2021 Crypto Investing Tips From Financial Advisors

You can buy it online. You can get it at the ATM. And you can even snap it up in person. Cryptocurrency has dominated investing headlines in the first half of 2021. But with Bitcoin falling from over $64,000 in April to less than $30,000 in June, many investors are thinking about moving their money back to stocks, options, and other types of investments. SmartAsset spoke with financial advisors to help you decide if (and when) cryptoassets are good for you. Here’s what you need to know about crypto investments in 2021.

With so many cryptocurrencies available, the opportunities could feel endless. And while these digital currencies are attracting record numbers of investors in 2021 with the hopes of cashing in on high returns, financial authorities continue to warn about the risks of losing all your money.

Nevertheless, cryptocurrency is gaining mainstream acceptance. And this is shifting attitudes on crypto investments, elevating Bitcoin and other digital currencies from short-lived gambles to long-term investing strategies that compel those who are willing to take on the risk to “HODL” – a misspelling of the word “hold” that means “hold onto dear life” in crypto slang.

“We’re at the point of reaching mass acceptance before mass adoption when it comes to cryptoasset investing,” said Tyrone Ross, CEO of Onramp, an online platform that offers cryptoasset management technology for financial advisors. “Which basically means that we know that cryptoassets are not going away.”

Similarly, other financial advisors also point to Bitcoin’s milestone year in 2021 as a cryptoasset. Despite its volatility over the last 10 years, it has gained momentum in garnering mass acceptance by investors in America and abroad.

“The adoption story of this decade is Bitcoin,” said Isaiah Douglass, partner at the investment advisor firm Vincere Wealth Management. “The Bitcoin and cryptocurrency market is small when compared with other types of assets. But an estimated 46 million Americans own Bitcoin today.”

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With more than 10% of Americans owning Bitcoin, this represents a solid critical mass for the asset in the U.S. And Douglass says that “seeing it get added to company balance sheets and sovereign nations like El Salvador and likely others is a powerful global growth story.”

What Is Cryptocurrency?

2021 Crypto Investing Tips From Financial Advisors

Financial experts define cryptocurrency as a digital currency that is often decentralized. And this allows it to be transferred bank-free without relying on third party handlers.

Advocates say that decentralized currencies offer greater freedom and lower transaction costs than regulated currencies like the U.S. dollar, which is issued by a central bank. Critics, however, point out that the lack of regulation also makes it difficult to take action on illegal transactions.

Because cryptocurrencies are not backed by governments or precious metals like gold, they tend to be riskier investments since they are largely based on a perceived value.

As an example, the founder of the spacecraft company SpaceX and cofounder of the electronic payment firm PayPal drove the value of the open source peer-to-peer digital currency Dogecoin to an all-time high over $0.70 in the days leading up to his May 8 appearance on the sketch comedy and variety show Saturday Night Live.

Interest in crypto investments soared after the value of Bitcoin rose for the first time above $30,000 in January 2021. Within a few months, it had gone up more than double to a record high of $64,642.40 on April 14th, and then fell again briefly beneath $30,000 on June 22.

Cryptocurrencies like Bitcoin are just one type of cryptoassets which include other digital assets that are stored and tracked on blockchain technology.

The U.S. Treasury Department wants crypto transfers over $10,000 to be reported to the IRS. This is part of an $80 billion tax compliance initiative in President Joe Biden’s American Families Plan that aims to crack down on money laundering and tax evasion.

Should You Invest in Cryptoassets?

While cryptocurrencies have a reputation for being speculative and volatile, financial advisors say that these crypto investments can make sense as a long-term strategy.

“The key to investing in Bitcoin and other cryptocurrencies is understanding why you own it,” Douglass told SmartAsset. “If you only own it because you think it’s going to continue going up as an investment, then that’s probably the wrong reason to get into it.”

The financial advisor says that a good starting point for a crypto investor is to understand how money works and then compare it with what makes digital currency valuable.

“As long as investors understand what is money, then they can benefit from it like any other long-term investment,” said Douglass. “Bitcoin is math, it is code, and this can give investors confidence because it is programmatic and it says what it is going to do.”

But regardless of which cryptoasset you invest in, financial advisors will tell you to exercise the same practicality as you would with other investments and make sure that it fits into your financial goals and needs.

“When investing in cryptocurrency or cryptoassets, investors need to ask themselves whether these investments move the needle to help them reach their financial planning goals and objectives,” Ross told SmartAsset. “The answer is always the same, whether it’s Bitcoin or Apple stock, if it helps the investor achieve their goals then great. But if
not, why is it even in the conversation?”

How to Mitigate Crypto Investment Risks

2021 Crypto Investing Tips From Financial Advisors

Investors are keen on boosting their return rates. But whether you are careful when picking low-risk assets for your portfolio or are taking on additional risk, financial experts say that it is important to rebalance or make adjustments to protect your investments.

“When you invest in Bitcoin, you need to rebalance frequently and keep the allocation meaningful to your personal risk tolerance and time horizon,” Ross said. “Cryptoassets are up a lot and down a lot. So you have to figure out how much risk you’re willing to take and for how long to ride those movements.”

While keeping investment goals and risk in mind, financial experts will also call your attention to an investing strategy that could help you manage volatility.

“I encourage clients to establish an initial position and then do some sort of dollar-cost average of continuous buying from there to help level out the price over time, especially for when you see downturns and volatility,” Douglass said.

Dollar-cost averaging, which is commonly referred to as the constant dollar plan, is an investing strategy that requires you to put a fixed amount of money into a security. These payments are typically based on a schedule.

Following the strategy, if the price of a cryptoasset goes up, the fixed amount will buy you a small number of shares. And when it goes down, you’ll get more shares. As a result, dollar-cost averaging aims to reduce how much you will pay per share over time.

Bottom Line: Is It Worth the Risk?

Financial advisors say cryptoassets, like other types of investments, only make sense if they line up with your financial goals and needs. From an investor’s perspective, as more countries and companies adopt cryptocurrency, it will gain even more mass acceptance and mass adoption. And while 2021 has been a milestone year for crypto investors with exciting ups and vertiginous downs, financial advisors will also tell you that it’s good to be skeptical because opportunities will come when you are educated and ready to invest.

“It’s still very early so don’t feel like you missed the opportunity to invest in cryptoassets, Ross said. “Learn, read, ask questions. And understand that it’s O.K. to be a skeptic. If you decide to invest, you will come to it at your own time.”

Crypto Investment Tips for Beginners

  • A financial advisor can help you navigate through the volatility of the cryptoasset market. SmartAsset’s free tool matches you with financial advisors in your area in five minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.

  • Because the IRS categorizes cryptocurrency as property, you may owe capital gains taxes. SmartAsset’s free capital gains calculator could help you figure out how much you owe.

  • If you lost money on Bitcoin or other cryptoassets, a financial advisor can also help you deduct your capital gains losses. Learn more about tax-loss harvesting.

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