Investing in Cryptocurrency 101: Should You Invest?
Whether you’re looking to plan for retirement or have other major financial goals, there’s no doubt about it – you need to be thinking about investing. And, whether you’re a veteran or just dipping your toes in the investment pool, you’ve probably heard the buzz about cryptocurrency. Here’s the scoop to help you decide whether to make space for crypto in your portfolio.
Bitcoin and beyond
Cryptocurrencies began as an alternative means of paying for things, using decentralized, blockchain technology. Bitcoin is the best-known form of cryptocurrency, but it’s just one of thousands and new ones are being introduced all the time. Traded on cryptocurrency exchanges, they’re considered by many to be an asset like stocks or other types of currencies such as the U.S. dollar, the Japanese yen, and the Mexican peso. However, stocks represent partial ownership of an actual business and traditional currencies are issued by governments. For example, the value of the U.S. dollar is backed by the full faith and credit of the United States. Meanwhile, cryptocurrency is a digital representation of value that’s backed by – well – nothing.
Instead, the value of a cryptocurrency is based entirely on supply and demand. Some see that as a positive, but it’s also one of the reasons it’s not unusual to see wild fluctuations in price.
Tips for beginners
An investment in cryptocurrency can be worth a fortune one day, and zero the next. That’s why it’s so important that no one – seriously, no one – invest hard-earned dollars that they expect to need in the short-term. You could, in fact, lose everything. And, unlike traditional investments, at this point typical investors lack the solid research and regulatory safeguards that can help to reduce risk. While some sophisticated investors see cryptocurrency as a savvy means to diversify their portfolios, for many people, investing in cryptocurrency amounts to speculation.
It’s true there are some major, legitimate businesses investing and trading in cryptocurrency, but be aware there are plenty of scammers looking to cheat unsuspecting investors. And, remember, even legitimate crypto platforms require you to hand over some amount of private information in order to create an account. The term caveat emptor – or buyer beware – has never been more relevant!
What’s next for crypto?
Governments around the world have been struggling to figure out how to define, regulate and respond to the challenges of cryptocurrency. In fact, it was just in early 2022 that the U.S. Securities and Exchange Commission (SEC) issued a proposed definition change that experts say could provide a means for the SEC to regulate the platforms (called exchanges) where cryptocurrency is traded.
All that makes the investment landscape even more complex and murky for investors looking to save for a secure retirement.
Advice for individual investors
It’s easy to get distracted by the hype surrounding any new investment opportunity, but the fact is, smart investing principles don’t change:
- Make investing a habit, ideally by earmarking a specific percentage of your income each month toward building your investment portfolio.
- Invest for the long-term, so you aren’t too euphoric about the “ups” or too rattled by the “downs” of the market.
- Reduce risk by diversifying your investment portfolio with a reasonable mix of assets, such as stocks, bonds, cash-equivalents and real estate.
- Balance the amount you have in each of the asset types to reflect your risk tolerance.
- Rebalance your portfolio on a regular basis, at least annually, to maintain the asset allocation that’s right for you.
- And, perhaps now more than ever, don’t invest in anything you don’t understand.
Want some help planning for retirement?
Our experienced Investment Services team can help. Reach out for a free consultation to get started, or to get second opinion on your current portfolio.
This information is provided for educational purposes only and is not intended to be financial or investment advice. Investments are not NCUA Insured and may lose value.