What is it? How does it work? Should you own it? What do we think about it?
It is hard to ignore the hype around cryptocurrencies. Will it eventually be the new form of payment?
Cryptocurrency is a digital payment system that uses encryption to verify transactions. It exists purely as digital entries. They do not have a central issuing or regulatory authority to uphold or maintain it.
Cryptocurrencies run on a digital ledger called the “blockchain”, a computerized database using strong cryptography to secure transaction records, to control the creation of additional coins and to verify the transfer of coin ownership.
Should you own it? What is your tolerance for risk? Can you handle the volatility?
Investing in cryptocurrencies, like with any asset, involves risks. They are notoriously volatile. Yes, some investors have seen significant gain. But many have experienced significant losses.
Some risks, just to name a few, unique to cryptocurrencies surround the lack of regulation.
- Laws can change which could restrict or impair holding cryptocurrency.
- There may not be any recourse if is lost or stolen.
- New technologies like cryptocurrency are often used to carry out fraudulent investment schemes. Investors should do their due diligence before investing in a cryptocurrency as well as the platform on which they purchase it.
More importantly, because cryptocurrencies are relatively new, there may be unforeseen risks in the future that are not evident now.
Investors who want to pursue opportunities in cryptocurrencies should proceed with caution. Before getting started, investors should get educated and consider whether cryptocurrency exposure may fit into their portfolio in a way that aligns with their risk tolerance and financial goals. After considering the risks and rewards of cryptocurrencies, the final step for investors would be to decide the final amount of their overall portfolio they are willing to allocate.
Due to the lack of regulation, Avantax currently does not permit us to hold cryptocurrencies. There are many platforms available. Be careful of scams. Work with a reputable company. In the meantime, we will continue to do our research, so we are making an educated decision on the appropriateness of cryptocurrency for our clients.