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Even if you don’t work directly with financial advisors, it might be worth paying attention to what they say about markets and investments.
Take a look at the recent cryptocurrency announcements from the CFP Board, a professional organization of certified financial planners. The board ruled that planners who provide advice on cryptocurrency-related investments are neither obligated nor prohibited from providing cryptocurrency-related advice, but should “do so with caution.”
This is wise advice for every individual investor to follow. This is because CFP operates according to strict standards, including fiduciary duty and capacity obligations. Basically, if you are a client, a CFP must know them to advise you on how to invest and act in your best financial interest.
If a group of financial professionals treat cryptocurrencies cautiously, it might make sense for you to follow suit. Here are the cryptocurrency risks that financial professionals are most concerned about and how they are approaching cryptocurrency on behalf of their clients.
In some respects, the CFP Board has made it clear that advisors should treat cryptocurrency investments like they treat other cryptocurrency investments. A good advisor, and therefore a good investor, evaluates factors such as risk, return potential, cost and performance before purchasing an investment.
However, the notice notes that cryptocurrencies and related assets come with inherent risks. Here are six things to consider:
- They are speculative: Cryptocurrencies fluctuate in price based on investor speculation. This makes them more volatile than traditional assets, which tend to fluctuate based on changes in underlying fundamentals such as earnings growth.
- Difficult to analyze: Our analysis of stocks and bonds is backed by decades of data. The same newness that makes crypto exciting makes it difficult to evaluate. Even knowledgeable investors have a hard time separating “hype from fact,” the notice said.
- They can pose a storage risk. Sites that store crypto may have an increased risk of their investments being lost or stolen.
- They are difficult to evaluate: Without the standard accounting practices and well-worn valuation methods found when analyzing stocks, it can be difficult for investors to value crypto assets. In other words, there is a risk of overpayment.
- They may have been unregistered. You may have purchased virtual currency or virtual currency-related assets through a dealer that does not comply with government regulations.
- They may face more regulations: Governments may change the way cryptocurrency investments are regulated and taxed, which could have unpredictable effects on portfolios.
The CFP board does not want planners advising clients on crypto unless they have expertise in the crypto markets. It might be worth making that outlook yourself too: You are average financial Do you think you have a better handle on the power of the crypto market than a planner?
Before investing in cryptocurrencies, ask yourself how well you understand the market and whether you know the insides and outsides of the cryptocurrency you want to buy.
It would be prudent to also incorporate a planner’s perspective when evaluating how a cryptocurrency investment fits into your overall financial situation.
Think about your unique financial situation, including your investment goals, risk tolerance, and tax status. The reason to buy cryptocurrency is ideally more than “because it will go up”.
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