Bitcoin has smashed records. Should you invest?
CNN
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In the first quarter of this year, the price of bitcoin broke records in the wake of approval by the Securities and Exchange Commission for the first exchange-traded spot bitcoin funds. The cryptocurrency topped $70,000 in March, according to coinmarketcap.com.
Then, with crypto advocates buoyed by Donald Trump's win in the US presidential election this month, the price of bitcoin hit a record $80,000 less than two weeks ago.
And as of Monday this week, it was trading north of $90,000.
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Bitcoin evangelists are confident it will keep climbing as they anticipate a friendlier regulatory environment under the new administration. Many think bitcoin is a great tool to build generational wealth. And some are even advocating for the US to create a strategic bitcoin reserve, which MicroStrategy executive chairman Michael Saylor told CNBC is a way for the US to "buy the future."
In the first decade after bitcoin's creation in 2009, the financial planning world was reluctant to consider crypto assets as a serious option for most individual investors. But in the past few years, education about crypto assets has been made more available to professionals. For example, the Financial Planning Association now offers three continuing education courses on crypto, according to FPA president-elect Paul Brahim.
So it's easy to wonder if maybe it's time to consider investing in bitcoin. We reached out to some financial advisers to see what guidance they offer clients interested in doing so for the first time.
What you'd be investing in
Bitcoin is the oldest and best known of all crypto coins. Its creator, the ever-anonymous Satoshi Nakamoto, set things up so that there can never be more than 21 million bitcoins in existence.
Unlike other assets that are valued based on tangible components, for example, a company's goods and services or a natural resource, bitcoin is considered a store of value, the price of which depends strictly on what others are willing to pay for it.
Its pricing is highly volatile, and therefore highly risky. For all its nosebleed ascents, bitcoin also has had some gut-punching plunges. Between November 2021 and November 2022, for example, the price of bitcoin dropped 75%, from $64,455 to $16,196, according to data on coinmarketcap.com.
While it's called a currency, and in some instances can be used like money, bitcoin is not legal tender in the United States or most other countries. And it is a much more complicated transaction for the individual who uses it to buy and sell things, especially when it comes to reporting the transactions on their taxes.
Its role in your portfolio
When asked what role bitcoin might play in a person's overall financial investment and savings portfolio, which you might use to buy a house, start a family, pay for college or save for retirement, one strong area of consensus among planners is to not invest any money in bitcoin for anything you must do in the next five years.
A representation of the Bitcoin cryptocurrency is being displayed in Brussels, Belgium, on December 6, 2023.
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"Due to its volatility, I would definitely avoid using bitcoin for short-term savings goals. And for the same reason, I would recommend only allocating a very small percentage of my long-term investment strategy to it," said Trent Porter, a certified financial planner and certified public accountant at Priority Financial Partners. He advises his clients who insist on exposure to limit their portfolio allocation to bitcoin to no more than 5%.
CFP Mike Turi, a founding partner of Upbeat Wealth who is also an accredited portfolio management adviser, is more conservative. He doesn't recommend clients allocate more than 3% to bitcoin, if they allocate any at all.
"I would not recommend using bitcoin as the main strategy to achieve your financial goals. If it's extra investable money that can help you get there faster? Sure. However, don't miss out on valuable opportunities by overexposing yourself to an asset that you might not fully understand," Turi said.
From Pulse Financial Planning CFP Matt Elliott's perspective, tax-advantaged 529 plans will always be the better option for college because they can be diversified and carry less risk. "It is one thing to bet your money on crypto, but another to bet a child's college savings on it," he said.
Elliott, however, can see a small role for bitcoin in a long-term retirement portfolio. He recommends his clients use a "core and explore" strategy. "Ninety-five percent of your assets should be in a core, well-diversified portfolio that is designed with your timeframe and risk tolerance in mind. The other 5% can be used for more speculative investments (such as crypto) if you have little debt and are willing to accept the risk of losing what you put in," he said.
Questions to ask yourself before buying bitcoin
Whether bitcoin make sense for you depends as much on your circumstances and preferences as it does on the facts of the asset itself.
"Before you invest in bitcoin for any reason, ask yourself if it were to drop 50% or more, would you be left in a pinch? If the answer is yes, you should reconsider," said Porter, who notes that even if regulatory risk does go down for crypto assets during the Trump administration "by no means has the overall risk changed significantly."
Turi suggests getting real with what you'll be able to live with. "I still see bitcoin more as a gamble than a reliable investment. Is it a risk you can afford to take? Consult your future self. What will happen if it doesn't work out?" he said.
If you do invest, set some ground rules for yourself from the jump. "The most challenging aspect of the bitcoin craze is that more retail investors are entering the market at its peak when euphoria is highest," Turi said. "On the flip side, they've never really established an exit strategy. …Investors need to set their exit price to avoid being driven by emotion."
Low-risk way to invest in a high-risk asset
If you decide you do want to put some money into bitcoin, you can buy it directly and store it either in your own virtual wallet or on a digital asset platform like Coinbase. But both options can get complicated and carry risks. [Here is a long list of storage options and their pros and cons.]
Or you can get access to it more simply and safely by buying into one of the new SEC-regulated spot bitcoin ETFs. Investors have poured nearly $28 billion on net into these ETFs, and their combined net asset value was approaching $96 billion as of Friday, according to data from Morningstar Direct.
Using a bitcoin ETF for exposure is the easiest option for most individuals who are not dedicated crypto investing experts.
"Due to risks such as cybersecurity threats and the possibility of losing private keys, holding bitcoin through an SEC-regulated ETF is by far the safest option," Porter said.
