Bitcoin has been heavily marketed to investors and would-be investors. This cryptocurrency was once a word that floated around the internet in certain circles. Now it’s becoming a household name. Even if you don’t know what bitcoins is, you’ve probably heard of it.

Bitcoin is a currency that exists virtually and is not administered by any central authority. The digital coins are “mined” by solving mathematical problems and ownership is anonymous. It is limited to 21 million coins and is created at a rate of 25 every 10 minutes. “Currency” is simply a unit of exchange that people are willing to trade goods for. Using this definition, it would appear that as long as merchants are willing to sell goods for bitcoin, the currency may have some validity.  

 Cryptocurrency has appeared to have passed the fad stage and may be here for quite some time. When talking to investors about bitcoin I teach them to view the cryptocurrency as any other investment. Asset allocation is a smart investment strategy to keep in mind.  Deciding what percentage of a portfolio bitcoin should make up will vary depending on the investor’s risk tolerance and needs. The outcome of investing in a cryptocurrency is unpredictable, so keep this in mind when deciding how much to add to your overall investment allocation. Chasing returns through bitcoin or any other investment can often lead to less than desirable results when taking into account an overall portfolio’s return. 
bitcoins

Image courtesy of Pexels

If you are investing in bitcoin, don’t neglect to diversify. In my book, Money Matters: 21 Practical Lessons To Everyday Success, I explain that investing isn’t gambling. Through diversification, returns can be averaged over a longer period of time, allowing investors to take advantage of compounding. I consider bitcoins to still be on the speculative side of investing and advise many of my clients to invest no more than 5%-10% of their overall portfolio into exploratory or speculative investments. This includes speculative stock of companies that do not have a track record.

So, is bitcoins a fad? Or will it be here to stay? 

Ultimately, we will not know exactly how cryptocurrency will fit into the overall market until the next crash happens. Will merchants still exchange goods for bitcoins then? When the next crash happens, the weak hands will be wiped out as they usually are and we will see where the cards fall. This happens in every business cycle, though; we just haven’t experienced one yet in the age of bitcoin.       

For more information on investing, click here. 

Contributor Adam Torres CFP®, AAMS® is CEO of Century City Wealth Management and serves as an independent financial advisor to small business and individuals. He has been featured in media such as Forbes, Inc., Fox Business, U.S News & World Report, and Investors Business Daily to name a few.