Crypto is the cool kid on the block in the world of currencies and investments. And in our experience, its allure is as wide as the mystique that surrounds it.
While many investors have dubbed cryptocurrencies as the next “must-have” investments and are making (or losing) significant amounts of money in the process, just as many are warning that its undeniable volatility is perhaps a sign to shy away from the currency as an investment altogether.
So, if the fear of missing out has you looking to learn more, our team of financial advisors put their heads together to Decrypt Crypto, so you can make the best decision for your personal financial situation.
You've Heard of “Crypto,” but What Exactly is Cryptocurrency?
Cryptocurrencies – Bitcoin, Ethereum, Dogecoin, and others - are decentralized digital currencies. Unlike the U.S. dollar and foreign currencies, cryptocurrencies are not regulated by a central banking system or government. The decentralized control of each cryptocurrency is made possible through distributed ledger technology - called the blockchain - that serves as a public financial transaction database. We’ll dive into the blockchain in just a minute.
In the meantime, there are two ways to obtain cryptocurrency: mining and trading.
Mining crypto is to create new crypto tokens and enter them into circulation. This is not a process for beginners as it carries a significant cost and requires deep knowledge of the technology at play.
Trading cryptocurrencies, on the other hand, is just like trading stocks or commodities— you aim to buy low and sell high to turn a profit.
Crypto Should Be Viewed as an Alternative Investment
The closest comparison to cryptocurrency that you may already have in your portfolio is an alternative investment, such as gold, real estate investment trusts (REITs), commodities, and private equity funds. Like these other alternative investments, the ups and downs of the stock market do little to impact the market price of a crypto token.
Cryptocurrencies don’t need a one-day market dip to fluctuate in price – they can create volatility all on their own. Because cryptocurrencies are relatively young and we’re just starting to understand their place in the larger financial market, they tend to be volatile with significant price swings. This means that from an investment standpoint, they’re unlikely to provide a significant diversification benefit to a portfolio of stocks and bonds.
However, there are some investors who may consider allocating a small portion of their portfolio (e.g., 2-5%) to cryptocurrencies as an alternative investment to gain exposure to the asset class. Alternative investments can serve as a potential hedge against inflation and potentially provide significant long-term capital appreciation if the asset class grows in popularity or proves more resilient than traditional currencies over the long term.
If You're Asking, “Should I Invest in Crypto?,” You're Asking the Wrong Question
The question we should all be asking right now isn’t whether to transfer our cash to crypto. The right question is, “How can I better understand blockchain technology?”
Why? Because it’s the technology behind the cryptocurrencies – the blockchain – and it is expected to be a true disruptor to the financial industry and the way we do business in general in the years to come.
What is Blockchain Technology?
The blockchain is a public digital ledger network. It’s unique in that it’s incorruptible, enforces transparency, and bypasses censorship. Like other forms of digital technology, it reads code and takes actions based on that code – including making a transfer of currency or ownership from one entity to another.
Blockchain technology was invented in 2008 to serve as bitcoin's public transaction ledger. Today, the technology has many other applications beyond cryptocurrency and can potentially be used to record, track, and transfer anything of value.
Unlike our government-backed financial system, cryptocurrencies have no central authority, and therefore, can bypass the traditional role banks play in validating financial transactions. The blockchain is ‘where’ these crypto transactions occur.
Since the blockchain is a transparent ledger, the information and transfer history of every transaction is open for all to see. This means any transaction utilizing the blockchain is, by its very nature, transparent – there’s never a question of who made what transaction or when.
How Is Blockchain Technology Expected to Disrupt the Financial Industry?
The financial industry has traditionally been slow to adopt new technology. The blockchain presents an opportunity to streamline the financial sector by increasing transparency, creating a single source of truth, and reducing reconciliation costs.
The blockchain is likely to be a disruptive technology for investors and banks, but there's still uncertainty about its applications. That said, many industry experts are convinced that it's the future of financial technology. That’s because it is:
- Faster and cheaper than traditional financial networks
- More difficult to hack
- Transparent and auditable
- Reduces risk and fraud, especially on the international level
- Allows for the use of "smart contracts," with the terms of the agreement between the buyer and seller written directly into lines of code
And the blockchain's applications aren't limited to financial transactions, either. The technology can be used to create a permanent, public, and transparent ledger system for virtually anything that needs to be recorded and verified. This technology may soon change how we verify everything from medical data to legal contracts to academic records.
If You Decide to Dip Your Toes into the Crypto Pool, Consider Your Portfolio as a Whole
So, what does this crypto stuff mean for you and your finances today and your investment portfolio long-term?
The answer to that question starts with an understanding of your financial priorities and comfort with risk. At Stages, we’re watching crypto closely and discussing it with our clients when it makes sense for their personal financial situations.
While everyone’s situation is unique and you should always consult your financial advisor, we’re evaluating cryptocurrency as an alternative investment and helping clients determine if it’s a smart addition to their overall portfolios.
What are your financial priorities and goals? Wherever you’re looking to take your finances, we’d love to help you get there. Contact us to start the first of many conversations about your financial wellbeing. Our team will work with you to develop your personal financial roadmap and chart a course towards your goals so you can live the life you want and deserve.