Should you join the cryptocurrency craze? If you’re considering it, you aren’t alone. In a recent survey of more than 500 financial advisers, nearly half said clients have asked them about investing in crypto compared with 17% in 2020. About 14% of advisers surveyed said they use or recommend it, compared with fewer than 1% last year. But there is more you need to know.
KEY TAKEAWAYS:
1. Start small.
Among those advisers who recommend cryptocurrency for some clients, most suggest sticking to a small allocation, on the order of 1% to 2%. Consider buying a fixed amount at regular intervals until reaching your desired allocation. This strategy reduces the chances of buying at a market high. Anything over 1% of a portfolio is “an aggressive allocation” given that cryptocurrency represents just 0.5% of the value of global stocks and bonds, says Dan Egan, vice president of behavioral finance and investing at Betterment, an online advisory firm.
2. Be ready for the risk.
Because cryptocurrency is highly volatile, adding even a small amount to a portfolio may require you to revamp your asset allocation, reducing exposure to other risky investments including stocks, said Mr. Egan. Roger Aliaga-Diaz, head of portfolio construction at Vanguard Group, says “it is a volatile investment prone to speculation that doesn’t belong in a prudent, well-balanced investment portfolio.”
3. Do your research.
Reflect on your goals and strategies. Do you want to stick with bitcoin or try lesser-known currencies? Do you plan to buy and hold it or rebalance your portfolio often? Can you absorb any potential losses? Will you have to revamp your asset allocation? Will you hold it in your IRA so you can reinvest profits tax-free or will you hold it in a taxable account? Talk to a financial adviser and make sure to check off all your planning boxes before you dive in. Cryptocurrency scams are common.
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