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If You’re Going to Invest in Cryptos, Diversify

With the extreme, rapid price appreciation of digital currencies, some clients may be demanding an investment in cryptocurrencies. If you must, diversification is key.

The price of bitcoin surpassed $11,000 per unit on Wednesday. The price of Ether has risen 5,700 percent this year. The cryptocurrency craze is, no doubt, prompting questions from clients, leaving advisors to determine how to invest in something that could be highly speculative.

“People either say [bitcoin is] going to $1 million, or it’s the greatest scam of all time,” said Matt Hougan, CEO of Inside ETFs, echoing an uncertainty that is likely plaguing many advisors when clients ask about their options.

 If you must capitulate, ETF managers say that just as with investing in stocks and bonds, the best way to get exposure to digital assets is to diversify.

“The reason for tracking a basket of these applications is the same reason one would buy an ETF or basket of stocks and bonds, meaning you want to reduce your risk or exposure to any particular technology because it’s early days and you don’t know what the winner is going to be,” said Jan Van Eck, CEO of Van Eck, which launched a series of cryptocurrencies indexes and filed for a bitcoin ETF.

Van Eck compares Ether to Netscape 1.0, the first usable internet browser. While the internet itself was widely adopted, and in fact changed the world, Netscape didn’t even survive as a company. That’s why owning a basket of digital currencies is better than placing a single bet. “Just understand the risk,” he said.

The MVIS CryptoCompare Digital Assets 10 Index, for example, an index of the largest and most liquid digital assets, is up 4,300 percent this year, compared to bitcoin, up 1,500 percent, said Gabor Gurbacs, director of digital asset strategy for Van Eck. Diversification helps manage volatility and allows investors to participate in the returns of some of the smaller tokens.

While many clients are asking about digital currencies, most advisors just wave it off, which Gurbacs says is also a mistake.

“Digital assets are a type of disruptive technology, and the first thing that I think financial advisors have to do is not to poo poo the technology because frankly, every major technology and financial institution that I know of is investing heavily in blockchain technology;” blockchain technology being the distributed ledger technology behind digital currencies. “You don’t want to be making fun of it in the high probability that all these corporate CEOs are correct in using this technology.”

Growth investors should have exposure to technology as a sector, and Gurbacs recommends putting from 0.5 to 1 percent into these assets.

“People are afraid that you get sucked in by the mania and the momentum of these markets, but I think people, on the other hand, are also afraid if they don’t get involved too.” 

Is bitcoin a bubble? Gurbacs said it is highly speculative and the run-up will probably end one day. But if you’re comparing the digital currency to gold, a store of value, it still has room to grow. The market capitalization of gold is currently at $8 trillion versus $200 billion for bitcoin.

Still, consider bitcoin’s “M1,” a measurement of the total quantity of a currency in circulation and stored in liquid accounts, Gurbacs said. By that token, the currency is the 25th largest in the world, bigger than the currency supply of Mexico, Venezuela and Denmark put together.

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