business forward

Beyond Bitcoin, diversification can help manage cryptocurrency investing risks - Minneapolis Star Tribune

When it comes to investing, diversification is key. By spreading your wealth around, you're less likely to suffer a major financial blow should one of your investments not pan out.

This is especially true for cryptocurrency, an asset class so new and often volatile that some financial advisers caution their clients to steer clear of it.

Jesse Proudman, chief executive of the crypto investment platform Makara, says that people interested in buying cryptocurrency might learn from wealthy "angel" investors. These buyers, who fund early-stage startups, are used to dealing with projects that may or may not succeed.

"When you're angel investing, you make a lot of different investments, and many of them fail, some of them are moderately successful, and some of them are incredibly successful," Proudman said. "It's that combination that makes your portfolio compelling. Diversifying here is smart for this same reason."

But the novelty of crypto makes diversification more complicated than it would be for more traditional investments, such as stocks. For instance, there are no widely available mutual funds offering broad exposure to the digital asset space.

Still, there are some strategies savvy investors can use to mitigate their risks.

A handful of products have emerged that seek to make cryptocurrency more accessible to people most comfortable with traditional investing tools.

An exchange-traded fund, for instance, can be held in a brokerage account or used as part of a retirement fund, unlike crypto on its own. But such funds also carry fees, and they offer investors less control over their digital assets.

As it stands right now, the Securities and Exchange Commission hasn't approved an ETF that would hold Bitcoin, nor any that invest directly in other digital assets.

One ETF option for crypto-curious investors is a fund that focuses on cryptocurrencies' underlying "blockchain" technology. Such funds buy the stock of companies with an emphasis on that sector. Those, however, are not direct investments in cryptocurrency.

The lack of fund options available in the digital asset market is mainly due to the SEC's skepticism.

This fall, the first ETF linked to Bitcoin debuted on the New York Stock Exchange. But the fund doesn't buy Bitcoin itself. Instead, it invests in futures contracts tied to the crypto asset.

Other funds have more direct exposure to multiple cryptocurrencies, but those have been restricted to private placement for accredited investors. Grayscale and Bitwise are among the financial firms that have created such products.

One disadvantage of funds is that investors don't have direct ownership of their portfolios. For this reason, building a portfolio yourself can be appealing, especially when it comes to crypto, which may offer particular advantages.

For instance, crypto holders may want to participate in "staking," a process available with some cryptocurrencies that rewards participants for helping maintain the computer networks that support their tokens. Or they may simply want more control over their investment strategy.

Generally, cryptocurrencies are considered high-risk investments, which should make up only a small portion of your portfolio — one rule of thumb is no more than 10%.

For that reason, financial advisers often advise caution on crypto, and some shy away from making detailed recommendations for how to assemble a portfolio.

"Financial planners have not done a good job of being a part of this process," said Justin Pullaro, a certified financial planner based in Florida who advises clients on cryptocurrency.

For people who don't have a relationship with an adviser, some online offerings help people compose their crypto portfolios.

Though major online crypto exchanges such as Coinbase do not offer such services, new entrants in the field are attempting to fill the gap.

Makara, for instance, allows customers to choose among eight different "baskets" of crypto assets allocated for different goals. One, for example, includes top-valued "blue chip" cryptos, while another targets "Web3" projects that are focused on decentralized Internet technologies.

Rosen writes for NerdWallet.