Having a good investment portfolio is part patience and part understanding the current state of the economy. An important piece of the puzzle is: where is the money and where is it going? The latest wave of curiosities comes in digital form, like crypto-currencies. Think Bitcoin, but also Ethereum, Ripple and Litecoin! Everyone is asking if it’s a scam, a risky gamble, or a future windfall worth considering for investments?
The short answer: All 3. The long is answer is a bit more complex.
Let’s start with what “Cryptos” are not. They are not imaginary money. Cryptos (the real ones at least), are a form of ledger technology that records transactions, whether it’s sales, accounting ledgers, proxy votes for corporations, or classified information. It then protects the information behind layers of encryption, and is verified on a peer to peer network of computers around the world. It is decentralized, meaning there is no single computer to hack, or computer to steal to obtain the information. Blockchain technology is transparent and incorruptible.
Cryptos have value, which means they can certainly be profitable. For accounting purposes they are not “currency” but treated as assets. In the eyes of the IRS, when you buy or sell there is basis, and a loss or gain.
So is it a scam you ask? No, not really. But there are scam “coins” out there, companies that invented some coin or fraudulent crypto-currency to falsely entice you into giving them money with no intention to provide the ledger or to continue encryption. Scams are prevalent in any industry, especially in any digital industry, where it is easy to remain anonymous and transactions are instantaneous. So naturally scam artists and crooks jumped on the crypto boom of the last few years. Remember, that when evaluating any investment, it is important to be cautious, and properly educated.
Having been invented in 2009, at this point crypto-currency as a concept is not a gamble. It has proven itself to be of value, being adopted for use in several banks and many other businesses for obvious reasons. However, betting on an individual crypto-currency could be seen as risky. Betting on retail stocks could be seen as risky too. Back in 1995 picking Amazon vs Sears was a gamble. Retail is still with us (and so is Amazon) but Sears is closing its doors. It’s the same with crypto-currencies, the technology will not go away, but who knows for sure today which “coin” will be victorious and end up the winner?
Why are cryptos so volatile? Well the simple answer is there is no good metric for its valuation. People are either buying it in the hope that eventually the valuation of the crypto will be higher than what it was purchased for, or they are selling it because they do not believe it will go any higher than what it is currently worth, (which is generally what happens with short term investors when the fascination of any investment wears off).
The important question to ask your financial advisor is: should crypto-currencies be a part of a well rounded investment portfolio? In today’s market, it is still a high risk investment with potential for significant loss. Most investors continue to have difficulty understanding what it is or how to obtain it. You cannot simply ask a broker to put it in your investment account. You need to open an account with a crypto-currency trading desk, fund the account, and trade from there; which means more research into the different providers to make sure they are not fraudulent. All that being said, even if you have a high tolerance for risk, crypto-currency should not represent a significant portion of your investment portfolio.
The point is, everyday new technology, investment products, and financial opportunities present themselves, each ultimately bringing profit or loss. It is our personal responsibility to educate ourselves about these opportunities before committing to them, and if we are educated decision makers, our chances of reaping profits somewhere along the line is greater.
Feel free to contact, Cory Lyon, directly at 561-209-1120, with any questions regarding crypto-currencies or other financial investment strategies. At TFG, we believe in customized investment portfolio design and personalized asset management. I act as a fiduciary for my clients.
