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Everyone wants to know if they’re missing the next bitcoin boom or crypto goldmine, but most advisors agree that cryptocurrency sits in a unique investment category that isn’t right for everyone. Crypto is a highly volatile asset with few guarantees; it can skyrocket or crash without warning.
A small, specific group of investors can handle its wild ups and downs, and not because they’re chasing quick riches. Financial experts explained the profile of the people who should invest in cryptocurrency. Find out if it’s you.
To put it bluntly, “The ideal investor for cryptocurrency is somebody that actually does not care whether they make 100 [times their profit] or lose everything,” said Julian B. Morris, CFP and principal at Concierge Wealth Management.
Anne Connelly, who teaches about blockchain at Boston University’s Questrom School of Business, agreed: “For folks who are averse to volatility swings, then a long-term plan must be put in place where investments are held over a specific time frame rather than bought and sold to capture market swings.”
And swing wildly they do. It’s not uncommon for cryptocurrencies to lose 30% in a week, so the right investor must be emotionally detached and patient. Crypto rewards logic, not adrenaline.
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The ideal crypto investor isn’t putting their emergency savings into bitcoin. Rather, they’re “someone who can afford for it to go to zero,” said Chad D. Cummings, Esq., CPA, the CEO of Cummings & Cummings Law, a law firm specializing in estate planning and tax law. “They already have multiple years of liquid reserves, zero high-interest debt and no reliance on their portfolio for near-term expenses.”
In other words, the money these investors put into crypto is “fun money,” typically capped at no more than 5% of their total portfolio.
Cummings shared an anecdote of a client who ignored that advice and invested through an offshore exchange. “[This] later turned out to be a money laundering front for North Korea with funds routed through offshore banks in both Switzerland and Singapore,” he said. One FBI investigation and $13 million in losses later, the client is now struggling to rebuild his retirement savings.
The ideal crypto investor is often an early adopter with an ultra-aggressive risk profile who’s comfortable venturing beyond traditional markets. These investors tend to spot trends before they go mainstream.
“Crypto investors tend to see future trends early and are already onboard as the momentum is building,” Connelly said.
They’re also tech-savvy, Morris added, because anyone buying outside a brokerage must be comfortable navigating digital platforms. “If the investor chooses to not invest in cryptocurrency through a brokerage platform with their advisor, I would encourage them to be tech savvy because it is going to involve the use of an app or a specialized crypto wallet,” he said.
Knowing how the technology and security work is non-negotiable.
While the “ideal” investor may be well-funded, risk-tolerant and emotionally disciplined, Connelly believes there’s value in everyone gaining some firsthand experience. “Everyone should own $1 worth of crypto. Understanding how it works and how it will change global payments is critical to being able to see its future potential,” she said.
Still, discipline is key. Cummings said investors need a Spock-like level of detachment to avoid being ruled by emotion. “Most retail crypto investors want fast returns, follow influencers and lack basic tax literacy. They panic on downturns and ignore custody risk. These clients do not need crypto … they need discipline,” he said.
The right investor approaches crypto with curiosity, not FOMO, fully aware that every dollar invested could just as easily disappear as multiply.
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This article originally appeared on GOBankingRates.com: Financial Advisors Reveal the Type of Person Who Should Actually Invest In Cryptocurrency