Cryptocurrency Investment: Should You Follow The Crowd?

Cryptocurrency has evolved from a niche interest to a mainstream financial topic, with approvals for crypto futures exchange-traded funds (ETFs) quickly followed by funds for spot bitcoin and ether ETFs in the early 2020s. As a financial advisor, you can't avoid questions about these and other digital assets from your clients. As your clients' trusted partner, ignoring this major shift is no longer an option.

The SEC's approval of bitcoin and ether ETFs marks a major shift in the regulatory landscape. Yet, most financial advisors still won't discuss cryptocurrencies with their clients. A July 2024 study by Cerulli Associates found that only 13.7% of financial advisors use or discuss cryptocurrency with their clients. Despite early 2020s approvals of crypto ETFs, the SEC has expressed concerns about endemic fraud in the sector. Advisors must navigate these challenges by staying informed, educating clients, and maintaining a cautious but open approach to crypto investments.

Should I trust online sources for investment advice?

When it comes to investing in cryptocurrencies, it is essential to exercise caution and conduct thorough research before making any decisions. While online sources can provide a wealth of information, it is important to approach them with a critical eye. Here are some key considerations to keep in mind when evaluating online investment advice:

Understand the Risks

Before investing in cryptocurrencies, it is crucial to have a comprehensive understanding of the risks involved. Cryptocurrencies are highly volatile and speculative, making them susceptible to rapid and significant price fluctuations. As such, it is important to only invest money you can afford to lose. Additionally, the cryptocurrency market is prone to scams and fraudulent activities, so it is essential to be vigilant and informed to avoid becoming a victim of these schemes.

Diversify Your Investments

Diversification is a fundamental principle of investing. By diversifying your portfolio across various assets, including stocks, real estate, and cryptocurrencies, you can mitigate the risk associated with any single investment. This strategy helps protect your overall financial well-being, even if one particular investment performs poorly.

Conduct Thorough Research

When considering investment advice from online sources, it is crucial to verify the information and conduct your own research. Reputable online platforms, such as Investopedia, offer extensive resources and educational content to help investors make informed decisions. It is important to understand the investment case for each cryptocurrency and assess its potential upside and downside. Additionally, whitepapers published by cryptocurrency projects can provide valuable insights into their technology, use cases, and business models.

Seek Expert Advice

While online sources can provide a valuable starting point, it is advisable to consult with certified financial advisors or crypto advisors who have specific expertise in the field. These professionals can offer personalised guidance based on your financial goals and risk tolerance. They can also help you navigate the complex regulatory and tax landscape surrounding cryptocurrencies.

Stay Informed and Adaptable

The cryptocurrency landscape is constantly evolving, with new developments and regulatory changes occurring frequently. It is important for investors to stay informed about these changes and their potential impact on their investments. Additionally, maintaining open conversations about crypto with trusted advisors can demonstrate adaptability and help make more informed investment decisions.

In conclusion, while online sources can provide a valuable starting point for learning about cryptocurrency investments, it is essential to approach them with caution. Conducting thorough research, seeking expert advice, and diversifying your investments are key to making informed decisions and managing the risks associated with this volatile market. By staying informed and adaptable, investors can better navigate the complex world of cryptocurrencies.

How do I find a credible crypto financial advisor?

When considering a crypto financial advisor, it is important to remember that this is a relatively new field, and the cryptocurrency market is highly volatile. As such, it is crucial to find an advisor with a proven track record of success who can guide you through the complex world of crypto investments. Here are some strategies to help you find a credible crypto financial advisor:

• Research Certifications and Qualifications: Look for advisors with specialised crypto certifications, such as the Certified Digital Asset Advisor (CDAA) or Certified Blockchain Expert. These certifications demonstrate a strong understanding of the crypto space and adherence to industry best practices. Also, consider their educational background and any relevant degrees or courses they have completed.
• Seek Recommendations and Referrals: Ask fellow investors or professionals in the financial industry for referrals. Engage with online forums and communities dedicated to cryptocurrencies to gather recommendations, but always verify the credibility of these sources.
• Evaluate Experience and Track Record: Assess the advisor's experience and performance in the crypto market. While finding data on investment performance may be challenging, look for advisors with a significant presence in the industry. Experience brings valuable insights and the ability to navigate volatile market conditions successfully.
• Interview Potential Advisors: During the interview process, ask relevant questions to gauge their expertise and suitability. Inquire about their certifications, how they stay updated on crypto developments, their risk management strategies, and how they customise their advice to align with your investment goals and risk tolerance.
• Check for Crypto Services on their Website: A reputable advisor will likely advertise cryptocurrency services on their website, indicating that they have the confidence to market their knowledge in this field.
• Verify Credentials: Check the advisor's credentials with organisations such as the Financial Industry Regulatory Authority (FINRA), the Certified Financial Planner (CFP) Board of Standards, and other relevant membership bodies.
• Seek Testimonials and References: Request testimonials and references from the advisor's previous or current clients. This will provide insights into their working style, reliability, ethics, and effectiveness.
• Trust Your Instincts: Beyond qualifications and testimonials, trust your instincts and personal comfort level with the advisor. Financial discussions require a high level of trust, clear communication, and transparency. If an advisor seems dismissive, aggressive, or non-transparent, it may be a red flag.

What are the risks of investing in cryptocurrency?

Investing in cryptocurrencies carries a substantial degree of risk and is considered highly speculative. Here are some of the key risks you should be aware of:

Volatility and Manipulation

Cryptocurrency prices are highly volatile and subject to sharp and sudden moves. This volatility is driven by market sentiment, speculation, and potential manipulation by crypto exchanges, media owners, and influential investors. The unregulated and anonymous nature of digital asset markets contributes to price volatility.

Regulatory Uncertainty

Cryptocurrencies are currently unregulated by governments and central banks, leading to uncertainty about future restrictions and potential bans. The lack of clear regulatory frameworks also makes tax obligations unclear, deterring some investors.

Cybersecurity Threats and Scams

Cryptocurrency exchanges and personal wallets are vulnerable to hacking, phishing, and other malicious activities. Scammers and tricksters also target cryptocurrency holders, often through fake websites and phishing emails. It is crucial to practice good digital hygiene, such as setting strong passwords and enabling two-factor authentication.

Lost or Compromised Private Keys

Private keys are crucial for accessing and controlling your cryptocurrency holdings. If a private key is lost, destroyed, or compromised, you may lose access to your digital wallet and your cryptocurrencies. If acquired by a third party, they could gain access to your assets.

Technical Complexity and Human Error

Sending cryptocurrencies requires inputting a receiving address, which is a long string of numbers and letters. Even experienced users can make mistakes, and since blockchain transactions are irreversible, errors can result in permanent losses.

Forks and Discontinuation

Cryptocurrency trading is susceptible to additional risks, such as hard forks or discontinuation of projects. Forks can lead to substantial price volatility, and discontinuation of a project can negatively impact its value.

Centralization and Governance Risk

While blockchains and cryptocurrencies are decentralized, the business entities issuing them may not be. This reliance on a trusted entity introduces risks related to mismanagement, divergence of interests, or malicious actions by team members.

Slow-Down of Network

A high volume of transactions on a blockchain can lead to a slowdown, impacting the speed of transactions and potentially affecting the value of cryptocurrencies.

It is essential to understand these risks and conduct thorough research before investing in cryptocurrencies. Educating yourself, practicing good digital hygiene, and managing your risk are crucial steps to take when considering investing in this emerging market.

How do I invest in cryptocurrency?

Investing in cryptocurrency is risky, so it's important to do your research and not invest more money than you can afford to lose. Here is a step-by-step guide on how to invest in cryptocurrency:

Step 1: Choose what cryptocurrency to invest in

You'll want to understand and carefully evaluate the different, unique characteristics of each cryptocurrency you're considering for investment. You may choose to invest in one or several different cryptocurrencies.

Vetting cryptocurrencies can be more difficult because they have become a popular vehicle for fraud, such as pump-and-dump schemes. Those risks might leave you wondering how to invest in cryptocurrency without falling victim to a scam. In order to avoid pump-and-dump schemes, avoid smaller/newer cryptos that are being heavily promoted on social media platforms. It’s critical to analyze the investment risk of a given cryptocurrency and social media experts may not have your best interests in mind.

Step 2: Select a cryptocurrency exchange

Cryptocurrency must be bought through an exchange or investment platform, such as Coinbase, Gemini, or Kraken. Some factors you may wish to consider when selecting an exchange are security, fees, the volume of trading, minimum investment requirements, and the types of cryptocurrency available for purchase on a given exchange.

Step 3: Consider storage and digital wallet options

Cryptocurrency is completely digital, so you'll need a digital place to keep your coins safe. One choice is to keep them on the same platform where you’re investing. Just make sure you pick a platform that will be responsible for the custody and safekeeping of your assets. Such platforms are regulated, have strong protection against hackers and online threats, and carry financial insurance.

If you choose not to hold your cryptocurrency on the more popular platforms, you’ll need a crypto wallet; these hold the private keys that allow you to access your crypto by unlocking the digital identity that is associated with your ownership, recorded on the blockchain. You can opt for either a “hot” or “cold” digital wallet. A hot wallet is accessible via the internet and is generally more convenient. A cold wallet is a physical storage device, much like a USB drive, that keeps your cryptocurrency keys completely offline and is generally more secure. Holding your cryptocurrency in a wallet provides an extra layer of protection.

Step 4: Decide how much to invest

Just like any investment, the amount you choose to put into crypto will depend on many factors, such as your budget, risk tolerance, and investing strategy. You’ll also want to consider any minimum investment requirements and transaction costs, which vary across crypto exchanges.

If you want to invest in a cryptocurrency with a high value per coin, most exchanges allow you to invest on a dollar basis, rather than buying a whole coin. This means you don’t need a huge amount of money to invest in something like Bitcoin. Focus on the total amount of money you want to invest, rather than the number of coins you want to buy. And always remember, don’t invest more than you can afford to lose.

Step 5: Manage your investments

Cryptocurrency is a unique investment because it can be used to buy things and can also be held as a long-term investment; how you manage your crypto holdings depends on your investing strategy and goals.

Other things to consider:

• It is important to pay attention to transaction fees when making crypto purchases because these fees can vary widely among currencies.
• The cryptocurrency space is evolving rapidly, so it's important to pay attention to new developments that may affect your crypto holdings.
• Cryptocurrency investors need to understand the tax consequences of using crypto, especially if they purchase something or sell their crypto investments.
• It is recommended to periodically review your entire portfolio to assess the need to rebalance your holdings. That might mean increasing or scaling back your crypto exposure, depending on your investment goals and other financial needs.

How do I diversify my investments?

Diversifying your investments is a crucial aspect of managing your financial portfolio. Here are some detailed strategies to help you diversify your investments effectively:

Spread the Wealth

Don't put all your eggs in one basket. Diversify across different asset classes such as stocks, bonds, commodities, exchange-traded funds (ETFs), and real estate investment trusts (REITs). Consider investing in a range of companies and sectors that you know and trust, including those you use in your daily life. Diversifying across industries, interest plans, and tenures is also essential. For example, instead of investing solely in the pharmaceuticals sector, allocate funds to other sectors like education technology or information technology.

Consider Index and Bond Funds

Include index funds or fixed-income funds in your portfolio. These funds track various indexes and provide diversification over the long term. Index funds often have low fees, benefiting your bottom line. Additionally, fixed-income solutions help hedge your portfolio against market volatility and uncertainty.

Regularly Add to Your Portfolio

Build your portfolio over time by regularly adding to your investments. If you have a substantial sum to invest, consider using dollar-cost averaging to smooth out market volatility. This strategy involves investing the same amount of money over a period, buying more shares when prices are low and fewer when prices are high.

Know When to Exit

While buy-and-hold and dollar-cost averaging are sound strategies, stay informed about your investments and overall market conditions. Be prepared to cut your losses and move on to other investment opportunities when necessary.

Monitor Commissions

Be mindful of the fees you're paying, especially if you're not an active trader. Some firms charge monthly fees, while others have transactional fees. Understand what you're getting for these fees, and keep yourself updated on any changes to your fee structure.

Diversify Within Asset Classes

Diversification doesn't just apply to the types of investments but also within each class of securities. For example, if you're investing in stocks, ensure you're not overly concentrated in a single stock. Consider diversifying across market capitalization (small, mid, and large caps), sectors, and geography.

Understand Risk and Return

Stocks are typically associated with higher risk and higher returns, while bonds are considered more stable with lower returns. When diversifying your portfolio, balance these two asset classes based on your risk tolerance and investment goals. A common rule of thumb is to subtract your age from 100 to determine the percentage of stocks in your portfolio. For instance, a 30-year-old may allocate 70% to stocks and 30% to bonds, while a 60-year-old may opt for a more conservative allocation of 40% stocks and 60% bonds.

Periodically Rebalance Your Portfolio

Regularly review and rebalance your portfolio to maintain the desired level of risk and alignment with your investment goals. This process involves checking your asset allocation at least once a year or whenever your financial circumstances change significantly.

Diversify Geographically

Think beyond your home market and invest globally. Diversifying across different geographic regions can help spread your risk and potentially lead to greater rewards.

Diversify with Cryptocurrencies

Consider adding cryptocurrencies to your portfolio. However, approach this asset class with caution, as it is known for its volatility. Conduct thorough research, understand the risks, and only invest money you can afford to lose.

Remember, diversification is a key component of successful investing. By following these strategies, you can effectively diversify your investments, manage risk, and work towards achieving your financial goals.

Frequently asked questions