Although cryptocurrencies have only been around for a short time, it is pretty clear that they are here to stay. As a financial advisor, we would like to share our guidelines on investing responsibly in cryptocurrencies in Betterment, if you want to do something like that.
Fortunately, Betterment has a set of five universal investment policies that serve as a guide for investment advice to our 1,000,000,000 customers and can help you make educated decisions about cryptocurrency.
1. Make a personalized plan.
As an investor, you have your own unique goals and values. Depending on those goals and values, the role that cryptocurrency plays in your overall financial plan – if it has any at all – will be different.
Let’s start with your personal values. Many people are fans of cryptocurrencies, because the value of their assets is in addition to the possibility of going to the “moon”. You may be fascinated with crypto from an engineering perspective, or maybe for social impact.
In the end, it’s okay to invest your money in a way that reflects your personal values; Just do it in a known, principled manner.
The second element of personalization is your financial goals. How and when to apply cryptocurrency to your portfolio will also affect your goals.
For example, if your child is going to college next year, their tuition money should probably not be invested 100% in Dogcoin. Volatility is much greater for short-term goals. Similarly, you shouldn’t put emergency funds in Bitcoin either, as it has experienced large price changes over the past few years.
But, if you have a playing account by your side, or a long-term goal where you are able to endure more ups / downs, cryptocurrency can be a suitable component of your portfolio.
The overall point is that, like any other investment, there is no one-size-fits-all answer: the best financial advice includes each person’s unique goals and values.
2. Diversify your investment.
Even if cryptocurrency as an asset class could exist here, it is impossible to know which cryptocurrency will prosper and which will become extinct. There are currently more than 4,000 unique cryptocurrencies, with new currencies appearing every week. It will probably fail a lot, if not more.
With any kind of investment, “putting all your eggs in one basket” is not a wise thing to do. This is why diversity is an important part of any financial plan.
By early 2021, the cryptocurrency market had surpassed ১ 1 trillion for the first time. It’s quite an achievement. But when compared to the size of the global stock and bond markets, we see how new and small the cryptocurrency is.
All cryptocurrencies account for only 0.5% of the total stock and bond markets worldwide, exceeding $ 200 trillion.
Global market capitalization of stocks, bonds and cryptocurrencies
Source: Reuters and Sifma
Our recommended investment portfolios do not include cryptocurrency improvements, but if you decide to invest in cryptocurrencies, they should be moderate.
If you adopt a market capitalization approach, crypto will be about 0.5% of your overall portfolio. Even if you are very passionate about crypto, Improvements It is not recommended to exceed a maximum of 10% of your portfolio. We recommend diversifying across multiple cryptocurrencies.
3. Prepare your taxes.
Tax management is part of any investment strategy. After all, it’s not what you earn, it’s what you keep.
When it comes to taxing cryptocurrencies, the term that best describes them is “misleading”. If you are going to invest in crypto, be sure to comply with all relevant laws and reporting requirements.
The IRS has published an FAQ page that addresses the most common questions, such as:
- How are virtual currencies used for federal income tax purposes?
- Will I recognize profit or loss when I sell my virtual currency?
- Where do I report my capital gains or losses for virtual currencies?
If you invest in crypto, the strategy you can consider for tax management is tax loss harvesting.
Advanced applies this strategy when flipping a switch for our investment customers and we have automated the process so that our customers do not have to do it manually. For example, losses that can be used to offset the gains on your cryptocurrency investment can be used.
4. Overall cost and price weight.
With all the hype and talk of double-even triple-digit growth in the world of cryptocurrencies, it’s easy to forget the potential costs that come from their investment.
Overall costs incurred, not only include how much you pay out of pocket, but also the quality of your business implementation and the opportunity cost of your time.
Depending on where you buy and sell cryptocurrencies, you can pay a transaction fee of more than 1% for each trade. New cryptocurrencies, or those that do not trade very often, may have large bid-ask spreads. This means that you have to spend more to buy less than the price at which you can sell your cryptocurrency.
Lastly, when it comes to big price changes, you must be careful about executing orders. All of these direct or indirect costs can take you back home from a tripping cryptocurrency.
5. Increase investment discipline.
Warren Buffett is famous for saying that the market is “a tool to transfer money from impatience to the patient.” He was referring to the stock market, but this also applies to the cryptocurrency market.
Almost all investments have ups and downs and the cryptocurrency market is no different. Bitcoin lost 80% of its value in 2018, more than 1,000 currencies failed, and fraud stories are not hard to find. These challenges – price shock, bankruptcy, panic, theft – are not unique to crypto; However, due to new technology, lack of control and intense media publicity around the cryptocurrency market, the risk has increased.
You must be willing to HODL even if your portfolio is declining. As an asset class, cryptocurrencies are highly volatile, and it will probably be the well-organized investors who will be rewarded. Before you buy a crypto, make sure it is suitable for your risk tolerance, and have a plan for you if you encounter instability.
Manage your investments purposefully.
Cryptocurrency is a fancy type of investment, and carries many risks. This is why it is important to have a clear set of investment policies. These policies can help guide your investment decisions and help you avoid falling into the trap of news coverage of particular cryptocurrencies.
Although Betterment does not include cryptocurrencies in our portfolio, we acknowledge that many investors want to own them. If you are one of those people, hopefully these five principles will help you determine if you need to invest your investment portfolio in cryptocurrency.
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the CFP: Certification Mark, Certified Financial Planner ™ Certification Mark and CFP: Certification Mark (with plaque design) logo, which allows it to be used. By individuals who successfully meet the CFP Board’s initial and ongoing certification requirements.