How should I look at crypto within my overall portfolio?


Q. I invest in several cryptocurrencies. Should I treat it like a regular asset class? If yes, how much of a portfolio should I allocate?
— Investor

A. Cryptocurrency is certainly a hot topic these days.

Digital assets have grown to over a $2 trillion market, with Bitcoin representing roughly half of that amount.

Before we get specifically to your question, let’s talk crypto in general.

There has been no shortage of headlines in terms of investor interest and increased adoption of cryptocurrencies by fintech companies, consumers, businesses, service providers and banks, said Charles Pawlik, a certified financial planner and chartered financial analyst with Beacon Trust in Morristown.

He noted a few prominent examples, including Paypal allowing for cryptocurrency transactions.

There’s also a recent partnership between Mastercard and cryptocurrency company Bakkt that will allow businesses and banks the ability to issue branded cryptocurrency credit and debit cards to consumers along with other crypto-based services).

And U.S. Bancorp announced that it will be providing cryptocurrency custody services for institutional investment managers, he said.

Pawlik said there has been “widespread enthusiasm” around cryptocurrencies by those that view them as a viable and efficient alternative currency, exchange of value, a form of digital gold, a potential hedge against inflation and a way to bring banking to parts of the world that don’t have access to traditional banking services.

“However, there are a number of risks involved with investing in cryptocurrencies that should be contemplated when deciding whether or not to make an investment such as significant price volatility, as evidenced by the 50%+ drop in Bitcoin that occurred in the second quarter of this year, fraud, theft, the use of crypto for illegal transactions and increased regulation,” he said.

Aside from direct investment through opening an account with the cryptocurrency exchange platform CoinBase, there are other ways to invest, Pawlik said. Investments in both Bitcoin and Ethereum are accessible through the Grayscale Bitcoin Trust (GBTC) and Grayscale Etherium Trust (ETHE), which currently trade in the over-the-counter market, he said.

He said the crypto market recently had what he called a “significant milestone” with the launch of a Securities and Exchange Commission-approved Bitcoin futures exchange traded-fund (ETF) through ProShares. The ProShares Bitcoin Strategy ETF (BITO) is the first SEC approved ETF linked to the performance of Bitcoin, and trades on the New York Stock Exchange.

“However, it is important to note that the fund invests in futures contracts — an agreement to purchase the underlying asset, Bitcoin in this case, at a predetermined price at a specified time in the future — linked to Bitcoin, versus directly investing in Bitcoin itself,” Pawlik said. “In contrast to Bitcoin itself, Bitcoin futures are an already established and regulated financial product that are traded on an exchange.”

With all that said and aside from all of the meaningful risks of investing in Bitcoin itself, Bitcoin futures contracts can carry added risks, he said.

“For instance, as short-term futures contracts expire, new longer-term futures contracts have to be purchased or renewed/rolled forward to maintain exposure,” Pawlik said. “If the longer-term futures contracts are trading at prices above the ones currently owned/that are expiring, the fund will have to pay more to maintain the exposure and will in effect be consistently selling low and buying high as long as that dynamic continues to be the case.”

To your question, Pawlik said despite investor interest in cryptocurrencies, it would be difficult to recognize them as a dedicated asset class in portfolios alongside equities, fixed income and alternative assets such as real estate at this point in time.

“There is no reliable way to determine a true intrinsic value or fair price for cryptocurrencies,” he said. “The significant volatility and increase in price for Bitcoin thus far has been driven by the demand for what is a speculative investment that does not have inherent value, and based on the belief that there is value there versus any reliable way to determine that value.”

He said as cryptocurrencies continue to garner more demand from investors and are increasingly adopted, the launch of more investment options tied to these cryptocurrencies and increased regulation may continue to drive the discussion around where these assets fit as part of a traditional portfolio.

“For the time-being, it would be prudent to view any investment in cryptocurrencies as a speculative investment made outside of the construction of a traditional portfolio, and to keep the investment to a small percentage of your assets so that a potential significant drop in value will not disproportionately affect your overall asset base,” Pawlik said.

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This story was originally published on Nov. 3, 2021. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.