Digital assets such as cryptocurrencies are increasingly big business in the financial world. In 2017, for example, the entire cryptocurrency market’s capitalization was $18 billion. A few short years later, in 2021, it was $2 trillion – a huge upward move. Nearly three-quarters of financial advisors have allocations in digital assets. 

An Overview of Digital Assets

Do these facts and figures whet your interest in digital assets? They may, or they put digital assets on your radar for the future. If so, you need to understand the digital asset world and the need for professional guidance in it. 

Digital assets include cryptocurrency, a form of digital currency that can be exchanged for goods and services, in a manner analogous to regular currency. Cryptocurrency exists on crypto exchanges and digital wallets and can be used with phone apps as well. Digital assets also include blockchain, a distributed electronic ledger system used for cryptocurrency, and many other transactions. Digital assets also include non-fungible tokens (NFTs), which are either assets or represent assets, such as artwork or video, that has a token value traded on the blockchain.

The value of digital currency is expected to rise over the long term, for several reasons. First, many observers believe that cryptocurrency has the potential to replace existing paper- and metal-based currencies in the future. It is more convenient, is not restricted to one national currency, and is secure and rapid to transfer – more so than existing currencies.

In addition, the use of cryptocurrency is in its infancy. As it reaches more widespread acceptance, the value is likely to rise, so there is a very high appreciation potential. 

Blockchain may have even wider uses. Blockchain tracks transactions on a digital ledger which is verified and secure. Though it grew up together with cryptocurrency, it is not inextricably linked to cryptocurrency: blockchain can be used in virtually any industry or sector with a need for transactions – which is any industry under the sun. Blockchain can, for example, track retail shipments from producers to stores; it can track the receipt of parts for factories; can track units of sales within companies. Blockchain has the power to transform the way business is done, in a way analogous to the rise of the desktop computer in the 1980s.

Investing in Digital Assets

And that, in a nutshell, is a central reason why digital assets can be important to Generation X investors. They were too young, on the whole, to benefit from the steep rise in value in the computer sector during the twentieth century, because many of them were not invested in the stock market then. But digital assets have a similar transformative power, and Gen X-ers are often in a position to benefit from investment in digital assets now. 

Digital assets are also important to all investors as a tool of diversification. Generally, investment and retirement portfolios are spread among asset classes to balance risk and reward. The most common asset classes in the U.S. are stocks, bonds, and cash. All of these have different risk and reward profiles. Stocks, for example, are relatively high risk – the price fluctuates, and it is possible to lose money. 

But they are also high reward, with returns on average above those of bonds and cash, even accounting for periodic downturns. Bonds and cash are thus lower reward, but their advantage is lower risk. Cash doesn’t fluctuate, and any fluctuations in bonds are usually more minor than those in stocks. Thus, for portfolio management, asset classes with greater risk and greater reward are often counterbalanced with asset classes with less risk.

Digital assets can add to the overall diversification of your portfolio. They are very high risk and potentially very high reward. The risk occurs for several reasons. First, digital assets such as cryptocurrency, blockchain, and NTFs are still in a very early stage. That makes it an exciting time to invest, but it also means that not every single digital asset is likely to be successful. 

Second, the digital asset market is extremely complicated. It’s huge, for one thing. There are thousands of cryptocurrencies and a wide array of NFTs. Investors and their financial advisors need to choose between types of cryptocurrencies and types of NFTs if they are interested in purchasing those. Blockchain has the potential for widespread use in all industries but has not fully penetrated them at this point, so investors need to keep up with the growth of blockchain.

Digital assets are also constantly evolving, with new companies, new issues, and new regulations emerging every day. Advisors must keep abreast of the market, the technologies, and the regulatory environment every day.

There are also multiple ways to participate: Investors can also purchase stocks involved in digital assets, baskets of digital assets, or companies invested in them, including mutual funds and exchange-traded funds, in addition to the assets themselves. 

Because of the higher risk, we recommend that investors interested in digital assets place no more than 5 percent to 10 percent of their total portfolios in digital assets.

Why You Need Professional Guidance to Invest in Digital Assets

It’s very important to obtain guidance from a financial advisor experienced in both comprehensive financial planning and digital assets themselves: not all financial advisors have both sets of expertise. At Sapiat Asset Management, we do. 

All of our financial advice is undertaken to meet your specific goals and objectives. I am a CERTIFIED FINANCIAL PLANNER™ Professional with expertise in comprehensive financial advising in Tennessee, including cash management of income and expenses, investments, retirement planning, tax planning, risk management of assets (insurance) and estate planning, including wills, trusts and powers of attorney for medical care and finances. The CFP® designation means that I have completed required education and time in the industry and that I am a fiduciary, who will always put your financial best interests above my own.

In addition, I have training and expertise in understanding digital assets and managing the back-office functions necessary for digital asset investment. 

I specialize in the needs and issues of Generation X. Contact me to discuss your goals and objectives in Greeneville, TN.