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Should I Invest in Cryptocurrency/Blockchain Technology? Thumbnail

Should I Invest in Cryptocurrency/Blockchain Technology?

How To Invest

If you somehow made it through 2021 without thinking about crypto, after this year’s Superbowl, there’s no hiding from it. Digital currency has also made news recently as Russian companies may be using it to evade sanctions. But looking past the headlines and celebrity endorsements, is blockchain technology the right investment for you?

Volatility – Bitcoin and other cryptocurrencies have been in the news for recent volatility as well as clever marketing. The largest and most widely known digital currency, Bitcoin, is down over 20% as of February 24, 2022, but this volatility is nothing new. 

Diversification – Even if you’re right about the staying power of the underlying technology, that doesn’t mean you’ll have a successful investment experience. As crypto has become more mainstream, Bitcoin has lost market share to Ethereum and other newer offerings. With thousands of cryptocurrencies currently available, choosing the right one can be daunting. Unlike traditional equities, in which you can invest in a portion of each company in the S&P 500 relatively cheaply and easily through ETFs and mutual funds, diversification in crypto is difficult for individual investors. 

You may own it indirectly – Cryptocurrencies may not be the most or even only lucrative approach to benefit from the underlying technology. Big name companies that you may already own such as Apple, Amazon, Walmart, and JP Morgan have blockchain operations. 

Expected Returns – Even if bitcoin is held for decades, the owner may never receive more, and it is not certain that bitcoin offers investors positive expected returns moving forward. Before putting all your eggs in one blockchain-basket, it’s best to consider what your goals and tolerances are. For many, the allure of crypto lies in the dazzling capital gains that previous investors were able to participate in. However, the future expected return for cryptocurrencies is unclear. The risk and uncertain returns of crypto can feel more like speculation rather than investing. 

Income? – If you’re interested in generating interest while holding digital currency, there may be some options, though it can get complicated. Until recently, cryptocurrencies did not provide expected future flows of income. With recent innovations, there is an option to generate interest via crypto, though the process does include some complexities that require research and forethought. Additionally, while the rates are typically higher than you’d normally receive from a savings account, it is not FDIC insured. 

Weighting – If after thorough research you find that a cryptocurrency is meeting a need not fulfilled by your current allocation, the next step becomes determining how much weight to give it. The total value of bitcoin in circulation is less than half of a percent of the aggregate value of global stocks and bonds, so its weight in a diversified portfolio may be relatively small.2  

Diligence – If you’ve weighed all the tradeoffs and decide you do want to allocate a portion of your portfolio to blockchain technology, make sure to stay thoughtful. The regulations around crypto are evolving and careful investors should remain attentive. The IRS wants to know about your digital currency transactions, so make sure to report it or risk facing an audit. Be cautious of getting scammed as crypto and NFT thefts are becoming more prevalent. Finally, don’t forget your key – which acts as your password to accessing your digital assets. Dimensional’s webcast with Professor Marco Di Maggio, fintech and cryptocurrency expert, dives into some of the intricacies to be aware of before jumping in.

Bottom-line – Blockchain technology represents innovation as well as uncertainty. A goals-based approach using stocks, bonds, and traditional currencies has helped many investors grow their wealth and achieve their goals for decades. If you’ve decided digital currency is the right decision for you, approach it thoughtfully and set appropriate expectations. 


Dimensional Fund Advisors

1Per Marketwatch, as of February 24, 2022.

2Per The Wall Street Journal the crypto market hit a $2.97 trillion market value in November 2021 according to CoinMarketCap. Per The Wall Street Journal the end-of-day market value of bitcoin was $41,910 USD as of March 9th, 2022.

Past Performance is no guarantee of future results. Named securities may be held in accounts managed by Dimensional. Diversification does not eliminate the risk of market loss.

The commentary above pertains to cryptocurrency. Certain cryptocurrency offerings may be considered a security and may have different attributes than those described in this material. As at the date of this material, Dimensional does not offer investment in cryptocurrency. This material is not to be construed as investment advice or a recommendation to buy or sell any security or currency. 

This information is intended expressly for discussion purposes only and should not be misconstrued or otherwise interpreted as legal or tax advice. Please consult with qualified legal or tax professionals regarding your individual circumstances.

Professor Marco Di Maggio provides consulting services to Dimensional Fund Advisors LP. The opinions expressed are those of the author and are subject to change. 

International and emerging markets investing involves special risks such as currency fluctuation and political instability. Investing in emerging markets may accentuate these risks.

Dimensional Fund Advisors LP does not endorse, recommend, or guarantee the services of any advisor, or advisory or consulting firm. Dimensional Fund Advisors LP is not affiliated with ETF Trends third-party speakers.