Does Crypto Deserve a Place in Your Portfolio?
To make sure we’re on the same page, let’s start with some definitions.
Crypto: A cryptocurrency is a digital only currency. It is an alternative currency that is not regulated by governments or banks. This means that they are not obligated to step in to help if the crypto markets erupt or even if many investors lose their shirts. Because they are not regulated, cryptocurrencies need special encryption techniques to ensure that transactions are kept secure. There is no physical form; you cannot withdraw cryptocurrency from your local ATM or use it to buy a coffee. The only way to transact cryptocurrency is via blockchain.
Blockchain: This is the technology that enables the existence of cryptocurrency. Basically, it is a decentralized database that maintains all of the transactions across a peer-to-peer network. The uses for blockchain are not limited to cryptocurrency. It is also being used to track the locations of shipping containers and to automate payments across borders.
Bitcoin: Bitcoin was the first cryptocurrency and it is the most widely adopted. It has the largest market share. Blockchain was created to support Bitcoin at its start in 2008.
Coinbase: An exchange where bitcoin or any other crypto can be bought, sold and managed. The holder stores the crypto holdings in a Coinbase wallet. Coinbase is a publicly traded company.
Spot Bitcoin ETF: This is a fund that holds actual Bitcoin. The share price is directly tied to Bitcoin’s price in the cryptocurrency markets. This is the new type of ETF that was recently approved by the SEC.
Crypto ETF: Crypto ETFs hold crypto futures. These are derivative investments that track the price of a ‘basket’ of digital currencies.
Both the Spot Bitcoin ETF and the more than thirty Crypto ETFs available today make it easier for the investor to hold digital assets. Many of these ETFs use Coinbase as their custodian – like a bank vault.
Is this an investment alternative worth looking further into? Where does it fit into a diversified portfolio?
Some asset managers, including BlackRock and Fidelity, have already started to offer the new Spot Bitcoin ETF. However, Vanguard has taken a stance against them.
Advisor Perspectives and VettaFi interviewed a number of investment advisors. Most of the respondents feel that investing in cryptocurrencies or ETFs would be considered speculative. They point to the extreme volatility in the crypto markets over the last few years as well as the many risks involved – from the lack of unform regulations to fraud (remember FTX?).
The consensus among advisors is that crypto should be held as a small part of a diverse asset mix; in addition, crypto holdings should be diversified over different cryptocurrencies.
Careful though: “A Morningstar study last year by Madeline Hume found that as little as a 2 percent holding of Bitcoin can transform a conservative stock-bond portfolio into a far riskier one.”
In addition, in this age of global warming, we must remember that crypto mining consumes more electricity as the yearly usage of a country the size of Argentina. (Mining is the way new coins come into circulation.)
Another reason for being wary of investing in cryptocurrency is the ease with which scammers operate in the crypto markets. The Federal Trade Commission reports that Americans lost $1.4 Billion in 2023 in scams involving cryptocurrency.
Here are some examples from instaxchange.com of crypto scams along with some tips on how to keep your money safe from scammers if you do decide you want to dip into the market on your own.
1. Beware of pump and dump schemes
Pump and dump schemes manage to bait many as the crypto market is unregulated and so it is wise to avoid these where possible. This type of fraudulent behavior is commonly set up on Discord, and many who are part of the group chats involved in pump and dump schemes are unaware that they are the victims.
This type of scam works by artificially raising the price of a stock, or cryptocurrency, by increasing its popularity, at which point they tell you to invest in it, before selling your investment off and gaining money from this.
However, insiders will have bought this crypto before you were involved and sell it off to you during this initial ‘pump’ to make a profit. The scam then works as you are unable to make a profit after this initial surge in price as the value quickly crashes and you are told you were not fast enough selling your share.
2. Never send money to someone you have not met in real life
Romance scams compiled more than $185 million in crypto losses from 2021 to 2022, and that figure has likely gone up in more recent years. Romance scams work when a con artist pretends to be someone else and creates a relationship to an individual, gaining their trust before gradually beginning to ask them for money to finance things like hospital bills, essential traveling or general bills that are fraudulent.
These predators ask vulnerable people for money, and so it is vital to remind yourself and loved ones to never send money to anyone you have not met in real life, even if you have heard their voice through a call or seen a picture of who they claim to be. Cryptocurrencies are non-refundable and you cannot stop a payment once it has gone through so it is vital you never send any money to a source you cannot verify is trustworthy.
3. Be mindful of investment scams
The instaxchange.com expert says that while many believe they would recognize a romance scam, plenty of people will fall ill to investment scams without realizing the fraud behind it until it is too late.
Investment scams, the number one area where crypto users are losing their money – as of the latest figures, $575 million was lost between 2021 and 2022-, occur when a fraudulent individual contacts you with promises of high returns on money.
Scammers will contact you randomly, often through social media but it can be through email or phone, and tell you to invest on their site. They will lure you in with promises of quick returns but what they are really doing is getting you to ‘invest’ then withdrawing this money for themselves. Be mindful of these and do your research before you invest in any form of crypto. Those who promise fast money are always scammers.
4. Always check the source of who contacted you
Imposter scams lost US citizens over $752 million last year, with $133 million being crypto losses, therefore it is imperative to check the details of those contacting you regarding payments.
One way that imposters will try to catch you is by pretending to be from a company or government body demanding you send them money, and they can be very convincing. The FTC, and any other government sector, will never harass you or demand money and neither will your company. If there is a link in an email to a site, you can double check if it is real by hovering your mouse over the URL – a fake URL will read as such when your mouse rests on the link.
As well as this, many email providers will show the real email address in the ‘from’ field which you can compare against any contact details on official sites.
5. Do not engage with black mail scams
Most Americans are on some form of social media nowadays, meaning it is very easy to be targeted by fake individuals. Criminals will report to have information they can blackmail you with so you give in to their demands, but this is a serious offense and should be immediately reported to the police.
Usually, the scammers do not have damning evidence on you and rely on your fear to get your money. Do not engage and report this immediately to the platform they messaged you on.
Commenting on keeping yourself safe with crypto, expert and head of SEO and research of instaxchange.com Gabriele Asaro said:
“Crypto can be a safe and secure currency. Millions of people are beginning to use and become knowledgeable about how it works, yet there will always be scammers looking to make money maliciously."
“It is unfortunate that many fall victim to scams and even more so that experienced users would dedicate time to taking advantage of those newer to crypto.”
“However, it is easy enough to ensure you do not lose money by remembering to verify sources, check if a site is trustworthy and never send money to a person you have not met in real life.”
There is no need to have FOMO – fear of missing out - about the possible gains to be made in cryptocurrency. You may already be invested in cryptocurrency through your holdings at Fidelity, Vanguard and the like. Index funds and ETFs seek diversification through holding shares of many types of companies. These include shares of Coinbase, some crypto mining companies and even stakes in the companies that run the computers that are used for mining.
Knowing where to invest is not easy. Deciding what new asset classes are appropriate for your portfolio calls for professional advice.
Please feel free to call (215-836-4880) or email the office (ellend@regardingyourmoney.com) to set up an appointment to discuss any investment questions you may have. Or, visit us at regardingyourmoney.com.
Sources: Advisor Perspectives, New York Times, Wall Street Journal, Investopedia, Morningstar. PriceWaterhouseCoopers, journoresearch.org, Instaxchange.com