Innovators have considered the idea of creating an all-digital currency for decades, but the invention of blockchain by the pseudonymous Satoshi Nakamoto in 2008 provided the technology to make it a reality. Bitcoin, also introduced by Nakamoto, was the very first “cryptocurrency” and hundreds of other digital currencies have followed since. However, rather than being used as money, most cryptocurrencies have been used more as investment products.
As you plan for your financial future, you may be intrigued by this alternate investment option. The crypto market’s novelty, lack of a central authority and seeming immunity to government interference are appealing to some who value those traits in an investment or currency.
Nevertheless, the crypto market is a place of uncertainty and unknowns. As you consider placing your wealth in cryptocurrencies, ensure you have an understanding of these four basic principles:
1.The Crypto Market Has Always Been Volatile. Crypto markets behave very differently than stock markets. There is no underlying production of goods and services driving value. Relative to stock markets, there is less foundation to support the assumption that crypto prices will rise in the long run. In the brief history of crypto markets, we have seen enormous swings in overall valuations to a far greater degree. Bitcoin alone, which makes up slightly less than half of the total cryptocurrency market share, is down almost 70 person from its 2017 peak. Thus, if you are planning to invest in cryptocurrencies, you must expect volatility.
Furthermore, cryptocurrency markets are unlikely to become less volatile. With no underlying production, valuations are determined entirely by supply and demand. Will digital coins ever become acceptable for mainstream transactions? Will cryptocurrencies ever be approved by the SEC to be the foundation of a regulated investment vehicle? Will one coin ever emerge as the digital currency of choice? No one know the answers to these questions, but each are crucial to the eventual success or failure of cryptocurrencies.
2. What the Crypto Market Looks Like Now. The most recent crash in cryptocurrencies began in early August when the SEC delayed a decision on a bitcoin ETF (exchange-traded fund), after rejecting it twice before. This decision scared many into believing that the market may never get an ETF, which would decrease the probability of the institutionalized investor involvement needed to take cryptocurrencies mainstream. After a large run-up in prices across the crypto market in 2017, they have turned sharply downward in 2018. Overall, the cryptocurrency market has lost over $600 billion since January.
3. How Cryptocurrencies Fit into Your Estate Plan. If you do decide to invest in cryptocurrencies, be aware of how they fit into your estate plan. The crypto market is completely anonymous and every user possesses a random set of numbers that makes up their “address.” Thus, if an investor dies without taking the appropriate steps to transfer their cryptocurrency, their money could be lost in cyberspace. There is no customer service or centralized recourse to recover lost addresses or passwords for many cryptocurrencies.
This problem has a simple solution. The wealth you have placed into cryptocurrency is considered an asset; thus, be sure to list it as an asset in your trust. In addition, ensure that your trustee has the ability to locate a detailed account of the access information.
4. The Power of Expert Advice. Are you considering incorporating cryptocurrencies into your financial plan? The crypto market is full of uncertainties. Ask a fee-only financial adviser so you can learn the pros and cons of making cryptocurrencies a part of your financial life. A financial advisor can provide expert knowledge, advice and planning specific to your current and future needs to ensure your financial goals are met.
This article was furnished by TrueNorth Wealth, a financial advisory firm in Salt Lake City.