Why Cryptos Should Be Part of Your Financial Plan

Cryptocurrency assets are here to stay. Bitcoin, Ethereum, Dogecoin, Litecoin, Ripple…. There are several thousand options currently available, and new ones are released almost daily. They are not a fad, nor a Ponzi scheme – if chosen wisely.

The reality is that crypto assets are real and deserve a place in your financial plan.

The invention of blockchain technology in 2009 started a cycle of innovation that will continue to revolutionize financial services – and other industries – for many years to come. It is quite difficult to understand what exactly a blockchain is and what it does, but it is essentially a decentralized online database, where each data point is organized in chronological order, related to the block previous and to the previous block in the chain. In simplistic terms, cryptocurrencies like Bitcoin use blockchain technology to record a record of transactions and thus secure the asset.

This is all pretty technical, but the take-home message is that cryptocurrencies have become safer and more accessible than ever. It’s time to take them seriously as an asset class.

It’s all about the asset class

Financial wealth is represented by the assets you own. It can be your home, a business, retirement savings…. Every asset has an intrinsic value and each counts towards your net worth. But not all assets are equal, which is why you need to categorize them. By doing so, you will be able to objectively manage the risk and return of each asset class.

A well-structured financial plan typically divides wealth into four major asset classes, the total of which represents your net worth. These categories are:

  • Business assets: Investments that generate a source of income, such as an actively managed business; a rental property; or your profession, which earns you a salary.
  • Lifestyle advantages: The investments we use to enjoy the life we ​​choose to live; like our homes, our cars and our furniture.
  • Lifetime assets: Investments like your retirement portfolio, which funds your lifestyle when you are no longer able to earn an income.
  • Legacy assets: Investments you don’t have to rely on to fund your lifestyle or retirement – ​​assets you’re likely to leave to your beneficiaries.

It is usually quite easy to decide which category an asset belongs to. Take your primary residence, for example. It certainly has value, and it may very well appreciate over time, but it is more important as a place of safety for you and your family, which is why it is classified as a lifestyle asset. .

But it’s not that simple when it comes to crypto assets – the new kid on the block. You could call crypto an “investment” and leave it at that, but that would be a cop-out. Remember that all wealth must be categorized to have meaning and purpose. So, what asset class does crypto belong to?

  • Commercial advantage? Do you mine Bitcoin? Is this a business you actively manage that generates revenue? For a very small minority of people, this might be the case. If your crypto investment falls into this category, you should have a business plan for capital investment, budgeted operations and returns, and how you will manage risks like fraud and business continuity.
  • Lifestyle asset? Lots of people are getting into cryptocurrency trading – they are the ones who like to discuss Ripple vs Ethereum around the braai. If you view your crypto investment as a status symbol, it should be classified as a lifestyle asset, like a car, and not something you rely on to generate income or contribute to your retirement plan. If this is your case, be sure to set a reasonable limit on the amount you plan to invest.
  • Asset for life? If crypto is part of your retirement plan, how much should you allocate to your total portfolio – 1%, 10%, more? You need to consider the price volatility and unpredictable valuation of crypto assets. Remember that your lifetime assets are your safety net – the bucket of capital you can dip into when you’re no longer earning income. Lifetime assets should therefore be a safe bet, the type of asset that gets rich slowly, is predictable and holds no surprises. We strongly recommend that you consult a Certified Financial Planner® to provide professional advice in this regard.
  • Inherited asset? If your cryptocurrency investment doesn’t fit into any of the first three categories, that’s where it will likely fall. The Legacy class is a catch-all asset class: investments you don’t rely on to fund your lifestyle or retirement; something to have a little fun. If you’re lucky, you might leave something for your beneficiaries, and if you’re not, that’s okay too. Most crypto investors fall into this category.

Be bold, but also be careful

With the rise of crypto taking such a prominent place in the media, it’s hard to sit on the sidelines and not be part of the action. You don’t have to either, as long as you are clear where your crypto investment fits into your wealth building plan.

In the long term, cryptocurrency will be a central part of any diversified portfolio, but we haven’t quite reached that point yet. Not all crypto platforms are currently regulated in South Africa and financial planners are not allowed to give specific advice on how to invest.

What we can advising is careful experimentation. Do not cash in your retirement pension to buy Bitcoin.

But if you have some spare cash and crypto is your legacy asset, give it a try. The more you know about the asset class of the future, the better.

Ricardo Teixeira CFP® is Director of Operations at BDO Wealth Advisers