Over the last couple of years, cryptocurrencies have become more well known due to the significant increases and swings in the price of popular coins like Bitcoin and Ethereum. Despite reaching an all-time high price last year, only about 16% of Americans have reported investing or trading cryptocurrency.
For investors curious about adding Bitcoin or another cryptocurrency to their portfolio, you should consider the following.
Cryptocurrencies are digital assets secured on a blockchain, which is a type of ledger that records transactions using concepts of cryptography and game theory. Some of these concepts include:
The first cryptocurrency was Bitcoin, a creation of the anonymous Satoshi Nakamoto that started in 2008. However, in the nearly 14 years since Bitcoin’s inception, many other cryptocurrencies now exist, each with its unique value propositions and communities.
The most common method for purchasing is through exchanges such as Coinbase, Kraken, or Binance. Because of Know Your Customer (KYC) laws, exchanges will require users to provide certain identifying information when creating an account. Additionally, exchanges will charge transaction fees when buying, selling, or trading crypto.
The value propositions of cryptocurrency may vary from coin to coin, which is why it’s important to thoroughly research the fundamentals of a crypto project before investing. However, some of the general attributes of crypto that may be of value include:
Once bought, some users keep their cryptocurrency in the account on the exchange they used to purchase them. However, others may prefer to hold their crypto on any number of crypto wallets.
Cryptocurrency wallets are generally distinguished as a hot or cold wallet. Hot wallets refer to software programs stored online through a computer or phone. In contrast, a cold wallet is held in a USB-connected device capable of offline storage.
The risks of cryptocurrency are threefold. The first is the potential for losing crypto by forgetting a spending password or wallet seed-phrase. Risk also exists through the potential for bad actors to hack and steal cryptocurrency either through manipulation of software or by obtaining an individual’s crypto wallet passwords.
For people not yet ready to purchase their own cryptocurrency, other options still exist for investors to have some exposure to the cryptocurrency industry in their portfolio. These include:
No single correct approach exists when it comes to determining the amount of cryptocurrency an investor should have in their portfolio. Rather, the chosen amount will always depend on factors specific to the investor and their financial goals.
Relevant to the discussion might be an investor’s net worth, current income and expenses, retirement savings, and overall risk tolerance. Generally, some experts may recommend allocating only a tiny percentage (e.g., 2-5%) of an investor’s overall portfolio, if any, to cryptocurrencies.
The cryptocurrency market is still a young industry, and its technologies and investment opportunities are continually evolving and changing. As a result, cryptocurrency investments can be somewhat speculative and subject to short-term volatility.
As always, investors should perform their own due diligence before buying a particular cryptocurrency and only invest amounts they won’t be afraid to lose.
Provided content is for overview and informational purposes only and is not intended and should not be relied upon as individualized tax, legal, fiduciary, or investment advice.
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Licensed Insurance Professional. Respond and learn how insurance and annuities can positively impact your retirement. This material has been provided by a licensed insurance professional for informational and educational purposes only and is not endorsed or affiliated with the Social Security Administration or any government agency. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.
Licensed Insurance Professional. Respond and learn how insurance and annuities can positively impact your retirement. This material has been provided by a licensed insurance professional for informational and educational purposes only and is not endorsed or affiliated with the Social Security Administration or any government agency. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.