23 Dec I want to buy crypto. How will it play in my portfolio?
Q. I haven’t bought any cryptocurrency yet, but I think I should. How do I decide where it should fit in my portfolio, which is 55% stocks, 40% bonds and the rest in cash. I’m 55 and don’t plan to retire for 10 years at least.
A. Cryptocurrency has certainly received a great deal of attention and interest from both experienced and new investors.
And like you, the rapid increase in the value of some cryptocurrencies has many wondering if it should be included in their investment portfolios.
Let’s start at the beginning.
Cryptocurrency is a digital currency that can be used to buy goods and services, said Jodi Cirignano, a certified financial planner and certified public accountant with Peapack Private Wealth Management in New Providence.
“The technology called blockchain is the decentralized online ledger used to secure, manage and record all cryptocurrency transactions,” she said. “While Bitcoin may be the largest and most popular cryptocurrency, there are thousands of currencies traded publicly.”
But, unlike traditional currency, cryptocurrency is not backed by the U.S. government, she said.
Cryptocurrencies have attracted many speculative investors as a way of making a quick profit, she said.
“Whether evaluating cryptocurrency or any other investment, we believe it is important to apply the same time-tested investment principles in the decision-making process and to understand the risks,” Cirignano said. “This includes determining if the investment is consistent with your time horizon, financial situation, liquidity needs and risk of loss.”
With cryptocurrency, there are numerous risks to consider.
First, she said, unpredictable and drastic fluctuations in the price of digital currencies could result in significant losses in a short period of time.
Next, the platforms that facilitate the exchange of digital currency are unregulated. In addition to being hacked, they can cease operations or fail, she said.
“Unlike U.S. banks that provide FDIC insurance, there are no backstops to digital wallets,” she said.
Then, unlike traditional stock and bond investments, cryptocurrencies do not on their own generate any income or dividends, she said.
“To profit from your cryptocurrency investment, in general, someone needs to pay more for the currency than you did,” Cirignano said. “Contrast this to an investment in a well-managed company. The company’s ability to grow revenues and earnings is a key driver in its stock value; and you have the added benefit of transparency in the company’s operations through SEC filings and other public information.”
Do a lot of research and proceed with caution, and consider consulting with a tax or financial advisor who knows your specific needs.
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This story was originally published on Dec. 23, 2021.
NJMoneyHelp.com 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.