Why to invest in crypto despite its risks

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By Elliot Raphaelson
Posted on May 18, 2022

As cryptocurrencies have become more mainstream, average investors have wondered whether and how to use them safely and effectively in their portfolios.

I recommend Ric Edelman’s book The Truth About Crypto: A Practical, Easy-to-Understand Guide to Bitcoin, Blockchain, NFTs and Other Digital Assets. This book, which will be available in May in both paperback and Kindle editions, covers crucial issues associated with digital assets.

Edelman shows you why investing in digital assets will enhance your portfolio. He comes with some pretty impressive recommendations. Barron’s has ranked him the nation’s No. 1 independent financial adviser.

Several years ago, he wrote The Truth About Your Future: The Money Guide You Need Now, Later and Much Later. In that book, early in the age of crypto, he wrote about the importance of digital assets.

He created the Digital Assets Council of Financial Professionals (DACFP), which is widely regarded as the premier resource on this topic. Edelman now devotes the majority of his time to DACFP.

Over the last decade, he has trained thousands of financial advisers and corporate executives regarding blockchain and digital assets. The organization’s website, DACFP.com, provides contacts for financial advisers who can offer advice about investing in digital assets.

In The Truth About Crypto, Edelman explains why blockchain is so transformative. There are thousands of commercial applications for blockchain technology.

Some of the commercial applications are consumer purchases, corporate finance, foreign trade and supply chain management. Blockchain offers advantages such as banking and credit to billions of people in the world who have smartphones but don’t have access to banks.

Blockchain even has the potential to eliminate poverty globally and raise the standard of living for billions of individuals who live in poverty.

Edelman also discusses
the basics associated with blockchains, how they work, and the role of Bitcoin and other digital assets in the process.

Not too late to invest

Is it too late to buy Bitcoin? A survey by Ernst and Young and Intertrust indicated that 31% of hedge fund managers planned to add significant digital assets to their portfolios by 2023, and to invest an average of 7.2% of their portfolios to crypto by 2025.

At the end of April, Fidelity announced it will allow customers to hold Bitcoin in their retirement accounts. It is not too late to invest.

Naturally, there are risks in investing in digital assets. Edelman writes that because digital assets are an emerging asset class, we should consider the possibility of a massive and permanent market crash in the prices of digital assets.

He discusses several reasons, such as market manipulation, technological obsolescence, the vagaries of consumer/investor demand, regulatory intervention, rogue custodians and scams. As a scam example, Edelman believes Dogecoin is a distraction and dangerous. He said don’t buy it.

Why hold risky assets?

Digital assets carry high risk, but that’s exactly why Edelman believes you should invest in them.

He refers to research done by Nobel laureate Harry Markowitz on correlation. Two assets that rise and fall simultaneously are positively correlated, so you are no better off if you owned only one of them. However, if two assets are negatively correlated, then if you owned both, your overall risk is sharply reduced.

Now, if you add a third asset with higher risk, then you not only reduce the overall losses of the portfolio at any one time, but you also improve its overall return because the third asset makes more money than the other two. So, by adding a higher risk asset, you get higher returns with lower risk.

Bitcoin’s correlation to other assets is very low: With bonds it is 0.25; with equities, 0.12; with gold, 0.07 and with commodities, 0.00. The bottom line is that adding a risky asset to a portfolio helps to reduce the portfolio’s overall risk.

Only 1% of portfolio

How much of your portfolio should you place into digital assets? Edelman is very conservative in this regard. He recommends only 1% of your portfolio should be invested in digital assets, in order to minimize your risk. He initiated the 1% strategy in 2015, and it is widely used. The book contains several examples that illustrate its value.

How do you choose the right assets? Edelman devotes a comprehensive chapter to the options available. In a conversation I had with him, Edelman recommended exploring funds managed by Grayscale, Bitwise and Osprey. He also recommends using dollar cost averaging for these investments.

Bottom line: This book is comprehensive, practical and easy to understand. After reading it, you will understand why digital assets are so important, and why you should add them to your portfolio.

Elliot Raphaelson welcomes your questions and comments at raphelliot@gmail.com.