At the time of writing the cryptocurrency market was worth about $934 billion. This is down from a market cap of more than $3 trillion in late 2021. Despite the losses, that still makes cryptocurrency a very large market. The upshot is that financial advisors get asked about cryptocurrency quite a bit. Clients want to know if they should invest, or how they should invest, in this market. Finding the right financial advisor is key if you’re thinking about buying crypto as part of your overall portfolio.
How Does Your Advisor Talk About Crypto?
It’s tempting to treat cryptocurrency as an investment because people have made money in this field. In fact, a few lucky ones have gotten very rich. But that’s the keyword when it comes to the crypto market: luck. Most investors who buy cryptocurrency lose their money, but this seems like a huge opportunity because of the investors who do well tend to make the news. They amass huge fortunes practically overnight and people love a good get-rich-quick story.
A seasoned advisor who understands cryptocurrency is likely to recommend that you keep your money in more stable growth investments. Buy cryptocurrency with disposable income, if at all, that you would use to buy a beer, a video game or a hand of poker. That’s money that you already have budgeted for consumption (that is, you spend it and it’s gone). If you make money back, great! If you lose that money, as most people have then it’s an expected loss.
Understanding Cryptocurrency Fundamentals vs. Technicals
There are two main reasons why the cryptocurrency market is properly considered a gamble rather than an investment asset. The technical indicators say that it is one of the most volatile assets on the market. How an asset’s price changes over time, and all of the many ways of analyzing that information, is called an asset’s technical indicators, or “technicals” for short.
The technical indicators for any given cryptocurrency are, simply put, all over the place. They follow very few consistent patterns and can double or drop in half over the span of days, if not hours. It’s difficult, if not impossible, to make long-term plans around an asset that has no predictable movement.
Cryptocurrency Has No Fundamental Value
The fundamental value determines what an asset would be worth if you didn’t sell it. For example, the fundamental value of a stock is that you own a piece of the underlying company. You are entitled to dividends, shareholder payments and returns and a portion of any eventual sale price or liquidation. This asset has a measurable value even if no one wants it, and that helps people decide if they do want it.
Fundamental value is one of the most important ways that investors judge the long-term price of an asset. If the underlying value is strong, then they can invest knowing that other investors will likely want to buy their asset or they can hold it and still make a profit. No cryptocurrency on the market today has demonstrated fundamental value.
Some tokens, like Bitcoin, offer themselves as alternative forms of money. But no major economy uses cryptocurrency this way. Others, like Ethereum, offer themselves as “utility tokens.” That means that you buy the cryptocurrency to access some product or service. But in the 14 years that blockchain has been on the market, no project has introduced a viable commercial product based on utility tokens or any other blockchain-based design.
This market does not have fundamental value to guide investors. You invest because you think other people will invest. You sell because you think other people will sell. This leads to unpredictability and volatility across the board. A financial advisor who understands cryptocurrency will be able to discuss the asset in these terms rather than the greed or fear that dominates many discussions.
What Cryptocurrency Does
Blockchain databases attempt to solve the issue of digital ownership. This is an issue that has followed the internet since it was invented. By definition, a computer copies any file that it sees. There’s no way of stopping this, it’s literally how computers work. Historically, digital security has been based on stopping computers from preserving that copy or forcing computers to restrict access to a file they have copied.
A blockchain database tries to address this from another angle. They allow unrestricted access to a file while permanently attaching the record of ownership. So, for example, John Smith might own Token 123ABC. You can make unlimited copies of that file because every copy will say “Token 123ABC owned by John Smith.”
This is the theory underlying all blockchain-based products. Monetary cryptocurrencies, like Bitcoin, rely on the idea that the database will permanently record who owns each unit of currency. More advanced projects like decentralized apps, essentially streaming software that runs on other computers’ hard drives and processors, and decentralized finance doesn’t have any necessary connection to blockchain databases. Developers use utility tokens for these projects as a form of security and monetization.
The trouble with this technology is that it has extremely limited applications. In some cases, blockchain-based tokens have not yet demonstrated any value. Instead of using the energy- and time-intensive technology of a utility token to build your decentralized app, for example, you could simply sell access on a subscription basis.
Understanding the Crypto Market
Even if your financial advisor can’t speak to all of the technicalities of the blockchain itself, they should be able to analyze the financial market of the value of crypto. At the very least, if they are wanting to make purchase recommendations, they should be able to speak to how the price of specific crypto has risen and fallen over time, what causes the price fluctuation and what to expect moving forward. This is well within their specialty as a financial advisor to understand before making any recommendations with your money.
For example, the first half of 2022 has been a tough six months for cryptocurrencies as inflation has grown and the market has stumbled. If an advisor can’t provide evidence as to what happened to the market and what they expect the market to do then it wouldn’t be wise to take their recommendation. This is the same with the stock market or other investment options.
The Bottom Line
An advisor who understands the crypto market will be able to discuss how blockchain and specific coins work. Alternatively, at a bare minimum, they should be able to discuss the crypto market as it relates to price fluctuation. Keep in mind that crypto isn’t a potential asset you can invest in that has a fundamental value like stock or real estate and it is very risky, which is why it’s important to have a financial advisor on your side who understands it before you spend your money.
Tips for Investing in Crypto
- Balancing the risk versus the reward of crypto can be difficult, and so can deciding which crypto to invest in. A financial advisor that understands the crypto market can help you navigate how it falls into your financial plan. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Buying cryptocurrency can be a roller coaster ride, and investors absolutely should consider this consumption rather than investing. But if you’re interested in looking at crypto for the long term, here’s where to start.
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