By Dana Anspach, CFP, RMA
When I was growing up, my dad worked in the technology field serving the banking industry. He called upon small community banks across the Midwest to discuss their technology needs. For those of you familiar with the industry, he worked for Burroughs, which later became Unisys.
Dad would tell me technology stories that sounded like fairytales.
We lived about six hours apart. He was in Des Moines, Iowa, and I lived with my mom in St. Louis, Missouri, and he told me that one day, he'd be able to help me with my homework by sending messages on the computer or chatting live via video. It sounded like magic at the time. And it all came true.
Every so often, revolutionary technology happens, and it changes the world.
And, right now, a new revolution is happening. The technology is blockchain, a form of software code that is infamous for launching Bitcoin.
The first I heard of cryptocurrency was in 2017 when Bitcoin started making the mainstream news. My brother texted me asking about it. Here's our transcript.
In hindsight, although my answer in terms of the risk/return framework was correct, he knew more about it than I did. I wish I'd taken the time to learn more then. But, instead, I forgot about it.
Then at the end of last summer, I attended a virtual conference that changed my perspective. One of the speakers, a fellow financial advisor, did a presentation on cryptocurrencies (also called tokens or abbreviated as crypto) and the technology behind them. From that moment, I was hooked.
What was I hooked on? Well, it's perhaps easier to start by sharing the parts that did not hook me in. Some things made me (and perhaps you) disregard this new investment opportunity as a fad. For example, you may hear stories about Bitcoin replacing the dollar and becoming the new world currency. I don't have much to say about that. That's NOT the part of blockchain technology that interests or captivates me, although I read enough to understand the thought process behind those sentiments.
Of the books I read, I found The Bitcoin Standard by Saifedean Ammous to be the most useful. Money Without Boundaries by Thomas J. Anderson was the runner-up.
The underlying technology
What does interest me is the underlying technology that powers Bitcoin.
I can see the potential – not just from an investment point of view – as to how this technology can change the world.
What is revolutionary about blockchain technology is it allows a series of transactions to occur automatically and validates these transactions as authentic, without human intervention.
Think about how long it takes a check to clear. With blockchain technology, such transactions become nearly instantaneous.
Another thing that makes what is happening in blockchain so incredible is the open-source code. Anyone can see and build upon what you have created, which expedites the speed at which new developments occur.
This technology has the power to change how the backstage (what you don't see) works in nearly every industry: supply chain management, social media, search engine optimization, and my favorite, finance. It can change the underpinnings of all aspects of finance from saving, borrowing, and lending to mortgages, insurance, and how real estate ownership is tracked and recorded. It will open up new investment opportunities.
For example, real estate ownership can be "tokenized" or turned into a tradeable asset on the blockchain. Imagine that you could own $100 of the Empire State building. One day, that may be possible.
I think of blockchain projects as new software companies. The way they raise capital and incentivize ongoing use is by issuing tokens. The tokens have a "use case" – meaning you need the token to use their service. Think of it like taking the kids to Chuck E. Cheese. You trade in your dollars for their tokens to use in their games.
When you use the service offered by a blockchain project, it collects fees. The fees help cover the cost of recording the transactions to the blockchain, thus providing irrefutable proof of the transaction, who owns what, how much, and so on. If it is a valid product offering, over time, it will collect more in fees than it costs to operate, and the excess payments are distributed back out to the community and/or token holders, and a market value develops as people buy and sell the tokens.
A New Asset Class
This simplified explanation doesn't do this new asset class justice, but the bottom line is this is a new asset class. It is not a currency. It is not an equity. It has characteristics of both and unique characteristics that we have never seen before. It is fascinating, and it presents a huge investment opportunity.
The question is, should you be buying into this new asset class?
In hindsight, these questions are easy to answer. If we could go back to the '90s would it make sense to invest in companies building on the technology that the internet offered? Yes, of course. But many companies didn't make it. Others, such as Microsoft, Apple, Netflix, Amazon, and Facebook, became giants. I believe we will look back a decade from now and see blockchain projects that have amassed massive value (many today already have multi-billion dollar market caps.) But which ones will be the winners?
So far, software projects have issued over 6,000 tokens, and 1,000 of those have become worthless, much like how many dot.com companies disappeared in the early 2000s. At this stage, no one knows which ones will be the most successful.
And that is why we diversify. If you do invest, diversify.
And, before you invest, make sure you understand the level of volatility to expect. A bear market, defined as the market dropping 20% or more from its previous highs, happens in the stock market on average every 3-4 years. In the crypto market, prices change that much every few days.
If you'll feel sick to your stomach watching something you just bought worth 30-50% less a few days later, then maybe this isn't for you. If you believe in the industry's long-term prospects, then those price moves don't phase you, as you have your eye on what it might be worth in ten years.
Once you've addressed the question of if you should invest in this asset class, the next question is how much? As it is considered speculative and high-risk, the traditional answer is 5% or less of your portfolio. For experienced investors with nerves of steel and lengthy time frames, larger allocations are okay.
How to Invest in Crypto
Suppose you do your research, like what you discover, and want to invest in this asset class. How do you do it?
There are apps, such as Gemini, that you can download, link to your bank account, and instantly make purchases. The fees, however, are astonishing. When I began in this industry in 1995, there were 8.5% front-end sales charges on most mutual fund purchases, with rates eventually decreasing to 5.75%. Today, you rarely see mutual funds with hefty upfront fees.
In crypto, it can cost 12-14% in fees to make a purchase. Where do those fees go? Back to the network, and eventually, they hopefully help the value of the project increase. As the industry matures, just as we saw with mutual funds, fees will come down. There are places to purchase at lower costs, but in many cases, they are less convenient than the interfaces offered by apps like Gemini.
If buying directly through an app scares you (understandably so), some mutual funds have crypto exposure, such as the Ark funds. And there are securities called Trusts, such as those offered by Grayscale and Bitwise, that allow you to buy a share of a trust that owns crypto. But you may pay a premium for your purchase. What does that mean?
With a mutual fund, the share price is based on the closing price of all the underlying securities at day's end. With an exchange-traded fund, the share price is based on the price of the underlying securities as priced at any moment – so you can trade them throughout the day. With the trust structure, if demand for the trust soars, the share price can be significantly greater than the underlying securities' price. If you don't understand how premiums and discounts on these types of investments work, you probably shouldn't invest in them.
How Crypto Ties Into Your Retirement Plan
Now, how does all this tie-in to your retirement planning? New asset classes don't come along often. We've had the typical cash, stocks, bonds, real estate, and commodities for a long time. Now, we have something new.
It presents a vast opportunity. I think it makes sense to explore this new asset class, as we are doing here at Sensible Money. We'll soon have more straightforward ways to invest in it, such as exchange-traded funds and mutual funds. If you've done your homework when these options become available, you'll be ready to invest, and you'll do it in a prudent way that fits your risk tolerance and time frame.
Of course, if making investment decisions causes anxiety, stress, and is something you don't want to do nor enjoy putting the time into, you are likely better off hiring a professional to do it for you.
About the author
Dana Anspach, CFP®, RMA®, founder and CEO of Sensible Money, the author of Control Your Retirement Destiny, and the professor of The Great Courses’ How to Plan for the Perfect Retirement, explains how to build a retirement spending plan.
Free Online Webinar
Don’t Cheat Yourself With the 4% Rule
The next online retirement planning class, Don’t Cheat Yourself With the 4% Rule, will be on Thursday, March 11, 2021.
Many retirees and advisors gravitate to simple rules of thumb, like the 4% rule, which says you can safely withdraw 4% of your portfolio each year, increase that withdrawal with inflation, and expect to have your income last for life.
Do such rules work?
Certainly they’re useful when you’re age 40 and planning for retirement 20 to 30 years away. But as you get closer to retirement, these rules can work against you.
This class will show you what to watch out for, and provide four practical tips on how to account for taxes, inflation, market returns, and Social Security when you lay out your retirement income plan
- Thursday, March 11, 2021
- 5 pm AZ & Mountain/6 pm Central/7 pm Eastern
- Register online by clicking on: Don’t Cheat Yourself With the 4% Rule!
Who Should Attend
- Those of you age 50-70 who are within 10 years of your desired retirement date will benefit the most from this class.
Dana Anspach is the author of Control Your Retirement Destiny (in its second edition) and of Social Security Sense, contributes to MarketWatch, and spent eight years writing for About.com as their MoneyOver55 expert and for TheBalance.com as their Retirement Decisions expert. She is the founder and CEO of Sensible Money. Dana is also a CFP®, RMA®, and Kolbe Certified Consultant who began her financial planning career in 1995.