How Should You Treat Crypto Compared With Other Assets in a Portfolio?

Is crypto an investment, a currency – or neither? The nuance around crypto is exactly why many investors and advisors are drawn to it in the first place – but also why it can be so confusing.

AccessTimeIconOct 14, 2021 at 12:50 p.m. UTC
Updated Apr 10, 2024 at 3:15 a.m. UTC

With popular platforms like Cash App, PayPal and Venmo offering easy ways to buy bitcoin and altcoins, a broader swath of consumers is getting the chance to own crypto.

But that doesn’t mean everybody is approaching owning and investing in crypto strategically. There’s a difference between buying a few hundred dollars’ worth of bitcoin and using a crypto exchange like Coinbase to round out your portfolio the same way rappers, sports stars and the mega-rich hold onto fine art, luxury watches and rare footwear.

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Many financial planners would say this: If artwork, sneakers and other alternative investments are considered speculative or volatile, then crypto seems like the wild, wild west.

At least that’s the opinion of Lazetta Rainey Braxton, a New York-based certified financial planner and co-founder of the financial planning firm 2050 Wealth Partners.

“You got new crypto communities, new coins that are coming out, new taxes and new platforms,” Braxton says. Some people use crypto to make purchases through apps or online, while others buy it on popular exchange platforms with the intent to hold on to it in case its value keeps climbing.

So how should a person treat crypto compared with the cash savings and securities they have in their portfolio? And if you are drawn to crypto as an investment, how much of your portfolio should you devote to such a nascent asset class?

Adding crypto to a portfolio

According to Braxton, the right amount to invest in crypto is “generally not more than what you’re willing to lose.”

Meanwhile, Dave Abner, global head of business development at Gemini, a crypto trading app, looks at cryptocurrency as neither an asset class nor a currency – although, in his words, “there are pieces of it that people use to buy and sell things.”

This kind of nuance is exactly why people are drawn to crypto in the first place – but also why it can be so confusing.

While Abner doesn’t consider himself to be among the “crypto OGs” (original gangsters) like his bosses, Cameron and Tyler Winklevoss, he can speak to how people originally conceptualized adding crypto to their investment portfolio back when bitcoin became popular in the early 2010s.

“The first thing people really heard about – especially within the financial advisor community – was bitcoin as a potential inflation hedge for their portfolio and pretty much as a substitute for gold,” Abner says.

The main facet of bitcoin that makes it work as an inflation hedge is its fixed issuance, he says. There’s only a limited amount that can ever be available – 21 million bitcoins, to be exact.

That built-in scarcity certainly turns heads “at a time when the U.S. is printing a ton of money and advisors are thinking about what they can do to protect the real value of their portfolios,” Abner says.

On top of its properties as a potential inflation hedge, crypto is based on a blockchain technology that contains all kinds of potential as an infrastructure system that’s more efficient than we’ve ever seen before. We’ve already started to see the possibilities with non-fungible tokens (NFTs), which have given rise to conversations about a better way to issue smart tickets and property deeds.

“It’s a more modern type of platform for businesses and transactions to take place on and to be recorded on,” Abner says about the crypto world and blockchain technology.

Approaching a crypto investment

But even though crypto and blockchain technology have such potential, many financial advisors and planners tell clients to put crypto in the speculative bucket. Braxton recommends clients max out their crypto investments at only 5% of their portfolios and make sure that they have done their due diligence before buying. That means covering the basics first: a strong emergency fund, a retirement account such as a 401(k) or an individual retirement account (IRA), or both, and a passive brokerage account composed of index funds and exchange-traded funds (ETFs). Your crypto money should be your “play money,” Braxton says.

However, Braxton adds that a person’s risk tolerance also contributes to whether their “play money” starts at $50 or $5,000. Your risk tolerance is a combination of your personality and general “gut check” attitude toward volatility and, of course, your financial safety nets in place. Don’t go betting your entire life savings on crypto, Braxton notes, but if you can afford to participate, the potential benefits are big.

Tax implications TBD

For instance, those who purchased cryptocurrency years ago and haven’t spent it yet might be sitting on a significant appreciation in value. According to Abner, the tax implications of selling an abundance of coin at a high profit are so new that people are waiting to see what kind of taxes they would owe on gains before they sell it off.

“A lot of people who have had those gains don’t want to sell. So if you bought bitcoin at $100 and it’s now [valued] at $45,000, you have a gain that could lead to an incredible tax bill at some point,” he says.

What those tax bills might amount to is still unknown. There’s not much clarity now on the tax implications of selling crypto – though it’s definitely coming.

But nobody wants to be the guinea pig. If your clients have a crypto stockpile just sitting there driving you bonkers, Abner points to an interesting option: “Instead of selling, [they] may want to hold the asset and use it in a different way. Almost as if you own a very expensive painting. You could use that as collateral and go out and buy a house and pay down the mortgage in dollars. You can get traditional loans now against [crypto as] collateral.”

Just remember: While the crypto market is ever-evolving and full of innovation, the basic foundations of financial wellness remain the same. As Braxton says, have your clients check off all the traditional boxes as far as savings and investments go, but then help them identify a safe amount to dedicate toward crypto almost as they would an alternative investment – and as always, double-check the taxes.


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Megan  DeMatteo

Megan DeMatteo is a service journalist currently based in New York City. In 2020, she helped launch CNBC Select, and she now writes for publications like CoinDesk, NextAdvisor, MoneyMade, and others. She is a contributing writer for CoinDesk’s Crypto for Advisors newsletter.