Talk about birds.
Cryptocurrency is all the rage with some investors, whose portfolios turn around a lot on a daily basis. The value of this type of investment, which is a form of digital payment, frequently rises and falls dramatically on social media posts, internet chatter, and sometimes, seemingly for no reason at all.
Sexy stories about investors who have hit hard in crypto make more mainstream investors question whether they should step into the game as well.
NJ Advance Media asked three financial advisers what they think about crypto and if it has a place in an investor’s portfolio.
What is cryptocurrency?
Advisors say that before you invest in cryptocurrency or any other investment, you need to understand how it gets its value.
“It trades more like gold, which derives its value from what people think value is in relation to a company’s earnings and growth potential,” said Jeanne Kane, Certified Financial Planner at JFL Total Wealth Management to Boonton, who noted that there are more. of 5,300 different types of crypto today.
There is no underlying asset with the cryptocurrency, she said.
“If you buy Apple stocks, you know the company makes computers, tablets, and phones. The value of the stock comes from their sales, from what they produce. This is not the case with cryptocurrency because there is no underlying asset, ”she said.
Kane said that unlike traditional investments, cryptocurrency transactions and records are maintained by a decentralized network rather than a centralized authority, such as a bank or government entity.
Cryptocurrency is not FDIC insured like your funds are in a bank, and there is no regulator like the Securities Investor Protection Corporation (SIPC), which offers certain protections for stocks and bonds. held in brokerage firms, she said.
So, the value of your cryptocurrency investment is based on what other investors are willing to pay for it.
Should I invest in cryptocurrency?
At a minimum, those who choose to invest in crypto should have a basic understanding of what it is and what makes it worth it, said Claudia Mott, certified financial planner at Epona Financial Solutions in Basking Ridge.
“It’s not an investment for the faint of heart given its extremely speculative nature,” Mott said. “Trading volatile assets like this can be a full-time job and those who think it’s a quick way to make money should consider how much time and attention should be given to an investment that can turn 20 to 30% due to a publication on social networks. “
Or any other type of public comment.
For example, Elon Musk appeared on Saturday Night Live on May 8 and made a joke on Dogecoin. The cryptocurrency fell 40% in a matter of hours.
It happened again on May 12 when Musk tweeted that he would not accept Bitcoin for Tesla.
“His comment caused a sell-off and a decline in the value of stocks that wiped out $ 300 billion from all cryptocurrencies in a single day,” Kane said. “Do you want a Tweet or an SNL skit to blow up or reduce your investments?”
Michael Maye, a certified financial planner and certified public accountant at MJM Financial in Gillette, said only those with a high tolerance for risk should consider buying cryptocurrencies.
“This is currently a very high risk / high return investment,” he said. “People who invest in crypto should be prepared for fierce price swings on any given day.”
But won’t I miss if I don’t buy
The fear of missing out – FOMO – can make even the most rational investors irrational, Kane said.
“The media are spreading stories about investors who have paid off their student loans or received astronomical returns from their cryptocurrency investments,” Kane said. “Do we hear so many stories about these individual investors who lost everything with a fall in the cryptocurrency market? Just because someone made money on Bitcoin or some other cryptocurrency doesn’t mean you will. “
Mott compared the “crypto craze” to the internet stock bubble that burst in 2000.
“Too many inexperienced investors think they are going to be doing murderous trading something they have no knowledge of,” Mott said. “It is more than likely that this will end badly for them, and for some it already is.”
I still want to buy. How can I do it smartly?
Advisors said that if you want to invest in cryptocurrency, take a balanced approach that looks at all of your finances.
Mott said price fluctuations alone would militate against making cryptocurrency a significant stake in any wallet. In addition, people should not use leverage or debt “to finance an investment which could lose a large part of its value and leave the investor worse off than he started”, he said. she declared.
She recommends keeping crypto out of your overall asset allocation and using side money instead.
Kane said conservative investors should avoid a speculative investment like cryptocurrency.
“If you are an aggressive investor and you think the cryptocurrency reflects your risk tolerance and fits in the speculative part of your portfolio, invest with caution,” she said. “Given its volatility, cryptocurrency should only represent a very small fraction of someone’s wallet.”
Maye said that rather than buying individual cryptocurrencies, investors might consider Bitwise, which in 2017 introduced the first cryptocurrency index fund and now has several other offerings.
But they too are volatile.
For example, the Bitwise 10 Crypto Index Fund, which tracks the 10 most popular cryptocurrencies, lost 19% last month and is down 16.9% in the past three months, but is up 70%. , 1% so far this year and has a 321% gain since its launch in 2017.
Maye said he would limit crypto exposure to 5% of your portfolio, or less, given the volatility.
What are the tax implications?
In 2014, the IRS classified virtual currencies as property and not as currencies, Maye said, noting that most cryptocurrencies are considered an investment asset and are subject to capital gains rules. .
“Crypto sold at a gain but held for less than a year is considered short-term and is taxed at a taxpayer’s ordinary tax rate,” Maye said. “Crypto that is sold at a gain but held for a year is considered long-term and taxed at long-term capital gains rates, which currently range from 0% to 20% depending on the income level of the taxpayer. “
Some higher income taxpayers may also owe an additional 3.8% surtax.
If a cryptocurrency investment is sold at a loss, it can be used to offset capital gains taxes plus up to $ 3,000 in ordinary income, Maye said. For federal tax purposes, unused capital losses can be carried forward to future tax years, but many states, including New Jersey, do not have a carry-forward rule, he said. .
And on Thursday, the Treasury Department released a report detailing the IRS’s changes under the U.S. plan for families. If passed, the bill would require reporting of crypto transfers if they exceed $ 10,000.
Have you personally purchased crypto?
None of the advisers we spoke to have personally purchased cryptocurrency.
“I’m not a speculative investor and I don’t want to waste my money on something that I might not be able to trade if the platform closes,” Mott said.
Maye also said he didn’t and didn’t intend to.
“I think crypto will be longer term because it’s an interesting technology, but nobody knows what regulatory environment awaits or which crypto will dominate in the long term,” Maye said.
Kane said the crypto was not in line with his investment strategy.
“I’m not much of a gamer and tend to invest in mutual funds and exchange traded funds which historically have returned an average of 8-10%,” she said. “It may sound boring to some, but over time it gets bigger. Slowly and steadily wins my race. “
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Karin Price Mueller can be contacted at KPriceMueller@NJAdvanceMedia.com.