Cryptocurrencies

Cryptocurrencies can be a tool for creating long-term personal wealth

Cryptocurrencies can be a tool for creating long-term personal wealth

A visual representation of digital currencies.

Yuriko Nakao | Getty Images

Even though it is a highly volatile asset, cryptocurrency can help investors build wealth, especially if they invest in digital coins for the long term.

It’s a portfolio game that has gained traction in recent months and is catching up with stock trading as something Americans are considering to grow their wealth. Some 13% of Americans have bought or traded cryptocurrencies in the past year, according to a recent survey conducted by NORC at the University of Chicago. During the same period, 24% traded stocks, according to the study.

Bitcoin has crashed lately, highlighting the volatile nature of many digital coins. On Friday, the asset fell to around $32,000 per coin, but rebounded to around $40,000 on Monday, the highest price reached since June. On Tuesday, the cryptocurrency fell again, trading down 5% around $37,000.

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That’s a big drop from the all-time high of around $63,000 hit in mid-April. Still, bitcoin is up around 30% since the start of the year.

“It has its place, especially for younger people,” said Tyrone Ross, CEO of Onramp Invest, a provider of “crypto-asset” management technology for financial advisers.

Part of a larger portfolio and plan

To be safe, investing in cryptocurrencies should come after having a solid financial plan that includes emergency savings and solid retirement planning, according to Ross.

“Have a financial plan first and figure out where crypto fits into that,” Ross said. “If you don’t have a plan, what do you do? »

Once that’s in place, however, it may make sense for investors to consider crypto as a key part of their long-term portfolio.

Due to the volatile nature of cryptocurrency, financial experts generally recommend it to tech-savvy investors who are dedicated to learning about the asset and have plenty of time to weather the ups and downs.

Then some of the same rules of investing in the stock market apply; namely, don’t make emotional decisions or sell in a downturn.

This could be even more difficult and require more discipline for cryptocurrency investors. Ross suggests not checking the price often, and certainly not every day.

“If you’re careful about that, you’ll have massive stomach acid and get drunk very quickly,” he said.

Allocation

Financial experts generally recommend putting into cryptocurrencies only an amount of money that you can safely lose – in other words, it shouldn’t be all your nest egg.

As a rule of thumb, having 5% of your portfolio in a high-risk asset such as bitcoin – or other coins – is a safe rule of thumb. For some investors, however, it may make sense to invest even more in crypto.

“I would say 5% to 15% of digital assets in general, and it goes from 2% to 5%,” Alex Mashinsky, co-founder and CEO of Celsius, a cryptocurrency lender that pays high returns and provides loans using crypto as collateral.

The higher allocations are usually for younger investors who truly believe in the technology behind cryptocurrency, believe it will be more widely adopted in the future, and have the time to wait.

“If you’re 69 and you’re retiring next year and you’re going to need that money, obviously that’s not a good idea,” Mashinsky said. “But if you’re in your 20s and projecting 20 or 30, then you should have a bigger allowance.”

Experts also recommend investors buy crypto using strategies similar to those used for stocks, such as dollar cost averaging – basically, putting in small amounts of money consistently, instead of to buy everything at once. This helps combat some of the price volatility.

“It’s not about ‘I’m going to make 10 times my money, I’m going to be rich,'” Mashinsky said. Instead, investing in cryptocurrencies should be seen as another path to financial independence that can help people beat inflation over time.

Attract younger and more diverse investors

Another benefit of cryptocurrency is that it has broader appeal for investors who have traditionally struggled to build long-term wealth, including people of color, women, and low-income people. .

Women make up over 40% of cryptocurrency traders compared to 38% of stock traders, according to the NORC survey.

People of color and those with low incomes surveyed by NORC were also more likely to invest in cryptocurrency than stocks. People of color make up 44% of crypto traders, compared to 35% who own stocks. And, those earning less than $60,000 a year make up 35% of cryptocurrency traders, while only 27% of those investing in stocks had similar annual earnings.

Additionally, the average age of crypto traders was 38, compared to 47 for those holding stocks.