Unless you have been hiding in a cave (or quarantining to the most extreme levels), you have heard about some form of cryptocurrency. Bitcoin would be the largest and most popular name you might have heard. And you might be surprised to learn that there are currently over 6,000 forms of cryptocurrency!
That said, what are we to do, if anything? We have compiled some items to consider regarding this popular topic.
1. Understand exactly what cryptocurrency is. Cryptocurrency is a form of digital payment that can be exchanged online for goods or services (nerdwallet.com). Basically, it is a digital currency which is different from our paper currency. This digital currency is not backed by a central bank or the good faith of a country such as the U.S.A.
2. Cryptocurrency is a speculative investment. What does “speculative” mean? Per marketbusinessnews.com, a speculative investment is “one with a high degree of risk where the focus of the purchaser is on price fluctuations. The investor buys the tradable good (financial instrument) in an attempt to profit from market value changes.”
“Speculative investments are long-term investments rooted in a thesis that’s not currently provable – but could become provable in the future.” (investmentu.com)
In short, there is a high risk of opportunity and loss.
3. Understand your risk tolerance. Are you an investor who likes to take risks? Your past investment behavior is a strong indicator of your risk tolerance. How did you feel/react during the dot.com bubble in the late 90’s and early 2000’s? Or the Great Recession in the late 2000’s? Or more recently, the first quarter of 2020 during the coronavirus pandemic?
These recessions greatly affected large, stable companies across the world. We experienced extreme market volatility across most every asset class. With speculative investing, you are subject to even more volatility on a regular basis. Can you handle this type of investing?
4.Understand your goals and financial plan. In our combined decades of financial planning experience, we have found having a personalized financial plan as the most effective way to address concerns of market volatility. Does your personalized plan require the need for speculative investing to meet your goals? If not, consider why you would want to take on market risk that your plan does not require.
To use a baseball analogy: If your financial plan requires bunts, singles and an occasional double to meet your needed investment rate of return, we are not going to set up your portfolio to swing for the fences!
In summary, this article is not a recommendation to buy or not buy cryptocurrency. Our goal is to help you better understand what cryptocurrency is and whether or not it fits into your financial plan. (In full disclosure, our compliance department does not allow us to recommend cryptocurrency as an investment as it is currently in the speculative category.)
We will leave you with a quote from a highly successful investor when asked about how to get rich quickly: “As to how to get rich quickly, I do not know. But I do know how to get poor quickly – try to get rich quickly.”
*For financial planning clients of Rivertree Financial Planning: Please contact us as soon as possible if you have had any changes in circumstances, objectives, goals or risk tolerance.