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    • Bitcoin has broken records. Should you invest?
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    Bitcoin has broken records. Should you invest?

    Vaseline Posted on



    CNN
    —

    In the first quarter of this year, the price of bitcoin broke records after the Securities and Exchange Commission approved the first publicly traded bitcoin funds. According to Coinmarketcap.com, the cryptocurrency reached the $70,000 mark in March.

    As crypto proponents were buoyed by Donald Trump’s victory in the US presidential election this month, the price of bitcoin hit a record $80,000 less than two weeks ago.

    And as of Monday this week, it was trading above $90,000.

    Bitcoin evangelists are confident that the price will continue to rise as they anticipate a friendlier regulatory environment under the new administration. Many think Bitcoin is a great tool for building generational wealth. And some are even advocating that the US create a strategic bitcoin reserve, which Michael Saylor, executive chairman of MicroStrategy, told CNBC is a way for the US to “buy the future.”

    In the first decade after bitcoin’s creation in 2009, the financial planning world was reluctant to consider crypto assets as a serious option for most individual investors. But in recent years, education about crypto assets has become more available to professionals. The Financial Planning Association, for example, now offers three continuing education courses on crypto, according to FPA President-elect Paul Brahim.

    So it’s easy to wonder if it might be time to consider investing in bitcoin. We first reached out to some financial advisors to see what guidance they offer to clients who are interested.

    Bitcoin is the oldest and best known of all cryptocurrencies. Its creator – the always anonymous Satoshi Nakamoto – set it up so that there can never be more than 21 million bitcoins in existence.

    Unlike other assets that are valued based on tangible components – for example, a company’s goods and services or a natural resource – bitcoin is considered a store of value whose price depends strictly on what others are willing to pay for it.

    Its pricing is highly volatile – and therefore very risky. For all its nosebleed rises, bitcoin has also had some heartbreaking plunges. For example, between November 2021 and November 2022, the price of bitcoin fell 75%, from $64,455 to $16,196, according to data on Coinmarketcap.com.

    Although it is called a currency — and can be used as money in some cases — bitcoin is not legal tender in the United States or most other countries. And it’s a much more complicated transaction for the person using it to buy and sell things, especially when it comes to reporting the transactions on their taxes.

    When asked what role bitcoin could play in a person’s overall financial investment and savings portfolio – which you could use to buy a house, start a family, pay for college or save for retirement – is a strong point of consensus among planners not to invest money. money in bitcoin for everything you need to do in the next five years.

    “Due to the volatility, I would definitely avoid using bitcoin for short-term savings goals. And for the same reason, I would recommend only allocating a very small percentage of my long-term investment strategy to it,” says Trent Porter, a certified financial planner and certified public accountant at Priority Financial Partners. He advises his clients who insist on exposure to limit their portfolio allocation to bitcoin to no more than 5%.

    CFP Mike Turi, one of the founders of Upbeat Wealth and also a certified portfolio management advisor, is more conservative. He doesn’t recommend clients allocate more than 3% to bitcoin, if at all.

    “I would not recommend using bitcoin as the main strategy to achieve your financial goals. If it’s extra investable money that can help you get there faster? Certainly. However, don’t miss valuable opportunities by over-exposing yourself to something you may not fully understand,” says Turi.

    From Pulse Financial Planning CFP Matt Elliott’s perspective, tax-advantaged 529 plans will always be the better option for college because they can be diversified and carry less risk. “It’s one thing to bet your money on crypto, and another to bet a child’s college tuition on it,” he said.

    However, Elliott sees a small role for bitcoin in a long-term retirement portfolio. He advises his clients to use a ‘core and explore’ strategy. “Ninety-five percent of your assets should be in a well-diversified core portfolio designed with your time frame and risk tolerance in mind. The remaining 5% can be used for more speculative investments (like crypto) if you have little debt and are willing to accept the risk of losing what you put in,” he said.

    Whether bitcoin makes sense for you depends as much on your circumstances and preferences as it does on the facts of the asset itself.

    “Before you invest in bitcoin for any reason, ask yourself if it fell 50% or more, would you remain in the pinch? If the answer is yes, you should reconsider,” says Porter, who notes that even if regulatory risk for crypto assets declines during the Trump administration, “the overall risk has not changed significantly in any way.”

    Turi suggests getting realistic with what you can live with. “I still see bitcoin more as a gamble than as a reliable investment. Is it a risk you can afford? Consult your future self. What happens if it doesn’t work out?” he said.

    If you do invest, set some ground rules for yourself from the start. “The most challenging aspect of the Bitcoin craze is that more retail investors are entering the market at its peak when the euphoria is at its highest,” Turi said. “On the other hand, they never really put an exit strategy in place. …Investors must determine their exit price to avoid being driven by emotions.”

    If you decide you want to put some money into bitcoin, you can buy it directly and store it in your own virtual wallet or on a digital asset platform like Coinbase. But both options can become complicated and involve risks. (Here’s a long list of storage options and their pros and cons.)

    Or you can access it more easily and securely by purchasing one of the new SEC-regulated spot bitcoin ETFs. Investors have poured nearly $28 billion net into these ETFs, and their combined net asset value approached $96 billion on Friday, according to data from Morningstar Direct.

    Using a bitcoin ETF for exposure is the easiest option for most people who are not dedicated crypto investment experts.

    “Due to risks such as cyber threats and the possibility of losing private keys, holding bitcoin through an SEC-regulated ETF is by far the safest option,” Porter said.

    Vaseline
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