Big gains in the Bitcoin price make the cryptocurrency look like it’s strapped to a rocket that only goes up. So you want in on the action. But how much should you invest?
Way less than you might expect, according to top financial advisors.
There are six ways you can invest in Bitcoin. The question is, should you? And as for how much of your portfolio to put into Bitcoin and its proxies, take a deep breath, advisors say. In a random sampling by IBD, advisors recommended less than a 10% weighting, if any at all.
Bitcoin Price: Potential Risks Of Playing Bitcoin
The question comes up more and more. Already, 22% of advisors tell nydig.com that their clients own Bitcoin.
Advisors point out the potential risks of owning Bitcoin. “I am not actively recommending cryptocurrency,” said Kimberly Foss, president and founder of Empyrion Wealth Management, in Roseville, Calif. “At this point, the market is too unproven, too unregulated and too prone to manipulation, both by actors with potentially nefarious motives and also by other forces that are at present not well understood.”
Only Invest What You Can Afford To Lose
The crux of the risk is the volatility of Bitcoin price.
As a result, only individual investors whose risk tolerance is moderate or stronger should even consider investing in Bitcoin, says Terry Sawchuk, CEO of Sawchuk Wealth, in Troy, Mich.
“Only invest what you can reasonably afford to lose,” Sawchuk said. Both Bitcoin and competing cryptocurrency Ethereum have been known to drop by more than 10% in a single day, and up to 80% in a year or less.
The odds of those kinds of drops are probably lower now due to cryptocurrencies’ popularity, Sawchuk says. And the fact that many large institutions are putting money into both of these currencies is a stabilizing force. They tend to not panic-sell. “At a certain level they’re more likely to buy more” on a price dip, he said.
The markets for Bitcoin and Ethereum have matured to the point where, while still volatile, “I think the chances of them going to zero are very low,” Sawchuk said.
Limited Access To Bitcoin Funds
The Securities and Exchange Commission has yet to allow any mutual funds or ETFs to play swings in the Bitcoin price directly.
Some funds invest instead in publicly traded stocks whose businesses relate to cryptocurrency.
Their holdings can range from stocks like PayPal (PYPL), which lets customers buy, sell and hold cryptocurrencies, to Riot Blockchain (RIOT), which is a so-called Bitcoin mining company — that’s a company that uses powerful computers to verify crypto transactions and the Bitcoin price. The newest such fund is VanEck Vectors Digital Transformation ETF (DAPP).
How GBTC Plays Bitcoin Price Swings
The trust looks like an ETF, but technically it is a private placement. Your brokerage may require you to meet certain wealth standards that typically demonstrate that you can afford an investment that might plunge in value, and that you know what you’re doing.
GBTC has told the SEC it wants to convert itself to an ETF, if the SEC ever approves Bitcoin-focused funds.
Advisors Recommend Modest Allocations To Plays On Bitcoin Price Swings
So what are some weightings top advisors recommend as plays on Bitcoin price swings?
- Foss: No more than 3% to 5% of a client’s portfolio. “Just as I advise limits for clients investing in any single highly focused asset, I would urge clients to observe careful limits for cryptocurrency,” Foss said. “I would advise no more than 3% to 5% of anyone’s assets be allocated to it.
- Ron Brown, co-founder of Athlete Essentials (which caters to professional athletes) and president of R.L. Brown Wealth Management, in Lexington, Ky.: 1% to 2%. Assuming the rest of an investor’s portfolio is balanced and in line with their risk tolerance, “then I would say 1% to 2%,” Brown said. “I personally think 2% is the maximum I’m going with for clients until the dust settles and we figure out which coins are going to survive.”
- Paul Schatz, president of Heritage Capital, in Woodbridge, Conn., and treasurer of the National Association of Active Investment Managers (NAAIM): 0% to 10%. As with any alternative asset, an investor’s allocation to Bitcoin or other cryptocurrency should be small, “somewhere between 0% and 10%,” Schatz said. “I would severely limit the allocation the more conservative (an investor’s risk tolerance) is.”
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and active mutual fund managers who consistently outperform the market.
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