what is going on in the market and determine your positions for you. 
  • The final option is a futures Bitcoin ETF, the first of which launched late last year. Through this method, you are not directly investing in Bitcoin but in the options for Bitcoin. This can be more expensive but easier to purchase the asset.

A good rule of thumb for beginners in the market is to talk to your advisor to determine the best way for you to get involved. Keep in mind, the less involved you are in actively managing your own crypto investments, the more you will pay in fees.

Crypto Investing for the Long Term

You must remember that cryptocurrencies are one of the most volatile assets. The most established ones are 7 to 8 times more volatile than the broad stock market. That is why you need to have a long-time horizon when investing in crypto to ride out that volatility.

It is important to avoid the temptation to try to time the market. As an asset class that experiences frequent volatility, investors will often buy when the market is good and be very quick to sell when there's a downturn. Going into the market with a customized approach is key and something you can work on with your trusted financial advisor.

One of the most important decisions you have to make is sizing. Invest an amount that you know could go down 50-90% and wouldn’t affect your financial future. As a guide, I like to think of it in global asset allocation terms. Cryptocurrencies currently fluctuate between 2-5% of the world’s money, so to be globally diversified, you could add 2-5% of your portfolio into crypto.

Starting out, you should stick with one of the more established crypto currencies and don’t get caught up in the hype of some of those coins that shoot up 100-fold over a few months. Determine which form of currency piques your interest, decide how much volatility you can comfortably take and, most importantly, stick with it. Cryptocurrency should be viewed as a five-to-ten-year asset; meaning that instead of chasing coins and returns, dedicate yourself to strategically navigating the market over a long term.

Although diving into unfamiliar waters is often intimidating, investors who hesitate for too long could miss out on a lot of the ride. Oftentimes, putting the time and resources into an asset class that may take a little more work can yield a much bigger return.

As technology continues to develop, we will see more uses for crypto in our everyday lives. Again, like the internet, many people were skeptical of cryptocurrency at first, but it has proven to be a fascinating development with rapidly increasing uses, many that we have yet to discover or predict. As it has been adopted even more rapidly than the internet was several decades ago, we should be prepared to see it evolve and grow relatively quickly. As we head into the next decade, the crypto market will likely see significant technical development and growth. Investors who can tolerate volatility should consider an allocation to some form of cryptocurrency in their portfolios.

About the author: Tyson Romanick, CFA®

Tyson Romanick, CFA®, assistant vice president and portfolio manager at Baker Boyer Bank in Walla Walla, WA, joined Baker Boyer in 2019 after a 14-year career in mutual funds and financial analysis. He works with clients daily to develop their investment strategy and ensure they are working towards their overall financial goals. He has a positive outlook on cryptocurrency and studies the subject diligently, staying on top of the crypto market as it develops.