Investor interest in digital assets is booming. If you are curious about digital assets, you’re not alone. In the last six months, 49% of financial advisors said clients asked them about investing in cryptocurrencies, according to a 2021 survey by the Journal of Financial Planning® and the Financial Planning Association®. That’s up from 17% in 2020.
Are you curious about digital assets? Here are the answers to some of the more popular cryptocurrency frequently asked questions:
1. What is cryptocurrency?
Cryptocurrency is digital money that can be used to buy and sell goods and services online. A technology called blockchain powers cryptocurrencies; it is a decentralized network that is spread across many computers, managing and recording transactions. People store cryptocurrency in a digital wallet device or on a computer, on a phone or in the cloud. There are thousands of digital currencies today – some of the better known include Bitcoin, Dogecoin, Ethereum and Litecoin.
Cryptocurrency is an unregulated marketplace and lacks oversight by agencies like the Securities and Exchange Commission and FINRA.
2. Are cryptocurrency exchange-traded funds coming?
Concerns around market manipulation are high and regulators are taking a cautious approach to the approval of crypto-related ETFs. In July, the SEC said it would seek public comment focused on whether a Bitcoin fund would be safe for investors. Questions remain around the potential for price manipulation, fraud and illegal activities like money laundering. “The SEC has been in a holding pattern,” Ben Johnson, director of global ETF research at Morningstar, told The Wall Street Journal. “There are still very fundamental foundational hang-ups … it’s difficult to say if or when they’ll get past those.”
3. Should I consider investing in digital assets?
One of the most common cryptocurrency FAQs – and we wish it had an easy yes or no answer.
Digital assets like cryptocurrency are highly speculative and extremely volatile investments. Cryptocurrencies have no intrinsic value and do not generate any cash flows, such as interest payments or dividends. There is no source of expected return beyond future demand from other speculators. It is important for investors to understand that any digital asset investment could go to zero.
To illustrate recent volatility, consider this: The price of one bitcoin soared to a record high at more than $63,000 in April, up from around $7,500 a year earlier. Then, Bitcoin collapsed, with a 50% price drop to less than $30,000 in July, including a 35% decline in one week.
Cryptocurrency investments are not appropriate for everyone, especially for those with low-to-moderate risk tolerance. If you feel compelled to get involved, think of your digital asset investment like a lottery ticket. Be prepared to lose 100% of what you invest. Because of the extreme volatility, we suggest only allocating a small portion of your total portfolio should you choose to invest in this asset class. A 1% allocation of your total portfolio would be plenty.
4. What are the challenges for blockchain technology?
The blockchain technology that powers digital securities is a big idea with significant potential in the years ahead. We are in the early days of a multiyear technology cycle. While blockchain could be successful technology with far-reaching ramifications and applications, Bitcoin and other digital assets could still fall to zero. The current digital asset marketplace is driven by speculation, leverage and investor sentiment. We believe the market must develop effective regulation along with government and institutional support before there’s a broad adoption of the technology.
5. Can I invest in digital assets through my Edelman Financial Engines planner?
We are exploring investment vehicles for indirect exposure to the digital asset space via publicly traded securities. Contact your planner if you’re interested in these investments and with your own cryptocurrency questions.