Financial Planning
back
In a 2023 survey, 17% of U.S. adults said they had invested in, traded, or used cryptocurrency. 1 Cryptocurrency — often simply called crypto — has become so entrenched that the Internal Revenue Service asks a question about cryptocurrency on Form 1040, and Super Bowl ads have featured pitches for crypto platforms. Popularity does not mean an investment is a good idea, but you may wonder what role, if any, cryptocurrency might play in your portfolio.
First and foremost, it's important to keep in mind that cryptocurrency is a high-risk, highly volatile asset. If the prospect of a wild investment roller coaster makes you uncomfortable, crypto may not be for you.
This extreme volatility reflects the fact that cryptocurrency is still a relatively new type of asset, and values are pushed and pulled even more than established investments by media hype, investor sentiment, potential regulations, and short-term profit taking. Put simply, investors are uncertain how to value crypto. And the reason for this uncertainty is that most cryptocurrencies, including the two most common forms, Bitcoin and Ether, are not pegged to any government-issued currency and have no intrinsic value other than what investors might pay for it.
Stablecoins, which are pegged directly to the value of the U.S. dollar or other reserve assets, are intended to remove the volatility from cryptocurrency while preserving some appealing features such as ease of digital transfer. However, stablecoins still carry significant risk.
When you buy stock, you are purchasing a share of a business and are entitled to a share of the business's earnings. When you buy a bond, you are purchasing the right to the interest and return of principal (assuming the issuer does not default). You are likely also hoping that the price will rise should you choose to sell, but there is underlying value to the investment regardless of price movement. By contrast, when you buy cryptocurrency, you are engaging in something close to pure speculation — the possibility that another investor might consider the digital asset more valuable in the future even if there is no underlying value.
Cryptocurrency can be used to purchase some products, and the governments of El Salvador and the Central African Republic have made cryptocurrency legal tender.2 It's likely that a wider range of opportunities to use crypto will develop, but dollars or other government-sponsored currency will generally remain easier and more appealing for most transactions because the buyer and seller can have confidence that the value of the currency will not change dramatically before or after the transaction.
Some proponents see cryptocurrency as a hedge against inflation, but there is no evidence that this is true — though any investment that consistently returns more than the rate of inflation might be considered a hedge. Most proponents see crypto as a store of value, similar to gold. However, gold has real-world value as a metal with unusual properties, and it has been a widely accepted store of value for thousands of years.
The key factor that may give crypto long-term value is limited production. The two most common forms of cryptocurrency, Bitcoin and Ether, have built-in safeguards that limit the number of bitcoins and ether than can exist. Once those limits are reached, value may grow, assuming that investors continue to want cryptocurrency.
Some investors may look at the extreme volatility of cryptocurrency as an opportunity to make quick profits by buying low and selling high, but this requires timing a market sector that is very difficult to predict, and the risks are extremely high. In May 2021, when China banned financial institutions and payment companies from offering services related to cryptocurrency, Bitcoin dropped almost 30% in a day and the capitalization (total value) of all cryptocurrencies dropped 35%. Two other common cryptocurrencies, Ether and Dogecoin, dropped 43% and 53% respectively.3
Over the longer term, Bitcoin has experienced dramatic losses in three out of the last ten years, ranging from -61% in 2014 to -73% in 2018 (and most recently, -64% in 2022). On the upside, it has had seven years of positive returns, ranging from a solid 35% in 2015 to an astonishing 1,338% in 2017. Bitcoin returned 156% in 2023.4 Obviously, this is an impressive performance, and returns were even higher in the first few years — so those who invested early received remarkable rewards. But this kind of growth is likely to be unsustainable, based on speculation in a new asset with unknown value.
The question for investors today is where does cryptocurrency go from here? It is never possible to accurately predict market direction, but stocks and bonds have a long history that can provide investors with a general sense of long-term trends. This record does not exist for cryptocurrency. Bitcoin, which was released in 2009, has the longest record, followed by Ether, which was released in 2015. Neither offers enough history to establish a long-term trend, especially with the extreme volatility of a brand-new type of asset. Other cryptocurrencies have even shorter records.
Considering all these factors, it should be clear that adding cryptocurrency to your portfolio involves adding volatility and risk in return for an unknown potential for gain. This kind of trade-off is not appropriate for all investors.
Like most investment decisions, the role of cypto in your portfolio depends on your time frame, personal goals, and risk tolerance. It also may depend on your personal opinion of the future of cryptocurrency and the role it might play in the global financial system. If you want to include crypto in your portfolio, more well-established forms of cryptocurrency might be a wiser choice than less-established crypto assets that may carry even higher risk. In January 2024, the first Bitcoin "spot" exchange-traded funds (ETFs) were approved by the Securities and Exchange Commission, providing a simpler way for investors to gain exposure to Bitcoin without holding it directly.5
It may be appropriate to look at cryptocurrency as a high-risk, potentially high-reward asset, similar to a start-up or small tech stock. You should not invest in crypto in lieu of other investments that are necessary to pursue your long-term goals. To look at it another way, you should not invest more than you are comfortable losing.
To determine whether cryptocurrency is appropriate for you, it would be wise to consult a financial professional. Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Cryptocurrencies are not traditional investments; they are highly speculative instruments, carry a significant amount of risk, and are not suitable for all investors. Cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. The IRS is treating cryptocurrency as an asset subject to capital gains taxation rather than as a currency.
The reserves of stablecoins may not be subject to rigorous audits, and the quality and quantity of collateral may not, in some cases, correspond to the issuer's claims. Stablecoins that maintain their value through algorithmic mechanisms are potentially subject to failure due to market pressures, operational failures, and other risks.
Exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) Pew Research Center, April 10, 2023
2) CoinMarketCap, 2024
3) Yahoo! Finance, May 19, 2021
4) Bankrate, January 21, 2024
5) The Wall Street Journal, March 5, 2024
This content has been reviewed by FINRA.
Prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Services, Inc.
This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.
Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.
Elevatus Wealth Management may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Elevatus Wealth Management will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.
Does Cryptocurrency Fit in Your Portfolio?
High risk and volatility
First and foremost, it's important to keep in mind that cryptocurrency is a high-risk, highly volatile asset. If the prospect of a wild investment roller coaster makes you uncomfortable, crypto may not be for you.
This extreme volatility reflects the fact that cryptocurrency is still a relatively new type of asset, and values are pushed and pulled even more than established investments by media hype, investor sentiment, potential regulations, and short-term profit taking. Put simply, investors are uncertain how to value crypto. And the reason for this uncertainty is that most cryptocurrencies, including the two most common forms, Bitcoin and Ether, are not pegged to any government-issued currency and have no intrinsic value other than what investors might pay for it.
Stablecoins, which are pegged directly to the value of the U.S. dollar or other reserve assets, are intended to remove the volatility from cryptocurrency while preserving some appealing features such as ease of digital transfer. However, stablecoins still carry significant risk.
Value and speculation
When you buy stock, you are purchasing a share of a business and are entitled to a share of the business's earnings. When you buy a bond, you are purchasing the right to the interest and return of principal (assuming the issuer does not default). You are likely also hoping that the price will rise should you choose to sell, but there is underlying value to the investment regardless of price movement. By contrast, when you buy cryptocurrency, you are engaging in something close to pure speculation — the possibility that another investor might consider the digital asset more valuable in the future even if there is no underlying value.
Cryptocurrency can be used to purchase some products, and the governments of El Salvador and the Central African Republic have made cryptocurrency legal tender.2 It's likely that a wider range of opportunities to use crypto will develop, but dollars or other government-sponsored currency will generally remain easier and more appealing for most transactions because the buyer and seller can have confidence that the value of the currency will not change dramatically before or after the transaction.
Some proponents see cryptocurrency as a hedge against inflation, but there is no evidence that this is true — though any investment that consistently returns more than the rate of inflation might be considered a hedge. Most proponents see crypto as a store of value, similar to gold. However, gold has real-world value as a metal with unusual properties, and it has been a widely accepted store of value for thousands of years.
The key factor that may give crypto long-term value is limited production. The two most common forms of cryptocurrency, Bitcoin and Ether, have built-in safeguards that limit the number of bitcoins and ether than can exist. Once those limits are reached, value may grow, assuming that investors continue to want cryptocurrency.
Ups and downs without a historical baseline
Some investors may look at the extreme volatility of cryptocurrency as an opportunity to make quick profits by buying low and selling high, but this requires timing a market sector that is very difficult to predict, and the risks are extremely high. In May 2021, when China banned financial institutions and payment companies from offering services related to cryptocurrency, Bitcoin dropped almost 30% in a day and the capitalization (total value) of all cryptocurrencies dropped 35%. Two other common cryptocurrencies, Ether and Dogecoin, dropped 43% and 53% respectively.3
Over the longer term, Bitcoin has experienced dramatic losses in three out of the last ten years, ranging from -61% in 2014 to -73% in 2018 (and most recently, -64% in 2022). On the upside, it has had seven years of positive returns, ranging from a solid 35% in 2015 to an astonishing 1,338% in 2017. Bitcoin returned 156% in 2023.4 Obviously, this is an impressive performance, and returns were even higher in the first few years — so those who invested early received remarkable rewards. But this kind of growth is likely to be unsustainable, based on speculation in a new asset with unknown value.
The question for investors today is where does cryptocurrency go from here? It is never possible to accurately predict market direction, but stocks and bonds have a long history that can provide investors with a general sense of long-term trends. This record does not exist for cryptocurrency. Bitcoin, which was released in 2009, has the longest record, followed by Ether, which was released in 2015. Neither offers enough history to establish a long-term trend, especially with the extreme volatility of a brand-new type of asset. Other cryptocurrencies have even shorter records.
Balancing risk and potential
Considering all these factors, it should be clear that adding cryptocurrency to your portfolio involves adding volatility and risk in return for an unknown potential for gain. This kind of trade-off is not appropriate for all investors.
Like most investment decisions, the role of cypto in your portfolio depends on your time frame, personal goals, and risk tolerance. It also may depend on your personal opinion of the future of cryptocurrency and the role it might play in the global financial system. If you want to include crypto in your portfolio, more well-established forms of cryptocurrency might be a wiser choice than less-established crypto assets that may carry even higher risk. In January 2024, the first Bitcoin "spot" exchange-traded funds (ETFs) were approved by the Securities and Exchange Commission, providing a simpler way for investors to gain exposure to Bitcoin without holding it directly.5
It may be appropriate to look at cryptocurrency as a high-risk, potentially high-reward asset, similar to a start-up or small tech stock. You should not invest in crypto in lieu of other investments that are necessary to pursue your long-term goals. To look at it another way, you should not invest more than you are comfortable losing.
To determine whether cryptocurrency is appropriate for you, it would be wise to consult a financial professional. Although there is no assurance that working with a financial professional will improve investment results, a professional can evaluate your objectives and available resources and help you consider appropriate long-term financial strategies.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
Cryptocurrencies are not traditional investments; they are highly speculative instruments, carry a significant amount of risk, and are not suitable for all investors. Cryptocurrencies are not typically subject to the same reporting and data integrity requirements that apply to more traditional investment products. The IRS is treating cryptocurrency as an asset subject to capital gains taxation rather than as a currency.
The reserves of stablecoins may not be subject to rigorous audits, and the quality and quantity of collateral may not, in some cases, correspond to the issuer's claims. Stablecoins that maintain their value through algorithmic mechanisms are potentially subject to failure due to market pressures, operational failures, and other risks.
Exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
1) Pew Research Center, April 10, 2023
2) CoinMarketCap, 2024
3) Yahoo! Finance, May 19, 2021
4) Bankrate, January 21, 2024
5) The Wall Street Journal, March 5, 2024
This content has been reviewed by FINRA.
Prepared by Broadridge Advisor Solutions. © 2024 Broadridge Financial Services, Inc.
This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.
Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.
Elevatus Wealth Management may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Elevatus Wealth Management will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.
