By Jared McClure
Now that some of the hype around cryptocurrency has died down, investors are still interested in what crypto can do for their portfolios. Many are wary, either because they are mystified by how it works or because of what they’ve heard about cryptocurrency in the news.
Blockchain has been thrust to the forefront as a technological solution simply because many cryptocurrencies, such as bitcoin, employ it. In that respect, crypto has earned some credibility as a concept worthy of additional exploration, and companies have begun to produce projects that have greatly enriched early-stage investors. Don’t worry if you don’t completely understand blockchain: A robust understanding of the technology supporting cryptocurrencies is less important than an awareness of how to steer investors clear of common pitfalls.
Avoiding Crypto’s Investment Traps
Some advisors shy away from crypto because of shady reputations, the shortcomings of well-known cryptocurrencies and the challenges of the speculative market.
Crypto’s reputational problems come from companies like BitConnect, which used a “pump-and-dump” scheme and defrauded investors. Cryptocurrencies can also feel like dubious propositions because so many people are unclear about how they derive their value.
It’s easy to understand why people get confused. Stocks combine aggregate investor decisions with company news or earnings reports to determine a price. Commodities retain intrinsic value along with their relative worth on the market. The value of cryptocurrencies, however, is almost always based on nothing more than market speculation.
Often, there isn’t much on which to base investment decisions—other than the price of bitcoin. This is the most significant drawback to many cryptocurrencies, as they rise and fall with their prices. Most investors are put off by the idea of eating, sleeping and drinking bitcoin news in order to stay at the edge of the market before a shift. Nonetheless, cryptocurrencies can still be a successful addition to an investment portfolio.
There are reputable companies poised to adapt crypto to solve real-world problems. In those cases, their real-world applications are what will give cryptocurrencies their value in lieu of relying solely on the current trading price of the speculative market. These companies are seeing success in promoting their ideas and building communities around their projects. To be on secure ground, steer investors toward opportunities from experienced teams who have generated support and funds from an enthusiastic community.
Questions to Ask Before Investing
Initial coin offerings are typically early-stage crypto investments and are often not yet fully developed ideas. Investing during the pre-ICO or the ICO has the potential for the most significant gains, but it also carries the most risk.
To minimize that risk, look for crypto projects you and your client can understand. Too much complexity means too many variables that can throw off the success of your investment. Get involved in the crypto community, as that’s often the best place to understand what is happening with a particular crypto at any given time.
Also, look for solutions, not prices. Too many investors are fixated on finding a crypto that will make the most money and can’t see beyond the price. Price is not indicative of value to a system or a society. Look for a crypto that provides value through utility, and the price of the token will increase alongside it.
These are some questions to aid in the thought process:
Why are you advising investment in cryptocurrency?
Warren Buffett wisely counseled, “Risk comes from not knowing what you are doing,” and I would add that cryptocurrencies are not an exception. Don’t let the illusion of massive overnight fortunes and the fear of missing out be the driving forces behind investment decisions. Prompt investors to learn about the space and be able to articulate why they should choose cryptocurrency as part of their investment portfolios.
Does crypto help to achieve your client’s investment goals?
One thing I hear repeatedly from new crypto investors is, “I’m in crypto to make money!” Hey, we’re together there, but it’s surprising how many investors do not have designated objectives for their investments. Unfortunately, for some this does not become apparent until they’ve had a major loss. Markets change and not always in the direction that benefits their positions. Investors need to have clear pictures of their objectives for those investment dollars, and it’s your job to paint and defend it with levelheaded thinking and outlined objectives.
What is your client’s investment style?
There are hundreds of cryptocurrency projects to choose from, each with a different take on how crypto and blockchain can be utilized. If an investor fancies buy and hold, look for a cryptocurrency with steady increases over a 30-day moving average. On the other hand, if your investor is more of a day trader, look for a coin with massive volatility based entirely on speculation. That makes it easy to get in and out quickly to maximize your gains.
Do you trust the team working on the crypto project?
The importance of the integrity, expertise and experience of the team behind a crypto project cannot be overstated. Look for teams whose members have verifiable histories around the professed goals of the project. They will ideally be working toward solving a real-world problem and will be committed to seeing the project through. They will also be transparent in their communication with investors as they traverse the obstacles of expanding their project in the market.
By understanding the value that cryptocurrency can bring to the world markets as a way to securely and transparently conduct transactions, as well as understanding the specific strategies wise investors should employ, this new horizon can be fruitful for long-term returns. Do the homework, don’t get caught up in the hype and always look for how new businesses are applying the virtues of cryptocurrency to solve real-world challenges. That’s where the long-term value lies.