Is there a right way to invest in Bitcoin in 2022? Yes.

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You’ve read stories about celebrities, like Elon Musk and Mark Cuban, who are supposed to profit from Bitcoin. You’ve seen advertisements for companies claiming to offer a safe and easy way to buy it. You probably even know a few people who have tried it.

But beyond the frothy headlines and its reputation as the Wild West of the money market, crypto is slowly emerging as a viable part of many people’s long-term investment strategies. According to a new survey from Wealthramp, more than one in five investors with assets between $250,000 and $2.5M+ reported holding 6% to less than 10% of their total investments in Bitcoin and crypto. It’s even higher among Millennials, with 43% of this age group of investors holding up to 10% in digital currencies.

The first thing to ask before jumping on the crypto bandwagon is, above all, why do you want to invest in it?

Some people own bitcoin as a way to make a political statement. Or maybe it’s because you think you can make a decent profit if you buy it now. A big draw to owning cryptocurrencies is simply the fact that they are new and exciting investment opportunities.

If these are your reasons, then you might want to get your feet wet as a crypto enthusiast. Open an account with an online crypto exchange and fund it with fun money you can afford to lose.

But if you really want to treat crypto as a real investment, you’ll want to understand what makes it unique.

How does bitcoin work?

Bitcoin, Ethereum and other cryptocurrencies are real the same way a digital image or video is real. Yes, they only exist in cyberspace, but again, so does this article.

Two factors make cryptocurrency different from other types of currencies.

First, because it takes an enormous amount of computing power to create crypto, there is a limited supply available to consumers. The more people who want to own a piece of the crypto pie, the more the price increases. Second, crypto is not backed by the full faith and credit of any government. This is why it has great appeal among people who oppose government regulations. However, the flip side of this lack of oversight is a lack of formal protections for consumers.

In many ways, investing in crypto is like investing in baseball cards or Beanie Babies, in that their value only reflects ever-changing consumer feelings about their collection. While some cryptos are valuable in terms of the transactional processes they enable, price fluctuations in general are driven solely by supply and demand. And like most investments, those that come in and out first tend to profit the most.

So what makes cryptocurrency more than a digital Ponzi scheme? Blockchain. Without going into details, blockchain is a revolutionary open-source cyber-technology that records every cryptocurrency transaction in a way that cannot be deleted or altered.

When you buy Bitcoin, your purchase will be recorded on the blockchain (but your privacy will be protected). As blockchain becomes more widely used for common transactional purposes, the more bitcoin and other cryptos will play a role in serving as monetary tokens for these exchanges.

Is Bitcoin safe to buy?

While you can use Robinhood and other online broker apps to trade crypto directly, none of the established discount brokers like Fidelity and Schwab allow you to do this with them, you can only invest in currency contracts. crypto futures or ETFs that invest in crypto futures.

Today, most people buy and sell crypto directly using crypto exchanges like Coinbase. But it’s important to understand that unlike banks and brokers, currency exchanges aren’t legally bound by the FDIC, FINRA, or SEC to guarantee the full return of stolen crypto to your account, although most have crime insurance to protect some of the digital assets. they hold in storage. This is worth considering, as in 2020 alone, hackers stole $3.8 billion worth of crypto in 122 separate attacks, a third of which directly targeted blockchain users. Between March and May 2021, hackers stole crypto from over 6,000 Coinbase accounts. Around the world, dozens of hacked crypto exchanges have gone bankrupt after losing everything to cyber theft and embezzlement, leaving consumers with little to no resources.

Could this happen in the United States? Time will tell us. Knowing all of these risks, if you still believe in the long-term investment potential of crypto, your next step is to figure out how to use it responsibly.

Is your crypto strategy an inflation hedge or a sideways stock market?

It is important to understand the impact that even a small allocation to crypto can have on your overall investment strategy. Although it adds a degree of diversification beyond stocks and bonds, it is not a risk mediator. Why? Because crypto is inherently volatile. Its huge price swings are driven solely by fear and greed, rather than quantifiable business, economic or geopolitical factors.

And once you decide to add it, how do you choose from the hundreds of cryptos available? Unlike stocks or bonds, there is no formal research available to help you determine which digital currency offers the best bank for your money.

That’s why if you’re serious about crypto as a long-term strategic investment, you might want to work with a qualified fiduciary financial advisor who has expertise in digital currencies.

Not only will such an advisor have access to research that makes crypto valuation something more than a mere guess, but they also have sophisticated financial modeling tools that can hypothetically illustrate its potential long-term impact on your portfolio under various return scenarios. Keep in mind that none of these models can predict future results in any way.

If you really want to invest in crypto, most financial advisors familiar with crypto recommend that it should not represent more than 5% of your portfolio. And that’s only if you have a long time horizon (20 years or more) and a moderate to high appetite for risk. (To learn more, please read How Much Bitcoin Should I Own? A Math Answer.)

The future of cryptocurrency in 2022 and beyond

Since crypto is not currently regulated by the SEC or FINRA, advisors cannot use institutional brokerage and custody platforms to buy and hold it on your behalf. This is why most simply offer advice to customers on how to make their own self-directed crypto purchases.

However, some paid financial advisors are testing the first generation of apps that allow them to buy and manage crypto for their clients. Once the SEC and FINRA finalize the rules of conduct for crypto investing, we should see a rush from Fidelity, Schwab, and other custodians to add crypto trading to their platforms. This will be critical, as one of the main responsibilities of advisors will be to continuously monitor crypto stocks and rebalance portfolios when price swings push crypto allocations out of their target ranges.

Crypto is not a passing fad. It’s here to stay, and crypto investing will eventually be regulated to provide the same level of consumer protection as investing in securities, mutual funds, and ETFs.

If you’re considering making a substantial investment in crypto right now, it’s worth working with a qualified financial advisor who can help you understand how to tap into its potential in a thoughtful and responsible way.

This article was written by and presents the views of our contributing advisor, not Kiplinger’s editorial staff. You can check advisor records with the SEC or FINRA.

Founder, Wealthamp

With more than 25 years of experience in investor advocacy, Pam Krueger is the founder and CEO of Wealthramp, an SEC-registered advisor-matching platform that connects consumers with carefully selected and qualified. She is also the creator and co-host of the award-winning investor education television series MoneyTrack, which airs nationally on PBS, and the Friends Talk Money podcast.

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