Cryptocurrency – a term you’ve likely heard in recent years as its popularity continues to grow. Many individuals and businesses are eager to get a taste of this “digital gold.” However, before making a move, it’s important you understand cryptocurrency, how it fits within your portfolio, and what the future holds for this high-risk, high-reward asset.
In this latest installment of Empowered Chats, we sat down with Jim Carpp, chief digital officer, and Simon Micakaj*, C(K)P, CHSA, retirement plan advisor, to discuss cryptocurrency and how to navigate today’s modern world of assets.
What is cryptocurrency? Cryptocurrencies are represented by a token, which is issued by a distributed ledger called a blockchain. Similar to how we see the stock market fluctuate, the value of cryptocurrencies can go up and down. It’s very possible that a coin could lose 95% of its value and this is where high risk, high reward comes into play. You may have also heard of NFTs or non-fungible tokens. These are a form of digital representation of an asset. Artwork, baseball cards, and even real estate can be put onto a blockchain to show proof of ownership for that asset. With over 18,000 cryptocurrency coins and a plethora of NFTs available with the prospect of high reward, it is a very enticing opportunity.
Investing in cryptocurrency. Time is your friend when it comes to investing in cryptocurrency. Cryptocurrency is an asset, and just like any other asset, the hope is that it grows with time. Therefore, when investing in cryptocurrency, be prepared for the highs and lows that come with it and give yourself time for that asset to grow. More time also allows for more opportunity to analyze what is happening in the market. This is important as the correlation between the stock market and cryptocurrency is tightening, especially in tech stocks. Portfolio diversification is also key when investing, so be sure not to put all your eggs in one basket.
Buyer beware. Currently, cryptocurrency is generally outside the jurisdiction of the U.S. federal government. This freedom brings unmatched opportunity in the U.S. market for potential buyers. However, it also creates a speculative and volatile market. Unlike the central bank which is a centralized entity with regulations, cryptocurrency is decentralized and lacking regulation. Without regulation, it’s possible to see things go sideways with cryptocurrency.
The Terra Luna coin, which is pegged to the United States Treasury (UST) – the UST runs off an algorithm and serves as Terra Luna’s stable coin – experienced a volatile situation. The issue in this instance was you could trade between the Terra Luna and UST; eventually, when UST dropped below its stable price, everyone began trading their Terra Luna in for UST, resulting in the disappearance of billions of dollars.
This is just one example and it’s not to say that cryptocurrency is bad. However, it may be an indicator that regulation is needed. China oversees their crypto assets via a single digital platform and controls when and how users spend their assets. The U.S. market may not require regulation of that capacity, however the U.S. Securities and Exchange Commission (SEC), several additional governmental agencies, and legislators all are looking at developing a regulatory strategy of some sort. Until then, be cautious and understand that the cryptocurrency market can be the wild west.
Metrics to consider before investing in coins. You now understand what cryptocurrency is and have a grasp of it risks and rewards. Now you’re eager to start buying coins. What are some principles that can guide you?
- Understand what the use case is for the coin. The use case will determine the coin’s adoption.
- Know what the future is for the coin and its development. Is there a team of developers working on the coin who have proven their abilities? Knowing the team of developers tells you who you’re investing in.
- Take the time to educate yourself. Every crypto coin will have a white paper that will provide info on the development team and the projects roadmap. Coinmarketcap.com is a great resource for learning more about cryptocurrencies.
At the end of the day, only risk what you can afford to lose, be patient, and be brave. Although it’s possible that cryptocurrency market will experience a crooked path with a few more highs and lows along the way, we believe it’s here to stay and may even change how we understand and interact with currency. Rehmann advisors like Jim and Simon are knowledgeable and ready to help you navigate today’s world of modern assets. Contact us today to get in touch with an advisor!
Securities offered through Rehmann Financial Network, LLC, member FINRA/SIPC. Investment advisory services offered through Rehmann Financial, a Registered Investment Advisor.
