By Damon Poeter
You’ve probably read or heard about cryptocurrency and may have asked asked yourself if it’s worth investing in. If so, you’re not alone.
As cryptocurrencies like bitcoin and Ethereum gain popularity and legitimacy, many folks are wondering if they should take the plunge and invest. It’s a question USAA financial advisors are hearing more frequently.
“So far, we’ve taken a pretty conservative view on investing in cryptocurrency,” says Robert Steen, USAA advice director for retirement and complex financial planning. “But the question keeps coming back as we've seen the prices of cryptocurrency rise and fall over the past few years."
But what exactly is cryptocurrency and where did it come from?
Cryptocurrency was conceived as an alternative to standard currencies like the U.S. dollar, the Mexican peso or the euro. Except this one would be digital, and not state-issued and regulated. Efforts to create such a currency date back to at least the mid-1990s but ran into trouble because early versions could be copied just like any other digital file. That problem was fixed with a technology called “blockchain,” which secures cryptocurrency transactions and prevents counterfeiting.
You can buy cryptocurrency on exchanges with dollars and then cash it in for dollars again if the price goes up. It seems pretty straightforward, but Steen’s advice is to treat cryptocurrency investment with lots of caution.
"Currently, cryptocurrency is a highly volatile, or speculative, type of investment. Any investment should be approached with caution, and this is especially true in the case of cryptocurrency,” he says.
For many novice investors, a rewarding strategy for exploring cryptocurrency is to invest a small, disposable amount of cash. How much you can afford to part with is up to you, but many cryptocurrency newbies start with stakes as low as $20 to $50.
“Cryptocurrency may not fit in an average person’s portfolio, and you should be a very experienced investor to take on any kind of speculative investment,” Steen says.
If you do buy a stake, beware of the temptation to risk more money than you can afford to lose if your investment grows. Cryptocurrencies may offer investors really big gains in a very short amount of time. But they may also send you reeling when the roller-coaster ride plummets to the ground.
A big reason veteran financial advisors are wary of cryptocurrencies is they see similarities between products like bitcoin and boom-and-bust “bubble” markets of the past.
Though “a lot of people may say it’s different this time,” Steen says the rise of cryptocurrencies could share similarities to historical investing bubbles such as the dot-com and housing bubbles of recent decades. Some observers note parallels to the granddaddy of speculative bubbles, Tulipmania, a period of a few months in 1636-37 when the price of exotic tulip bulbs in Holland shot up to extreme highs and crashed nearly overnight.
Those bubbles were quite profitable for some investors for a while, but when they burst, they left a lot more people holding the bag, Steen notes.
“You may have a very high ‘risk tolerance,’ but what’s your capacity for risk? Although a good way to learn about investing is to have some skin in the game, it can be a real severe lesson if you overdo it,” he says.
Another growing concern for cryptocurrency investors is the rise of scams, Ponzi schemes and inferior products being offered. Keep an eye out for deals that look too good to be true.
Many experts believe blockchain, the underlying technology that makes cryptocurrencies work, is destined to become more prevalent across many industries, ranging from media and entertainment to data processing and health care. That’s worth keeping an eye on, Steen says, because the expansion and versatility of blockchain should help legitimize cryptocurrencies and bring more discipline to exchanges.
“Cryptocurrency probably isn’t going away, and it will likely be more regulated,” he says. “With that, it may be hard to maintain this type of Wild West growth and volatility. Some people who can’t afford to may get all this really wrong, and those are the people I really worry about.”
Robert Steen, CFP®, MBA is the enterprise advice director for retirement and complex financial planning at USAA. Robert serves as the advice professional on topics such as maximizing retirement savings, establishing a retirement income plan, managing financial needs during retirement, estate/trust/inheritance tax planning, charitable gifting and distribution of assets.
This material is for informational purposes only and is subject to change at any time due to market or economic conditions.
Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and CERTIFIED FINANCIAL PLANNER™ in the United States, which it awards to individuals who successfully complete the CFP Board’s initial and ongoing certification requirements.
Financial advice provided by USAA Financial Advisors, Inc. (FAI), a registered broker-dealer, USAA Investment Management Company (IMCO), a registered broker-dealer, and for insurance, USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # OE36312). Investment products and services offered by IMCO and FAI. Life insurance and annuities provided by USAA Life Insurance Co., San Antonio, TX, and in NY by USAA Life Insurance Co of New York, Highland falls, NY. Other life and health insurance from select companies offered through USAA Life General Agency, Inc. (known in CA (license #0782231) and in NY as USAA Health and Life Insurance Agency). Banking products offered by USAA Federal Savings Bank and USAA Savings Bank, both FDIC insured. Trust services provided by USAA Federal Savings Bank.
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