Bitcoin is the latest craze in the world of online trading and investment strategies. Some people have been turning to Bitcoin to invest for retirement or grow their money, to varying degrees of success. You may have heard of people making fortunes in Bitcoin and are now wondering if you should try to get on board with the crypto craze and make a few bucks yourself.
But what exactly is a cryptocurrency, and should it be a part of your retirement portfolio?
What Is Cryptocurrency?
Cryptocurrency is a digital currency. While some of them can be used to make actual purchases, many are held solely for investment purposes. Essentially, you exchange real money for digital currency with ownership stakes and trades etched in a decentralized blockchain ledger. The cryptographic nature of the Bitcoin mining process and the decentralization of the blockchain means Bitcoin can’t be counterfeited, but it can potentially be stolen by hackers.
How Does Cryptocurrency Work?
The inherent risk and earnings potential of cryptocurrency has to do with fluctuations in the exchange rate. When you go to another country and swap your dollars for another currency, you may lose or gain money depending on the exchange rate and how valuable the foreign currency is.
Cryptocurrencies operate in a similar fashion, but the exchange rate fluctuations are much more unpredictable and volatile than traditional government-backed currencies. This is mainly because cryptocurrencies are decentralized, meaning banks and governments have no control over their value or how they’re exchanged.
Bitcoin remains the dominant cryptocurrency, mainly due to its high value, but there are several other options like Ethereum, Binance, Tether and more.
Is Cryptocurrency an Asset Class?
Yes, Bitcoin’s transition from obscurity to mainstream use, as well as the many upstart cryptocurrencies that have sprouted in its wake, have made cryptocurrency one of the fastest growing asset classes. An asset class is a grouping of similar financial securities. For example, cash is a type of asset class consisting of liquid funds, savings accounts and hard cash.
Although it may be tempting to lump crypto in with cash and cash equivalents, its decentralized nature, the way it’s exchanged and its reliance on blockchain technologies instead of government central banks makes it unique enough to stand on its own.
As a result, more people are considering diversifying their investment portfolios with Bitcoin and other more affordable cryptocurrencies.
Is Cryptocurrency a Wise Investment?
Whether Bitcoin should be in your investment portfolio is dependent on a lot of investment factors and risk tolerances that are unique to you. However, before you exchange your dollars for Bitcoin or another cryptocurrency, there are a few things you should know before deciding to buy.
Cryptocurrencies are subject to extreme fluctuations. This could lead to significant gains or devastating losses depending on where you are in your crypto investment journey. More hopes have been dashed thanks to crypto in recent years than just about any other investment opportunity. This is partially because inexperienced investors, often young people, have seen cryptocurrencies (as well as things like NFTs) as low-risk ways to get rich quick.
Unlike equities where valuations and investment outlooks are based on tangible things like balance sheets, consumer demand, intellectual property, business governance, etc., cryptocurrency valuations are based solely on demand.
Although the cost of an equity, bond or commodity can’t be perfectly predicted by its underlying fundamentals, those can at least inform market valuations. Cryptocurrencies generally don’t have that luxury.
If you have money to spare and enjoy risky “gambling,” Bitcoin and other cryptocurrencies may be a fun alternative to equities. However, if you’re looking for a steady, reliable and more predictable retirement investment, you may want to consider other options. That doesn’t mean its bad to have any cryptocurrency exposure in your portfolio, but you should speak with a financial advisor to ensure you’re minimizing your risk.
Cryptocurrency is also an attractive target for online fraudsters. Scammers and hackers may find it easy to get ahold of your personal information and drain your entire digital wallet. While traditional banks and financial institutions take great measures to protect you from fraud, and are usually insured, cryptocurrencies aren’t government-regulated, thus there is no guarantee you’d ever get your money back.
Thinking About Diversifying Your Investment Portfolio? Get Help From an Experienced Financial Planner in Arizona
Knowing where and how to invest your money can be a daunting task, especially when you and your family’s future relies upon the outcome of your choices. You don’t have to go through this process alone. At Fullerton Financial Planning, our financial advisors will help you secure your future finances by discussing various investment options to ensure your portfolio reflects your unique life goals.
For more information, call our Peoria office at (623) 974-0300, our Tempe office at (480) 912-4500 or fill out our pre-appointment form.
