Q. I invest in several cryptocurrencies. Should I treat it like a regular asset class? If so, how much of a portfolio should I allocate?

– Investor

A. Cryptocurrency is definitely a hot topic these days.

Digital assets have reached a market of over $ 2 trillion, with Bitcoin accounting for about half of that amount.

Before we get to your question specifically, let’s talk about crypto in general.

There has been no shortage of headlines in terms of investor interest and increased adoption of cryptocurrencies by fintech companies, consumers, businesses, service providers and banks, said Charles Pawlik, Chartered Financial Planner and Chartered Financial Analyst at Beacon Trust in Morristown.

He noted a few prominent examples, including Paypal allowing cryptocurrency transactions.

There is also a recent partnership between Mastercard and cryptocurrency firm Bakkt that will allow businesses and banks to issue cryptocurrency branded credit and debit cards to consumers as well as other services based on the. cryptography).

And US Bancorp has announced that it will provide cryptocurrency custody services to institutional investment managers, he said.

Pawlik said there was “widespread enthusiasm” around cryptocurrencies from those who see them as a viable and efficient alternative currency, a value exchange, a form of digital gold, a potential hedge against inflation and a way to bring banking services to parts of the world. who do not have access to traditional banking services.

“However, there are a number of risks associated with investing in cryptocurrencies that should be taken into account when deciding whether or not to make an investment, such as significant price volatility, as evidenced by the 50% + drop in Bitcoin that occurred in the second quarter of this year, fraud, theft, the use of crypto for illegal transactions and increased regulation, ”he said.

Besides direct investment through opening an account with cryptocurrency exchange platform CoinBase, there are other ways to invest, Pawlik said. Investments in Bitcoin and Ethereum can be accessed through Grayscale Bitcoin Trust (GBTC) and Grayscale Etherium Trust (ETHE), which currently trade in the over-the-counter market, he said.

He said the crypto market had recently experienced what he called a “milestone” with the launch of a Securities and Exchange Commission-approved Bitcoin exchange-traded fund (ETF) through ProShares. The ProShares Bitcoin Strategy (BITO) ETF is the first SEC-approved ETF linked to the performance of Bitcoin and trades on the New York Stock Exchange.

“However, it is important to note that the fund invests in futures – an agreement to buy the underlying asset, Bitcoin in this case, at a predetermined price at a specific time in the future – linked to Bitcoin, versus investing directly in Bitcoin itself, “Pawlik said.” Unlike Bitcoin itself, Bitcoin futures are an already established and regulated financial product that is traded on an exchange. “

With all of that said and aside from all the significant risks of investing in Bitcoin itself, Bitcoin futures may come with additional risks, he said.

“For example, as short-term futures expire, new, longer-term futures must be bought or renewed / rolled over to maintain exposure,” Pawlik said. “If longer-term futures are trading at prices higher than those currently held / expiring, the fund will have to pay more to maintain exposure and will in fact consistently sell low and buy high as long as this momentum continues. . be the case.

To your question, Pawlik said that despite investor interest in cryptocurrencies, it would be difficult to recognize them as a dedicated asset class in portfolios alongside stocks, fixed income and alternative assets. such as real estate at this point.

“There is no reliable way to determine a true intrinsic value or a fair price for cryptocurrencies,” he said. “The significant volatility and rise in the price of Bitcoin so far has been driven by demand for what is a speculative investment that has no inherent value, and based on the belief that there is value out there compared to any reliable means of determining that value. “

He said that as cryptocurrencies continue to generate increasing demand from investors and are increasingly adopted, the launch of more investment options related to these cryptocurrencies and increased regulation. could continue to guide the discussion on where these assets fit within a traditional portfolio.

“For now, it would be prudent to view any investment in cryptocurrencies as a speculative investment made outside of building a traditional portfolio, and to limit the investment to a small percentage of your assets so that a potential significant drop in value will not disproportionately affect your overall asset base, ”said Pawlik.

Email your questions to [email protected].

Karin Price Mueller writes on Bamboo column for NJ Advance Media and is the founder of NJMoneyHelp.com. Follow NJMoneyHelp on Twitter @NJMoneyHelp. Find NJMoneyHelp on Facebook. Sign up for NJMoneyHelp.com‘s weekly electronic newsletter.

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