Maybe bitcoin grows up to rule the world someday. Possible but unlikely. Whatever its future, it’s not going away, so the question is what to do about it. Should you own bitcoin? If so, why? FOMO is a real and powerful force and is also not a good enough reason. There needs to be more.
As I mentioned some time back, I’ve been delving deeper into the emerging digital assets space trying to answer these questions. My research led to some interesting and novel places, including to a new certificate program for planners like me. The program brought together information surrounding blockchain technology, bitcoin and the various other digital assets, as well as the evolving regulatory and tax landscape.
After many hours of reading, watching, discussing, and pondering, I’ve gotten comfortable with how to think about the fundamental question of what to do about digital assets, and bitcoin specifically.
The bottom line is that, yes, most people should consider investing in bitcoin. And there’s no reason to rush or to wait, so interested folks should start soon.
You’ll note that I’m italicizing “most” and “should” because not everyone needs this kind of exposure. Digital assets are an emerging investment category with major upside potential but also tons of risk. Frankly, if you’re investing for retirement (or are currently retired) and want to keep things simpler but get more growth potential, an argument can be made for just increasing your exposure to traditional stock investments. At least these cannot go to zero if you’re well-diversified, whereas bitcoin absolutely can. But a variety of research indicates that adding a relatively small amount of bitcoin can increase your return potential while also decreasing your portfolio risk. (I’m including a link below to a paper from the CFA Institute that details this.)
From my perspective, the combination of those two forces (growth potential and risk reduction) should be the main goal here. In other words, buying bitcoin to “get rich” shouldn’t be your only reason. Yes, there can be lots of reasons why people say they buy bitcoin and other digital assets, but it’s best to be reasonable about your goals when considering adding something new to your portfolio. There hasn’t been anything new like this since the creation of exchange traded funds almost 30 years ago, so let’s just agree to be careful.
Along those lines, it’s important to discuss some of the details about how you’d go about getting this done.
There are lots of different ways to add bitcoin, or at least something like it, to your portfolio. You can buy common stock in companies that mine it, such as Riot Blockchain. Some see this as an easy way to get exposure to bitcoin, albeit indirectly, since you can buy within your current investment account. There are also public and private funds that buy these types of stocks, and sometimes even bitcoin itself, for you. But at this point there isn’t something straightforward like an ETF (such as from Vanguard or Schwab) that holds bitcoin. There’s one up in Canada but not yet here. Should that change, and it very well could sometime soon, this would be a viable option assuming it’s structured the right way.
Until then, if you’re going to do this at all you should simply own bitcoin directly and not overcomplicate your life with the added fees and complexity of owning shares of a fund.
You’ll want to consider what role bitcoin will have in your financial life. Is it something you’ll want to see in the portfolio reports you get from someone like me, with all the transparency and tracking that comes with it? Or do you want to keep it off grid, so to speak? If the latter, you’ll want to research what’s referred to as cold storage (the link below is a good place to start), where you keep your digital assets offline. Otherwise, we’ll assume the online route for the rest of this post. Online, by the way, is how I suggest you hold your bitcoin. It’s simpler and less risky.
You’ll then need to decide which firm to use to buy and hold your bitcoin. Major brokerages like Schwab and TD Ameritrade don’t/can’t hold your bitcoin for a variety of reasons, so you’ll need to open an account with a firm like Coinbase. They’re publicly traded and the largest digital asset exchange in the country. Another provider is Swan Bitcoin.
(A quick aside here just to confirm that I receive $0 from these companies. There are others to choose from as well, but these are two that I’ve researched and use personally.)
Next, you’ll need to decide how much to buy. My suggestion is to start slowly and have reasonable assumptions. Again, the best reasons to own bitcoin have to do with growth potential and adding diversification to your portfolio. You don’t need a lot of bitcoin to do this, perhaps 2-3% of your allocation is sufficient.
The price of bitcoin is extremely volatile, dropping from a high of almost $65,000 per coin in April to about $30,000 last month. Now it’s back in the high-$30,000’s. That kind of volatility is perfect for incremental purchases, something called dollar cost averaging. Consider getting to your 2-3% goal that way. Take your time. You can link to your bank account for automatic funding as well. Pretty simple.
Once you’ve set this up a key question is how you’ll keep track of it. If I’m managing your investments, I’ll use my tech to link your Coinbase account to your existing portfolio. That way your bitcoin will show up in your reports, we can track performance, and I can drive the rebalancing process. If you’re an hourly client, you’ll need to do this on your own with my help if needed.
In either case it’s important to remember that the IRS and others will also be keeping track. It used to be possible to skirt the system and avoid paying taxes on bitcoin gains, but the authorities here and abroad are now paying closer attention to digital asset transactions. This is ultimately a good thing and will help bitcoin continue to mature.
That leads me to my final thought for today. Governments around the world, ours included, and a wide variety of companies, are leveraging the power of blockchain technology to build their own digital currencies that will likely steal that role from bitcoin. The latter is simply too volatile and too slow to be workable as an everyday payment system. But that’s not a bad thing, by the way. Bitcoin can continue to evolve as a viable store of value and be useful in portfolio design, making it more like gold but with greater long-term potential.
Here’s the link to the CFA Institute’s paper:
Some information on cold storage if you want to go that route:
Have questions? Ask me. I can help.