Should You Invest in Bitcoin and Cryptocurrencies? Experts Share Best Practices in a Volatile (Yet Maturing) Market.
Investing in Bitcoin and cryptocurrencies could be the right move ... if you know what to expect.
Do you believe Bitcoin and cryptocurrencies are ready to skyrocket again?
Since its inception in 2010, Bitcoin was the first digital asset to beget an entire ecosystem of cryptocurrencies. For quite some time, it grew an underground following of investors who seemed very interested in its future as a possible replacement to the physical monetary system, as traditional institutional players curiously watched its development.
While we are still likely many years away from a complete transition, the crypto space has been a fairly volatile playground. During the ascension and adoption of crypto, many people launched ICOs (Individual Coin Offerings, akin to offering a new stock) without any supervision or regulation. During this time, Bitcoin led the charge to a valuation of nearly $20,000 per coin in 2017, but then its value steadily declined over the course of 2018 and settled in the range of $3,500 to $4,000 for quite some time.
After witnessing the meteoric rise and subsequent fall of Bitcoin's value, many folks became gun-shy about investing in cryptocurrencies. However, recent activity has caused Bitcoin's value to significantly rise at the time of this writing and has caught the attention of many existing and would-be investors.
During the past couple of years, the crypto market has matured with more oversight and regulatory controls in place by both institutions and government agencies. As a result of these measures and more institutional dollars supporting the industry, more people are now seeking ways to reduce their risk while still seizing a profitable ROI.
Here are some tips on how to successfully invest in cryptocurrencies from industry experts:
Diversify your risk when investing in Bitcoin and cryptocurrencies.
In today's "instant gratification," microwave-results society, many people are looking -- again -- to time the crypto market and win big, almost with a "win-the-lottery" type of mentality.
However, Parul Gujral says this is a recipe for probable disaster. In my video interview with the CEO of Snowball, Gujral agrees that you can still win big if you time the market just right, but as many people experienced in 2018, you can also lose big just as quickly.
He believes the key to success when it comes to investing in cryptocurrency is to diversify your risk by investing in a pool of cryptocurrencies that are vetted by financial professionals, just like your 401k accounts or index funds.
"With our mobile app, we let you invest in cryptocurrencies or digital assets like Warren Buffet wants you to invest in stocks through the S&P 500. Warren Buffett, Ray Dalio and even Tony Robbins in his book, Money Master the Game, all recommend index investing. By investing in an index, the fees and risk are much lower, it's tax-optimized and you can typically outperform the market," Gujral said.
The recommendation of investing in an index fund means you're not putting "all your eggs in one basket" like many people did when they invested in a single coin or ICO and lost big when the cryptocurrency market deflated in 2018.
Paul Veradittakit, a partner at Pantera Capital, also recommends the concept of diversifying cryptocurrency investments: "I think if you're an individual investor, it makes sense to try to diversify as much as possible just because there is a lot of risk in cryptocurrency and a lot of volatility, and you want to make sure that you have a basket of them and hopefully hit on one of the investments that will do very well."
However, most people only have access to invest in crypto funds or indices if they are an accredited investor -- someone who makes over $200,000 for 2+ consecutive years and/or has $1 million of assets, not counting primary real estate. This means the novice or average person typically doesn't have the ability to invest in a crypto fund.
It’s a major reason why Gujral founded Snowball and hopes his app will help democratize access to the best crypto fund and index strategies. He believes the average investor should be able to wisely invest in the cryptocurrency sector with less friction and reduced risk.
Invest through regulated professionals.
Another challenge is finding those financial professionals who can effectively research and recommend a portfolio of cryptos that provide a steady return-on-investment (ROI) while minimizing your exposure to a bear -- or down -- market.
There are a plethora of options when it comes to cryptocurrency apps and investment platforms, but one of the differentiating factors investors should seek when working with financial professionals are those who have earned Registered Investment Advisor (RIA) status by the Securities Exchange Commission.
According to Investopedia, "RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients' best interests. As the first word of their title indicates, RIAs are required to register either with the Securities and Exchange Commission (SEC) or state securities administrators."
This designation essentially means that RIAs are not only regulated but are also fiscally responsible for their investment advice and recommendations.
"We’ve become a registered investment advisor or an RIA, just like Andreessen Horowitz announced they are requiring all of their firms to have registered investment advisors," said Gujral. "Since we are managing people's money and digital assets, we felt like it was extremely important to 1) have a stamp of approval stating that we're qualified and then 2) have a set of eyes regulating us. So now we're regulated by the SEC and FINRA and at some juncture in the horizon, we will also be regulated by FinCEN, but not yet."
During an interview with Veradittakit, whose investment firm has funded over 100 crypto-related projects, I asked how important the RIA designation is for the future of the industry. "I think it's a big deal. I think it's good that investors and entrepreneurs do whatever they can to protect themselves with regulations. When you are managing other folks' money, becoming an RIA with the SEC is a great way to provide credibility and have the right licensing to do what you want to do across asset management. It's why Pantera became an RIA as well."
As the cryptocurrency ecosystem continues to evolve and become more complex, it will only become time-consuming and challenging to know which coins and tokens are worth betting on and which ones to avoid like the plague. Working with registered professionals may help to save time and hopefully increase your odds of a profitable investment.
Focus on education and wealth accumulation.
Regardless, it's not wise to ignorantly entrust your capital to any financial advisor, app or crypto company without doing any of your own due diligence and research. After all, you're ultimately responsible for the outcome of your decision.
Gujral recommended Coinbase Earn as a good place to start for education. According to their site, Coinbase offers to pay people to learn about cryptocurrencies as people complete educational tasks like watching short video lessons and completing quizzes. Their organization is a regulated broker-dealer and, according to Gujral, they've received their RIA designation from the SEC as well.
During an interview with Gordy Bal, the CEO of Conscious Thought Revolution who has invested in companies like Bulletproof Coffee and WAX, I asked why people should educate themselves about the industry. He replied, "Over the next 25 years, Accenture reports there will be a wealth transfer of over $30 trillion in North America moving from baby boomers to their heirs, and it will be the greatest wealth transfer in history. There is no question if cryptocurrency is going to be a thing. It's just an inevitability. I think what would serve people really well is to understand the underlying technology from a philosophical standpoint and how it can serve a greater purpose."
While some folks are willing to bet big by day trading and timing the markets, the average and novice investor may not want to expose themselves to significant risks and losses and may want to adopt a more conservative approach.
As per Veradittakit, "If you have the time and you have the skill set to actively day trade and you can do well at it, then go for it. But I think for most folks, they're just not going to have that skill set or the time. I think the biggest thing is really finding projects or companies that you're passionate about and invest in a portfolio of cryptocurrencies for the long term."
Bal concurs, "I would say, instead of focusing on the possibility of making massive amounts of returns, make it about aligning with a project that speaks for the future of our race, our species and our planet. Focus on the long game -- find the founders who have a mission, who have had multiple successes before and who are already being funded by the Andreessens of the world. Play alongside them by investing in these deals."
With major financial institutions and corporations like JP Morgan, USAA, Goldman Sachs and IBM backing crypto, as well as Facebook's recent announcement of their own coin, it seems that cryptocurrencies are here to stay. In fact, Gujral is so bullish on the future of crypto that he plans to have Snowball be amongst the first to integrate with Facebook's Libra coin.
In an email, Reese Jones, a venture strategist who serves as an advisor to both Facebook and Snowball stated, “Facebook’s Libra will introduce upwards of a billion people to digital crypto money payments and many of those people will, of course, want to diversify their money investments into portfolios as facilitated by Snowball.”
As the industry continues to mature and grow, it may be wise to research and learn how to intelligently invest in the crypto markets. Investing in your financial education is usually profitable, and a conservative cryptocurrency strategy could pay big dividends in the long run.
Even Yale suggests that investors should put up to six percent of their assets into cryptocurrencies.
"Remember when your Gmail name was taken because you took too long to get your Gmail address?" recalls Bal. "It's the same thing with investing in cryptocurrency. These are the moments that you can get in at an early stage like you would have been able to for the Googles and Amazons in the early 2000s. Just get in the game, whatever that looks like. Don't be so behind the curve where a few years down the road, you reflect and wish you took action."
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