Given Bitcoin’s unpredictable nature, you may wonder whether you should consult a financial advisor before investing in the buzzy cryptocurrency. The short answer: It never hurts to get a second opinion.
Anything that jumps from less than $11,000 to more than $40,000 in a few months would make many investors take a second look. It’s hard not to see the allure of triple-digit returns. Time it right, and you might retire on Bitcoin alone. But time it wrong, and you could see all your hard-earned savings evaporate overnight.
A financial advisor will approach the investment decision from a pragmatic point of view and give you advice that isn’t emotionally or behaviorally biased, says Tyson Romanick, chartered financial analyst and portfolio manager at Baker Boyer in Walla Walla, Washington. “A financial advisor can familiarize you with the risks of investing in this type of asset, so you have a better idea of what to expect and the possible outcomes.”
Of course, it isn’t necessary to ask a financial advisor’s opinion before investing in Bitcoin. If you have already committed to buying Bitcoin no matter what anyone else says, there is no reason to get a financial advisor’s advice, says Josh Simpson, financial advisor with Lake Advisory Group in Lady Lake, Florida.
“If you’re an experienced investor who is only going to put a small portion of your investable assets into Bitcoin that would not destroy you if you lost it, then there is no reason to sit down and speak to an advisor before you invest in Bitcoin,” he says.
If your mind is not made up, or you’re thinking of investing more than a small amount, however, the best course of action is to get as much information as possible before making a decision. “A financial advisor may have some insights that you had not thought of or bring up some information that you may not have been able to find yourself,” Simpson says.
Getting a Financial Advisor’s Advice Before Investing in Bitcoin
When you buy Bitcoin, or any type of asset, there’s more to consider than just the binary decision of whether or not to buy, Romanick says. For instance, if you were to buy, how much would you invest? This comes down to a question of how much you’re able to risk, which depends on your financial situation and risk tolerance, he says.
Then there is the question of where to buy bitcoins. “Which firm are you going to choose to purchase the Bitcoin?” Romanick asks. “Is that firm going to custody, or hold, the Bitcoin in your name like a stock, or are you going to take possession of the Bitcoin and store it offline using cold storage?” There have been enough headlines about people forgetting their Bitcoin wallet passwords and supposedly losing access to hundreds of millions of dollars in Bitcoin to make you want to think twice about how you’d store your Bitcoin.
“Once you decide how much to buy and where to buy it, you need to think about an investment strategy,” Romanick says. Are you going to buy a single lump sum and just hold on? Or will you dollar-cost average in by purchasing smaller, equal amounts over time?
An even better question is what will you do if the price drops 80%? What if it doubles? “Then you have to think about how long you are going to hold it and how to exit your position,” Romanick says.
These are all important considerations that a financial advisor can help you work through.
What You Should Know About Bitcoin Before Investing
Simpson says there are a few facts people should know about Bitcoin before investing. “First, it is a currency that is backed by absolutely nothing.” Its value is not tied to the gold standard or the strength of any country’s economy. It is purely based on what people believe it’s worth from day to day, which is why it has such wild price swings.
This makes major retailers unlikely to ever accept bitcoins as a form of payment. “Today it may be worth $20,000 per coin, and tomorrow it may only be worth $5,000 per coin,” Simpson says. “No major company wants to take that risk when they sell something.”
If all of that isn’t enough to scare away a savvy investor, you should also be aware that since Bitcoin does not trade on any major exchange, there is no established market for investing in it. “If you have some and want to sell it, you must wait for there to be a buyer before you can get rid of it,” Simpson says. “That also contributes to the significant volatility that we have seen in the price of Bitcoin from day to day.”
And most of what you need to know about Bitcoin as an investment is written in its price history. “Bitcoin is a risky asset that has seen some very volatile swings, and there is still a chance that it all goes to zero,” Romanick says. “Don’t risk more than you are willing to lose.”
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Should You Get a Financial Advisor’s Advice Before Investing in Bitcoin? originally appeared on usnews.com