I’ll be the first to tell you that cryptocurrencies are exciting. While it is exciting to see its sharp rise in popularity, it is important to understand whether it has a role in a diversified portfolio.
Putting aside squabbles over the future value of bitcoin or other cryptocurrencies, here are a few issues you should consider:
- Threat of online hacking. Keep in mind that bitcoin held on exchanges isn’t insured by the FDIC.
- Little or no regulation. It currently operates with no major regulations making it susceptible to fraud and malpractice.
- Limited use. It is still not widely accepted making it an unfeasible investment vessel.
- Limited supply. There is a fixed supply of bitcoin, 21 million coins.
- Wallets can be lost. Bitcoin is not backed by an issuing authority and exists only as computer code, generally kept in a so-called “digital wallet,” accessible through a password chosen by the user. If you lose your password, you could permanently lose access.
None of this is to deny the exciting potential of the underlying blockchain technology that enables the trading of bitcoins. However, when it comes to designing a portfolio, a good place to begin is with one’s goals. This approach, combined with an understanding of various investment types, provides a good framework to decide which securities deserve a place in a portfolio.