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Astoria Strategic Wealth

Considering Crypto? - Part II of IV - DIVERSIFICATION

As a follow-up from Part I of our series (https://www.astoriastrategicwealth.com/blog.htm?ID=8939), once you have determined your reason for buying crypto, there are several considerations to assess. If you are viewing crypto ownership as a long-term investment, then it is important to consider how it may fit into your existing investment mix from a portfolio construction standpoint.  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As we all know, cryptocurrencies are extremely volatile, meaning their relative value fluctuates significantly from day to day.  In 2017 alone, the price of Bitcoin rose by over 2,000%! On May 18, 2021 Bitcoin plunged 30% in a single day. Due to this volatility, most would agree that these digital assets more closely resemble the risk (and reward) of stocks or equities. While the stock market is also volatile, such extreme swings are relatively rare across a broadly diversified group of stock holdings.

Some very smart people (see Ray Dalio article https://www.nasdaq.com/articles/heres-why-billionaire-ray-dalio-would-rather-own-bitcoin-than-bonds-2021-05-26) view Bitcoin as a better store of value than bonds.  Why?  They can be thought of primarily as a means to protect against currency devaluation due to the view that bonds will struggle to keep up with inflation. The strategy of using crypto as a bond proxy may not be feasible for a retiree, however, who is reliant upon their portfolio to generate consistent income.  Volatile swings could cause an investor’s retirement goal to suddenly be significantly under-funded.  No one wants that in their financial freedom years!

Consider also that there is growing consensus that cryptocurrencies are instead a completely unique asset class which may better resemble an alternative asset versus a traditional stock or bond. A potential advantage of alternatives is that they are often less correlated to the movement of the stock or bond public market overall, and therefore, in their own manner, may provide further diversification still (albeit typically with added risk). This, of course, could be advantageous to an already well-diversified portfolio.

So, where does cryptocurrency potentially fit in your investment mix, if at all? Our view is that digital currency is more akin to a highly speculative stock in terms of volatility, albeit with a potential (not promised) advantage of lower correlation to the overall stock and bond market.  Importantly, you need to be comfortable with the possibility of losing it all. Likewise, as with any volatile asset, it’s also important to consider your risk tolerance, and whether a significant change in value would cause you to panic and possibly sell (or buy) at an inopportune time.

If the light is still green for you and you want to invest, your next step is to decide how much and how to go about it.  Stay tuned for Part III.