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Bitcoin has done it again — the cryptocurrency topped $20,000 Wednesday to reach its second record in three weeks and its highest level since 2017.
The digital currency has been on a tear this year and is now up more than 180%, driven in part by new institutional support and low interest rates stemming from Covid-19.
Bitcoin believers see it surging even further. Galaxy Digital CEO Michael Novogratz, a longtime cryptocurrency bull, sees bitcoin skyrocketing to as much as $55,000 or $60,000 by the end of next year in a continuation of its epic rally.
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Tyler and Cameron Winklevoss, also early bitcoin investors and co-founders of Gemini, a crypto-exchange, think the currency could someday hit $500,000 as more people use it as a hedge for inflation instead of gold.
But for a majority of investors, financial planners are hesitant to advise putting a large chunk of a portfolio into bitcoin.
“It’s critically important to understand the risks associated with it,” said certified financial planner Douglas Boneparth, founder and president of Bone Fide Wealth in New York, adding that bitcoin is a highly speculative asset despite encouraging headlines.
“You don’t need to look too far back in time to see how volatile it can be,” said Boneparth, who is also a member of the CNBC Advisor Council.
Don’t get caught up in the trend
Many financial advisors get questions about bitcoin from investors that don’t know a lot about the cryptocurrency and have just heard about it in the news.
It can be easy to have FOMO, or fear of missing out, on the latest hot investing trend, according to Roger Ma, CFP and founder of New York-based financial planning firm lifelaidout.
It’s best to keep your goals in mind before putting money into a fad investment, which could be something like bitcoin, a commodity like gold or the latest hot stock that’s taking off.
That includes understanding your net worth, living expenses and credit score, said Ma. From there, he recommends assessing where you are with other prerequisites to investing — do you have an emergency fund, are you paying down debt, contributing to retirement and on track for other financial goals?
Bitcoin produces no earnings, it pays no dividends, it pays no interest, so it’s not really an investment in the traditional sense.
David Oransky
founder of Laminar Wealth
“What does your portfolio need to do to be able achieve your short- and long-term goals and for you to be able to lead your rich life?” said Ma. “If your plan relies on your portfolio returning 50% to 100% a year, it might make sense to rejigger your plan to make it a little more feasible.”
Also keep in mind that once something is making headlines or breaking records, it could be at the end of its run and be relatively expensive — meaning it’s not a good time to buy in.
“The problem is that everyone wants to buy when things are at all-time highs,” said Anjali Jariwala, a CFP and CPA and founder of Fit Advisors in Torrance, California. “We should have investment decisions driven by things that we can control versus having it driven by emotion or feeling towards certain investments.”
If you are going to invest, do your research
To be sure, some people will still want to invest in bitcoin.
Before putting money into bitcoin, it’s important to do your research and understand as much as you can about the asset class.
“Bitcoin produces no earnings, it pays no dividends, it pays no interest, so it’s not really an investment in the traditional sense,” said David Oransky, CFP and founder of Laminar Wealth in St. Louis. “Its value is purely dependent on what someone else is going to pay for it in the future.
We should have investment decisions driven by things that we can control versus having it driven by emotion or feeling towards certain investments
Anjali Jariwala
founder, Fit Advisors
“It’s very different than investing in stocks, where you’re investing in the future earnings of the company that produces goods and services.”
In addition, investors should research how to actually buy into bitcoin and withdraw money, as it’s not something they can get through a traditional brokerage account.
“It’s still kind of the ‘Wild, Wild West’ out there and that should scare people that don’t know a lot about it,” said Oransky.
Use play money
Once you’ve done your research and know you want to invest, financial advisors say that bitcoin shouldn’t be a major part of your portfolio. Instead, it should be a less than 5% position that’s thought of more as play money to be allocated toward fun investing and not tied to a goal such as retirement.
“It helps a person get their fix without disrupting their financial plan and achieving their financial goals,” said Ma.
If you do want to have a bit of play money in your investment account, make sure it’s an amount you’re comfortable with going to zero, said Oransky.
“If you want to buy a lottery ticket and this is the ticket you want to buy, that’s fine,” he said.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.
