Should I Tiptoe into Crypto? 10 FAQ's with a Financial Planner

Cryptocurrencies have had an incredible decade. Use, adoption and prices have experienced substantial growth since their respective births following the global financial crisis. With their growing popularity, we’ve begun to field several questions on Cryptocurrencies in recent years. We hoped it might be helpful to share some of the questions we get from friends and family, along with our thoughts.

As always- everyone’s situation is unique and our thoughts are for informational purposes only, Potential Investors should do their own research. We do not recommend owning Cryptocurrencies in traditional investment portfolios. None of these answers should be considered financial advice:

What is Bitcoin?
Bitcoin is a cryptocurrency, a form of digital money backed by cryptography. Fidelity has a comprehensive primer worth reading here: Bitcoin Background and Primer | Fidelity
How can I buy Bitcoin?
There are several ways to buy Bitcoin, Ethereum or various other Cryptocurrencies. The most popular (and most reputable) is through a large exchange such as Coinbase or Gemini (both are multi-billion dollar businesses). Both will set up an account (which you can link to your bank) and charge a commission on purchases or sales. They will then hold custody of your crypto through a private “wallet” until you choose to sell it or send it to another wallet address.
Can I Add Crypto To My Investment Portfolio?
Yes and No. Currently, there are no pure (or great) ways to add it to an investment portfolio. There are a few Bitcoin ETF’s which are backed by derivatives, and a mutual fund which holds Bitcoin (but has high fees and trouble tracking the spot price accurately). It appears the SEC will not be approving a spot-price Bitcoin ETF any time soon.
Some custodians are allowing high net worth clients to add it to their portfolio in some form, but the fees are more costly than buying it for a one-time commission and holding it directly in a digital wallet.
Should I Add One of Those Funds to My Investment Portfolio?
Our opinion is that clients should not own it within their investment portfolio. Rather, it makes more financial sense to own it in a digital wallet through a big exchange such as Coinbase or Gemini instead for several reasons Including Fees, Taxes, Centralization and Posession
What’s a Good Comparison For Bitcoin?
Bitcoin is viewed by many as being digital gold: There’s a limited supply (21 Million), as a decentralized currency it’s a potential inflation hedge. The blockchain it runs on is very good at tracking how many Bitcoin there are, and which wallets own them.
While it has no intrinsic value, enough people believe it’s worth something that it has seen value growth over time. The price will likely vary with demand, like all commodities do.
How Do You View Ethereum?
Ethereum has a supply which can grow over time based on usage. What makes Etherum unique, is that it’s transactions are more complex than Bitcoin. Etherum’s transactions are “smart contracts”, which allow people to record data as part of the transfer of money.
For example: an Ethereum-Based Sale of Digital Art (such as an NFT) can track ownership and include partial proceeds to the original artist every time the art piece is sold. Imagine how wealthy Picasso’s heirs would be if they continually collected 5% commissions every time his pieces went to auction.
Transfers of property through Ethereum also eliminate the need for a middleman or trustee (such as a modern-day title company), since the transfer of money and ownership record possession.
Because of it’s unique properties, Etherum has proven to be the backbone of several new web projects. Several venture capitalists view it a less of a commodity and more of a call option on the future protocol of the internet.
Is Bitcoin a Safe Investment?
Bitcoin has seen several crashes of over 50%, including a 70% crash last year. It’s incredibly volatile and we wouldn’t expect that to change anytime soon.
How Much Should I Invest In Cryptocurrency?
Before investing, expect regular overnight crashes, and understand that there are several risks from competing cryptocurrencies, governmental intervention and slowing use.
If you’re looking to get your feet wet, 1-2% of your investable assets would be a reasonable starting point. Not enough to make a killing or get killed (as Nick Murray once said).
How Are Cryptocurrencies Taxed?
As property, with accompanying capital gain and loss provisions. You can read more from the IRS HERE.
Where Can I Learn More About Cryptocurrencies?
There are several highly opinionated people you could follow on the internet, but Coindesk.com aggregates several news sources and has roughly 15 million readers per month.