Skip to main content

Astoria Strategic Wealth

Considering Crypto? - Part I of V - WHY?

As alluded to in our recent FOMO article (https://www.astoriastrategicwealth.com/blog.htm?ID=8790), you likely have heard a friend or family member talk about their short-term success investing in one or more cryptocurrencies. It’s human nature to minimally be at least very curious about these somewhat nebulous opportunities.  Perhaps you already have your own wallet and a variety of coins. Who wouldn’t want the potential for incredible upside?!  Recall, however, with that great potential, comes also the incredible risk of downside. Our human memories tend to be short and losses have been sparse throughout this long bull run.  Let’s also not forget the loss aversion principle (https://thedecisionlab.com/biases/loss-aversion/).

Before you decide to jump in and buy the latest or greatest digital coin, there are a few questions you may want to answer for yourself, and in accordance with your financial advisor of course. Ha!

We will try to address these considerations in a five-part series, starting with the most important question:

WHY am I buying this?

Two purposes are touted as main reasons to seek out crypto.  Knowing your reason to do so is a good place to start.  Are you buying this digital coin as an investment or as a medium of exchange? Many see the latter reason as the most beneficial use of the technology, especially in countries with less developed financial infrastructures. Know that cryptocurrency transactions as a whole are still relatively clunky and inefficient, even in the US.

If your objective is to hold a small amount of cryptocurrency as a means of payment, that is not an investment decision. There are fairly easy ways to accomplish this type of transaction which we will discuss in a forthcoming article.

If instead you view cryptocurrency as a long-term investment, by its very nature (long-term) therefore, you would not seek to spend or sell that asset anytime soon (see the famous story of the bitcoin pizzas which are now worth about $387 Million)!

There are ancillary reasons perhaps to engage in crypto transactions also - you are either just curious and want to learn by dipping your toes in the water, and/or you like to gamble. Author and thought-leader Nassim Taleb recently postulated that the true value of a Bitcoin (or any cryptocurrency really) is “no higher than a zero.”

For those who believe in the value of the technology behind most cryptocurrencies, called blockchain, are there other ways to potentially invest in this? To some degree you are likely already invested in it through mega corporations that are already utilizing this technology. Not to mention the myriad second and third order ecosystems that support blockchain (see https://finance.yahoo.com/news/bitcoin-mining-crackdown-in-china-is-a-boon-for-texas-182139400.html “China Crackdown on bitcoin mining is a boon for Texas”).

Once you have answered your WHY, and have decided to buy cryptocurrency in some form or fashion, we will lead you through the following considerations in the coming weeks:

  1. Diversification: What asset class does cryptocurrency fill towards diversifying your portfolio? Is it more akin to a stock or perhaps a bond and does it truly add diversification?
  2. Allocation: How much should you hold and potentially put at risk? Once you buy, how do you integrate it with your other investments in terms of rebalancing and tax ramifications?
  3. Location: where/how are the best ways to buy and hold cryptocurrency. Can you buy it in an IRA?
  4. Other Considerations: Our stance on cryptocurrency and estate planning for digital assets.