Bitcoin’s Meteoric Rise Sparks Debate: Should You Invest?

Bitcoin has been on a remarkable run in recent months, breaking records and stirring significant interest among investors. In the first quarter of this year, the cryptocurrency soared past $70,000, buoyed by the Securities and Exchange Commission’s approval of the first exchange-traded spot bitcoin funds, according to coinmarketcap.com. By March, the price hit an all-time high. This trend continued after Donald Trump’s recent win in the U.S. presidential election, with bitcoin reaching $80,000 less than two weeks ago. As of this Monday, it surpassed $90,000.

The rise in bitcoin’s value has fueled optimism among cryptocurrency advocates, who anticipate a more favorable regulatory environment under the new administration. Many view bitcoin as a tool to build generational wealth, while others argue that the U.S. should create a strategic bitcoin reserve. MicroStrategy executive chairman Michael Saylor has championed this idea, telling CNBC that it’s a way for the country to “buy the future.”

Despite its volatility, bitcoin has gained more acceptance over the years. Initially, many financial planners were skeptical about its viability as an investment for individual portfolios. However, as education around cryptocurrencies has expanded, attitudes have shifted. The Financial Planning Association now offers three continuing education courses on cryptocurrency, notes Paul Brahim, the association’s president-elect.

For those considering investing in bitcoin, financial advisers have outlined key considerations and strategies to minimize risks while making informed decisions.

Understanding Bitcoin and Its Volatility

Bitcoin, introduced in 2009 by the pseudonymous Satoshi Nakamoto, remains the most well-known cryptocurrency. Its supply is capped at 21 million coins, making it inherently scarce. Unlike tangible assets tied to a company or resource, bitcoin’s value is purely market-driven—determined by what buyers are willing to pay.

This lack of a tangible backing contributes to its extreme price volatility. While bitcoin has experienced meteoric rises, it has also suffered sharp declines. For example, between November 2021 and November 2022, bitcoin’s price plummeted 75%, dropping from $64,455 to $16,196, according to coinmarketcap.com. Such fluctuations underline the high-risk nature of the asset.

Although often referred to as a currency, bitcoin is not recognized as legal tender in the United States or most countries. Transactions involving bitcoin can be complex and have significant tax implications.

Bitcoin’s Place in a Portfolio

Experts agree that bitcoin’s volatility makes it unsuitable for short-term financial goals such as buying a home, paying for college, or saving for retirement. Trent Porter, a certified financial planner and certified public accountant at Priority Financial Partners, advises clients to avoid using bitcoin for short-term savings. “Due to its volatility, I would definitely avoid using bitcoin for short-term savings goals,” he said. Porter recommends allocating no more than 5% of a long-term portfolio to bitcoin for those insistent on exposure.

Other experts take an even more conservative approach. Mike Turi, a certified financial planner and founding partner at Upbeat Wealth, advises limiting bitcoin allocations to 3% or less, if at all. “I would not recommend using bitcoin as the main strategy to achieve your financial goals. If it’s extra investable money that can help you get there faster? Sure. However, don’t miss out on valuable opportunities by overexposing yourself to an asset that you might not fully understand,” Turi explained.

For college savings, tax-advantaged 529 plans remain a safer and more diversified option, according to Matt Elliott, a certified financial planner at Pulse Financial Planning. “It is one thing to bet your money on crypto, but another to bet a child’s college savings on it,” Elliott emphasized.

Still, Elliott sees potential for bitcoin in long-term retirement portfolios as part of a “core and explore” strategy. He suggests dedicating 95% of assets to a diversified portfolio while reserving 5% for speculative investments like crypto. “The other 5% can be used for more speculative investments (such as crypto) if you have little debt and are willing to accept the risk of losing what you put in,” he said.

Questions to Consider Before Investing

Investing in bitcoin isn’t for everyone. Before diving in, experts suggest evaluating your financial situation and risk tolerance. Porter advises asking, “If it were to drop 50% or more, would you be left in a pinch? If the answer is yes, you should reconsider.” He adds that while the regulatory environment may improve under the Trump administration, the overall risk associated with bitcoin remains high.

Turi stresses the importance of self-reflection. “I still see bitcoin more as a gamble than a reliable investment. Is it a risk you can afford to take? Consult your future self. What will happen if it doesn’t work out?” he said.

Setting clear rules and an exit strategy is also crucial. “The most challenging aspect of the bitcoin craze is that more retail investors are entering the market at its peak when euphoria is highest,” Turi noted. “Investors need to set their exit price to avoid being driven by emotion.”

Safer Ways to Invest in Bitcoin

For those determined to invest in bitcoin, there are several methods to consider. You can buy bitcoin directly and store it in a virtual wallet or on a digital asset platform like Coinbase. However, these options come with risks, including cybersecurity threats and the possibility of losing private keys.

A simpler and safer option is investing through SEC-regulated spot bitcoin exchange-traded funds (ETFs). These funds have attracted nearly $28 billion in net investments, with a combined net asset value nearing $96 billion as of last Friday, according to Morningstar Direct.

“Due to risks such as cybersecurity threats and the possibility of losing private keys, holding bitcoin through an SEC-regulated ETF is by far the safest option,” Porter said.

Ultimately, while bitcoin’s recent price surges have reignited interest, it remains a high-risk investment. For those willing to accept the potential for significant losses, experts recommend a cautious approach, keeping allocations small and focusing on long-term goals.