Investing in Cryptocurrency: What Is This New Asset Class and Should You Invest?
When it comes to your investment portfolio, you know the traditional assets. Stocks, bonds, mutual funds, and ETFs have been the primary asset classes in countless portfolios over the years.
Real estate, private equity, and peer-to-peer lending are just a few of the less traditional asset classes that you can invest in to diversify your portfolio. And while you’re thinking about nontraditional assets, you can’t ignore cryptocurrency.
Cryptocurrency, or crypto, has only been around for a little over a decade, but it’s increasingly talked about in the news. In November 2021, the total cryptocurrency market cap peaked above three trillion dollars. And based on this number and crypto’s prevalence in the media, you figure it’s time to get more information.
If you’re not already invested in cryptocurrency, you may be wondering how to get started, or if it’s too late. Read on to learn about investing in cryptocurrency, the technology that supports it, and what it can mean for your portfolio.
What Is Cryptocurrency?
Cryptocurrency is a type of digital currency. It uses cryptography—secure communication—to make transactions.
You’ve probably heard of Bitcoin, which is the most popular type of cryptocurrency. But there are thousands—more than 10,000 as of February 2022, to be exact—of different cryptocurrencies out there.
Cryptocurrency records transactions on a blockchain, which is a network of ledgers distributed among different computers. All users have access to the ledger, and it’s updated automatically. Transactions are all verified and based on the consensus of the majority of ledger holders, making fraud difficult.
By using blockchain technology, cryptocurrency relies on a decentralized structure rather than a single governing body. In contrast, the value of the U.S. dollar is managed by the government.
The price of cryptocurrency is based on supply and demand—because there is no inherent value backing it up. This makes the price of cryptocurrencies very volatile. In fact, Bitcoin’s value dropped 30% in just one day.
Depending on what you want to do with your cryptocurrency, you might be able to treat it like cash. Big companies—like Tesla, AT&T, Overstock, and Home Depot—are starting to accept Bitcoin as payment. While more and more companies may start to accept cryptocurrency, most people treat it as an investment. They invest in it like they would in stocks or other asset classes.
What is Blockchain Technology?
As mentioned above, cryptocurrency transactions are recorded on a blockchain. A blockchain is a shared database that stores data in chronological order. This technology means that the data stored in it is secure, decentralized, and irreversible. It can’t be edited or changed.
Blockchain technology has been around longer than cryptocurrency has, though it wasn’t really used in a practical sense until Bitcoin was launched. There are several growing markets, like financial technology, decentralized finance companies, and exchanges that are using blockchain technology.
You can’t invest directly in blockchain, but you can invest in companies that are developing blockchain products and services.
Investing in Cryptocurrency and Blockchain Technology
Like investing in more traditional asset classes, you can invest in cryptocurrency in different ways. First, you can make an account and invest directly through a cryptocurrency exchange like Coinbase or Robinhood. Some brokerage firms allow their account holders to invest in cryptocurrency. You can also invest in a cryptocurrency company or a company that is using blockchain technology (more on this below).
To purchase cryptocurrency, you need a “digital wallet.” Its function is similar to a traditional wallet—but instead of cash or your actual Bitcoin, the digital wallet holds the keys that allow you to access your digital money.
Should You Invest in Cryptocurrency?
Before investing in cryptocurrency, it’s important to do your research. There’s a significant risk in investing in cryptocurrency—it’s a new type of currency and there aren’t many years of data and trends to look back on. Many advisors suggest only investing an amount you can afford to lose.
Cryptocurrency is extremely volatile, making it hard to know when you should invest. Dollar-cost averaging—investing small amounts of money consistently over time—is a good way to deal with this volatility.
Because cryptocurrency doesn’t hold inherent value, it’s different from investing in the stock market. However, a new exchange-traded fund (ETF) allows investors to invest in Bitcoin without having to deal with buying, selling, and storing the cryptocurrency, which can be complex. Similar to other ETFs that track a specific index or sector, a Bitcoin ETF tracks the price of Bitcoin.
Pros and Cons of Investing in Cryptocurrency
Like with other asset classes, there are advantages and disadvantages to investing in cryptocurrency. Below are some of the major pros and cons.
Pros:
Investing in cryptocurrency allows you to diversify your portfolio with another asset class.
Cryptocurrency has the potential to deliver high returns.
Cons:
There is a lack of clarity in U.S. cryptocurrency regulation, meaning transactions aren’t legally protected.
Cryptocurrency is more volatile than other asset classes.
Cryptocurrency is still relatively new, meaning there aren’t long-term trends to study.
As with any investment, it’s important to weigh the pros and cons, do your research, and understand how cryptocurrency investments can fit into your long-term financial goals before adding this asset class to your portfolio.
The Future of Cryptocurrency and Blockchain Technology
Just as no one can predict what the markets will do, no one can accurately predict the future of cryptocurrency and blockchain technology. However, there are some characteristics of these asset classes that are important to consider as we look to the future.
With several cryptocurrencies—like Bitcoin—having a limited supply, some experts consider these to be somewhat inflation-proof. Inflation can happen with an increased supply of money—which lowers the purchasing power per dollar—and isn’t possible when there is a limited total supply of a currency.
Cryptocurrency and blockchain technology could change the way we bank in the future. For example, by using this technology, banks could complete transactions more quickly and at any time rather than only during business hours.
It’s also likely that cryptocurrencies will become more regulated in the future, which could make the use of cryptocurrency and blockchain technology more widespread. If one thing is certain, it’s that cryptocurrency is becoming more and more interesting to a wide range of investors.
How Chicago Trust Administration Services Can Help
You don’t have to limit your tax-advantaged accounts to traditional asset classes. With a self-directed IRA, you can invest in cryptocurrency and other alternative asset classes while still enjoying tax advantages.
At Chicago Trust Administration Services, we help investors who want to diversify their portfolios with self-directed IRAs. To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.