If you can’t beat the crypto crowd, it might be time to join them, experts say.
Virtual currency and its underlying technology, blockchain, are here to stay – and that means both will play some role in investors’ lives.
“It’s actually very hard to decouple blockchain and bitcoin,” said Sunayna Tuteja, head of digital assets and distributed ledger technology (DLT) at TD Ameritrade.
She spoke at the TD Ameritrade LINC conference in Orlando, Florida, on Wednesday.
“On the one end, how do we commercialize the value of DLT and blockchain to bring more innovation to traditional markets?” Tuteja asked. “On the other end of the spectrum: How do you tap into this nascent asset class?”
Cryptocurrency – at least bitcoin – has staying power. “Because there’s a fixed number of bitcoin, it’s inflation-proof and it’s virtually instantaneous,” said conference speaker Ric Edelman, founder of Edelman Financial Engines.
Even investors in retirement plans are dipping a toe into the asset class.
In the third quarter of 2019, the Grayscale Bitcoin Trust, which tracks the price of the cryptocurrency, was the fifth-largest holding among millennial investors in Charles Schwab’s self-directed brokerage accounts.
Self-directed brokerage accounts are sometimes offered within retirement plans and allow investors to select individual stocks, bonds and other assets that aren’t on a 401(k) plan’s general investment menu.
Finding the right allocation
The price of bitcoin surged to its zenith on Dec. 15, 2017, when one unit of the virtual currency was valued at $19,650. The price cratered a year later, slumping to $3,183 on Dec. 14, 2018.
As of Jan. 30, one bitcoin is equal to about $9,300.
A 1% allocation to bitcoin – that is, going from 60% in stocks and 40% in bonds to 59% in stocks, 1% in bitcoin and 40% in bonds — just might be enough to give investors the benefit of diversification without risking the whole portfolio, Edelman said.
“We need to acknowledge that 1% allocation isn’t going to materially harm a client,” he said. “It isn’t going to prevent them from achieving their financial goals, and won’t damage their personal finances.”
Making a tiny allocation toward bitcoin doesn’t absolve investors of the need to do their homework before buying, say experts. They should get schooled on digital assets, as well as the underlying blockchain technology, first.
“Don’t consider investing unless you understand the technology,” said Edelman. “Otherwise, you’re not investing; you’re spending.”
Investors hoping to jump into the crypto pool should approach it with a long-term mentality and prepare to ride out volatile times – including the chance of a 100% loss from that digital currency, he said.