Diversification is crucial when it comes to investing. You’ll be less likely to experience a huge financial setback if one of your assets doesn’t pan out if you distribute your cash around. This is especially true for cryptocurrencies, a relatively new asset class that is typically unpredictable, prompting some financial advisers to urge their customers to avoid it.
Those interested in purchasing cryptocurrencies may benefit from the advice of affluent “angel” investors. These investors are used to dealing with ventures that may or may not succeed, as they fund early-stage entrepreneurs.
“When you’re angel investing, you make a lot of different investments, and many of them fail, some of them are moderately successful, and some of them are incredibly successful,” Proudman said. “It’s that combination that makes your portfolio compelling. Diversifying here is smart for this same reason.”
However, because of the novelty of crypto, diversification is more difficult than it would be for more typical investments like equities. There are no publicly available mutual funds, for example, that provide broad exposure to the digital asset industry. Still, there are some strategies savvy investors can use to mitigate their risks.
A few solutions have been developed that aim to make cryptocurrencies more accessible to consumers who are more familiar with traditional investing tools. Unlike crypto, which cannot be held in a brokerage account or used as part of a retirement fund, an exchange-traded fund can be held in a brokerage account or used as part of a retirement fund. However, these funds charge fees and give investors less control over their digital assets.
Currently, the Securities and Exchange Commission has not approved a Bitcoin ETF, nor has it approved any ETFs that invest directly in other digital assets.
A fund that focuses on cryptocurrencies’ underlying “blockchain” technology is one ETF option for crypto-curious investors. Such funds invest in companies that specialise in particular industries. Those, on the other hand, aren’t bitcoin investments in the traditional sense.
The SEC’s mistrust is largely to blame for the lack of fund options accessible in the digital asset market. The first Bitcoin ETF debuted on the New York Stock Exchange this September. However, the fund does not purchase Bitcoin. Instead, it makes bets on cryptocurrency futures contracts.
Other funds have greater direct exposure to numerous cryptocurrencies, but they are only available to accredited investors through private placement. Among the financial firms that have developed such products are Grayscale and Bitwise.
One downside of funds is that investors do not own their portfolios directly. As a result, putting together a portfolio on your own can be intriguing, especially when it comes to crypto, which may provide unique benefits.
Cryptocurrency holders, for example, might be interested in “staking,” a procedure in which players are rewarded for assisting with the upkeep of the computer networks that support their tokens. Alternatively, they may simply desire greater control over their financial approach.
Cryptocurrencies are generally considered high-risk investments that should only account for a tiny fraction of your overall portfolio — one rule of thumb is no more than 10%.As a result, financial advisors frequently urge caution when it comes to crypto, and some are hesitant to make comprehensive recommendations on how to build a portfolio.
“Financial planners have not done a good job of being a part of this process,” said Justin Pullaro, a certified financial planner based in Florida who advises clients on cryptocurrency.
Some online products assist customers who do not have a relationship with an adviser in putting together their crypto portfolios. While big online crypto exchanges like Coinbase do not provide such services, newcomers are aiming to fill the void.
Customers at Makara, for example, can choose from eight different “baskets” of crypto assets dedicated to various aims. One comprises high-value “blue chip” cryptos, for example, while another focuses on “Web3” initiatives that focus on decentralised Internet technologies.