Unless you’ve been living under a rock the last couple years, it is inevitable that you have heard someone talk about investing in cryptocurrency (crypto). Since the beginning of the COVID-19 pandemic, few investments have drawn as much attention, or created as much division amongst market prognosticators, as cryptocurrencies like Bitcoin, Ethereum (and yes, even Dogecoin). With all the hype and conversation floating around, you may be wondering if you should invest some of your money in crypto. There is certainly no shortage of people willing to tell you how great or how terrible that decision would be, but that is not what this article is looking to accomplish. Instead, before you decide one way or the other, you should ask yourself these three questions:
Why do I want to invest in crypto?
Before you invest in crypto (or anything else, for that matter), you need to understand your “why”. FOMO (fear of missing out) is never a good reason to invest. So, if your interest in crypto is solely because your friend/relative/neighbor/coworker/random connection on Twitter told you about how much money they made, you may want to reconsider. Remember, everyone has different goals, risk appetites, and financial situations, and survivorship bias causes most forums to focus only on the winners, when there are a number of people who have lost significant amounts of money. However, if you have done your research and have a clear investment hypothesis for crypto, and believe that it can help further your goals, then you should move on to the next question.
Can I handle the price swings of crypto?
Once you’ve established your “why”, you need to ensure that crypto fits within your risk tolerance (AKA that you can handle investing in a volatile asset like crypto). Remember, any investment that can go up 20% in a day can also go down 20% in a day. It is important to evaluate your risk tolerance before you invest in crypto and ensure that your investment does not take your entire portfolio out of risk-balance. Crypto is unique in that it trades 24 hours a day, so unlike a standard stock-and-bond investment portfolio that only trades during specific hours, your crypto allocation will be constantly updating and adjusting. You will need to make sure that you are prepared for fluctuations that may occur while you are sleeping, and maintain discipline despite the movements in price. If, after evaluating your risk tolerance, you determine that crypto fits within your portfolio, move on to the final question.
How will I invest in crypto?
This may be the most challenging question to answer, simply because of the number of options out there. Will you buy coins directly through an exchange? If so, you will need to establish a “wallet” to house your crypto coins and ensure that they are securely stored (and that you remember your password!). Will you use an IRA to purchase crypto directly? If so, you may not be able to use the standard brokerage firms and will need to look at companies with a specific focus on crypto IRAs. Will you invest in a crypto fund or trust? Regardless of which method of investment you choose, you will want to make sure you understand all fees and costs associated with the transaction, that your investment will be safe where you decide to store it, and that the company you are investing through is trustworthy and secure. It may be wise to consult with your financial advisor for help. In a largely unregulated industry, it is important to be vigilant and do your research to ensure you do not fall victim to malfeasance like so many have.
Cryptocurrency has been one of the “hottest” investments in the last few years, but before you invest, ask yourself the three questions above, and ensure that you are making a decision about crypto investing that is right for you and your financial goals. If you are thinking about investing in crypto and looking for someone to help you answer the questions above, contact Greenspring today! If you are a participant in one of our retirement plans, schedule a 1:1 with one of our CFP® professionals on the participant advice team. If you’re an individual looking for personalized financial expertise contact our Private Wealth team.
