Your Questions Answered About Investing in Crypto

Stock vs. crypto allocation...taxes...the four-year cycle...and more

Ric Edelman: It's Tuesday, December 3rd. I don't know if you heard what Ric Wurster just said recently. He's the incoming CEO of Charles Schwab, and he was quoted by Bloomberg as saying the following: “I have not bought crypto, and I now feel silly.” Well, kudos to Ric Wurster for saying this for so many reasons. You know, bitcoin has been getting a massive amount of conversation over the past several weeks since the election quite frankly, and for all the obvious reasons, bitcoin is up over 50% since Donald Trump was elected.

His election heralds the end of the Biden administration's obfuscation of crypto and Gary Gensler's rant against it. The New York Times just ran a headline basically saying that the litigation environment that the SEC foisted upon crypto is over thanks to the incoming Trump administration that will be here in January. And because of this, we're basically seeing the gates wide open and the horses heading at full gallop. And this is why there has been so much excitement in the crypto community and why there has been so much buying of bitcoin, Ethereum, and many other digital assets. And it's raising lots and lots of questions from you.

I've gotten a bunch of questions from listeners and so I'm going to share what they've asked and I'll provide those answers, because it is really one of the most important topics that we can really engage in as we approach year end.[

Let's, hear from Mike first. He's in St. John's, Arizona.

Mike: “The bitcoin mantra is hold on for dear life. But considering the four-year cycle of bitcoin, does selling some make sense before we get to the peak? Or do the tax implications of selling outweigh this idea?”

Ric Edelman: Well, there's no question, Mike, that there has been a four-year cycle of bitcoin. Bitcoin rises dramatically for three years, falls in a massive crash in year four, and then that cycle repeats itself. This has been the way bitcoin has operated since its inception in 2009. The question is, is that cycle still valid? Can you rely on it? Well, you know that mantra in the world of investing. In fact, it's stamped on page one of every prospectus you've never read. Bold print center of the page. Past performance is no guarantee of future results. Any assertion of the contrary is a federal offense. The SEC requires that statement whenever anybody anywhere sells any investment to anybody else.

And the reason is very simple. You can't assume that what happened in the past is going to happen in the future. So, the fact that there has been a four-year cycle doesn't mean that there's going to be in the future. And we are in an environment now in bitcoin that is really radically different than the way it has been in the past on a couple of important points.

Number one is the fact that the bitcoin block reward, the compensation that miners receive for completing that complex mathematical computation that validates the blocks that are added to the bitcoin blockchain…those block rewards are now lower than ever. Three and an eighth bitcoins is all you now earn from this massive effort of bitcoin mining. Contrast that when bitcoin first came out, there were 50 bitcoins awarded every 10 minutes.

Four years after that, it got cut to 25. And then after that 12 and a half, then after that six and a quarter, and now only three and an eighth, meaning that the four-year cycle may not be as profound as it was in the past, because the number of bitcoins miners earn every 10 minutes isn't as big a number.

That's one big difference between now and 10 years ago. Another big difference from 10 years ago, we now have mainstream engagement of crypto that we didn't have before. You know, back in 2012, back when I got started with this, it was just a bunch of crypto bros playing with this, a bunch of techies and computer nerds.

Nowadays you have pension funds, endowments, sovereign wealth funds, hedge funds, family offices. You have some of the biggest billionaires on the planet engaging in crypto. I'm not so sure that major pension funds really care a whole lot about the historical four-year cycle. I don't know that it's going to drive their investment decisions the way that the boom and bust, buy and sell attitudes were among the crypto bros back in the day.

So I'm really not sure I would base an investment strategy on the four-year cycle of bitcoin. And your final question about the tax implications of this. Never let the tax tail wag the money dog. If you think bitcoin is a solid long-term investment, then you should hold it for the long-term, not trying to make short term profits in what you're buying as a long-term investment.

If you're speculating, if you think the price of bitcoin tomorrow will be higher or lower than today, go ahead and knock yourself out. Do something about it. That's not how you generate long-term wealth in my view. And I don't think you ought to be treating bitcoin any different than frankly, any other asset class. Stocks or bonds or gold or oil or real estate or foreign securities or commodities, you name it.

I think investing is about a long-term strategy. So Mike, the short answer is, I think you’ve got to find other ideas for how you're going to approach bitcoin.

Ric Edelman: Let's go off to Seattle. Here's Ruth.

Ruth: “You answered a listener's question who was trying to compare stock investing to crypto investing, paraphrasing. You said crypto investing should be treated differently. What are some basic guidelines for buying and selling bitcoin?”

Ric Edelman: I think crypto should be treated differently, or at least let me say it this way.  I treat crypto differently than I treat the stock market or any other asset class. The bottom line is this. I believe that bitcoin is going to be the best performing asset class for the next five years. It is clear that bitcoin has been the best performing asset class for the past 15 years, and I believe that trend is going to continue.

Bitcoin is currently in the neighborhood of $100,000, and I believe that bitcoin will end the decade above $400,000. That's a 4x increase from today. What can you expect out of the stock market? Well, the stock market generally gains 10 percent a year, which means over the next five years, you can expect the stock market to gain 0.5x. Not 4.0x. So I think that we're talking about the difference of a 400% gain versus a 50% gain. And on that basis, that strong bullishness, I don't believe in doing what you would normally do in a diversified portfolio management system. In a diversified management system, we would recommend rebalancing.

The problem with rebalancing is that it has you periodically selling as assets grow in value. That's the smart, prudent thing to do. And I am consciously, overtly, and willingly admitting I am not doing the smart, prudent thing. If I were smart, if I were prudent, I would be periodically selling my bitcoin, but I believe that its future profit potential is so strong that I simply don't want to do that and I'm willing to let it ride. Is that smart? No. Is it prudent? No. Am I recommending it to you? Hell no. I'm simply telling you that that is why I say crypto investing is treated differently than my investments in stocks and bonds and real estate, etc.

I'm not saying you ought to do it. I'm not giving you investment advice. That is something you need to figure out on your own. It's called do your own research, D-Y-O-R. And I'm simply telling you how I do it. But you asked Ruth, why I said bitcoin investing is different from stock investing. That's why.

Let's head over to the other side of the country off to New Rochelle, New York. Here's Danuta's question.

Danuta: “Hi Ric, my mom loves your show. She wants to know how you would advise this scenario. My dad owns a lot of Solana and is doing well with it. He's a believer in crypto, but doesn't want to stray too far from what he knows, which is Solana. His whole portfolio is Solana. Does he diversify? If so, what percentage do you recommend should go to bitcoin? And what percentage of retirement investments should be in crypto? Thanks for your thoughts. Wishing you the best in your future endeavors.”

Ric Edelman: Wow. Danuta, this is fascinating. I mean, there aren't a whole lot of people who know a lot about Solana. I'm a big fan of Solana. I own a bunch of it. Solana has been one of the best performing digital assets.

It's not by any stretch one of the biggest.  It's in the top 10, but it is certainly nowhere near the size of bitcoin's market cap or Ethereum's market cap. Solana was invented as a competitor to Ethereum. And, there's an awful lot of excitement about it. Predominantly because Solana operates at a much faster speed than Ethereum does.

And for this reason, a lot of people believe that, business applications are going to move to the Solana blockchain, as opposed to relying on the Ethereum blockchain. I don't know if that premise is going to prove correct. This is why I own Solana and Ethereum as opposed to one or the other. But my point is this, I don't think I've ever come upon somebody who was able to say, I own a lot of Solana and nothing else. In fact, I own Solana and don't know much about anything else in crypto. That's kind of weird. You know, it's kind of hard for me to envision that somebody knows a lot about Solana, but doesn't know anything about bitcoin. That just strikes me as unusual. So, your father is not at all diversified. He's highly concentrated.

I would argue diversification in crypto, from a safety perspective. There's no question that Solana has done extraordinarily well. That many people believe it's going to continue to do extraordinarily well. But I don't know what to tell you. All I can say is your father is highly concentrated in a digital asset that is not among the top 80% of the entire crypto markets space. So, he's done really well and maybe he ought to sell some of it and claim that prize. But that's really a decision you and your dad are going to have to do. And it's going to have to be based on his own research. Remember, D-Y-O-R…Do Your Own Research.

Let's head to Massachusetts a little bit north of New Rochelle. Here's Doug. He's in Northborough.

Doug: “Hi Ric, I think that you are a financial guru. My question is, do you recommend investing in bitcoin or Ethereum if you are 70 years old?”

Ric Edelman: Yes, Doug. Absolutely. 70 years old. That's an incredibly young age for an investment time horizon. I mean, if you're in good health, you can reasonably expect to live another 20, 30, 40 years. So on that basis, sure, there's absolutely no reason not to own bitcoin and Ethereum as part of a diversified long term portfolio.

Go for it, my friend. The only real question you have to answer is how much of your portfolio will you allocate to crypto? I would think you'd be comfortable with a low single digit allocation somewhere between 1% to 5% of the portfolio. And for those who say, Oh, it's inappropriate for somebody in their seventies or eighties to own bitcoin, here's my retort. Are you concerned that you're going to die? Well, think about it. If you're going to die, you're going to have a lot of assets that you're going to leave to your children.

Wouldn't it be reasonable to take the attitude that you're already merely the steward of your assets? You're going to pass them to your children anyway? You're not going to spend all of your money. Most of your money is going to be left as an inheritance, which means you ought to invest your money in the way that your children would invest money. And if you're 70, your kids are in their thirties and forties. And I think most of us would agree a 30 or 40 year old is perfectly appropriate to have a crypto allocation.

Let's hang around in Massachusetts. This time going to Dover. Here's David.

David: “I am 73 in good health. My 401(k) is worth $1,000,000. I am interested in investing 5% into a bitcoin ETF. Is one ETF sufficient or should I invest in several of the bitcoin ETFs?”

Ric Edelman: Well, David, your question is remarkably similar to Doug's. I ought to put the two of you guys together, since you're not living that all that far apart. And yes, I think allocating 5 percent into a bitcoin ETF is fine. Should you do just one of the ETFs? You can, if you wish, or you can diversify among several of the ETFs. They don't differ very much. One of the most fundamental differences is who the custodian is of the bitcoin that they are purchasing on behalf of their investors.  Most of the bitcoin ETFs are using Coinbase as their custodian. Fidelity, of course, is self-custodying. So you might want to use Fidelity’s bitcoin ETF, along with one or two of the others from BlackRock or Bitwise or Franklin Templeton and so on. So sure, investing in a couple of them can't hurt. Don't know it'll make all that much of a difference, but I don't see a lot of harm in it either.

Let's stick around in New England and head off to Glastonbury, Connecticut. Here's William's question.

William: “In the past, your show offered guidance that crypto should make up 1% to 5% of an average portfolio. I made an initial investment of 3% in the bitcoin and Ethereum ETFs, plus some of the “picks and shovels” ETFs. My stake has grown and is now 4.5% of my portfolio. When it reaches 5%, part of me is going to wanna shave it back to 3%, and another part of me is going to want to continue riding this pony. What's magic about 5%. Why did you say 5% is the upper limit for a portfolio? Thank you.”

Ric Edelman: William, you know, the proper way to invest and you're describing it exactly. It's called portfolio rebalancing. You establish parameters for how much you want to own with each asset class as part of your portfolio. If you have decided that you want 3% of your portfolio to be in crypto, you need to set a point at which you'll sell it. And you did that. You said, I'm buying a 3% of my assets. When it reaches 5%, I'm going to shave it back to three.

That is the classic definition of portfolio rebalancing. That is the smart, prudent thing to do. You also said you want to continue riding this pony because you think the price is going to continue rising. Well, now you're describing me. This is why I'm not doing rebalancing with my crypto allocation, but I got to tell you, I'm not being smart. I'm not. That's all there is to it. So if you want to be smart and prudent you will go ahead with your rebalancing strategy. You invested 3%, it's grown to 5%.  Sell 2%...that's money in the bank. And let it ride again and just continue that rebalancing approach.

And by the way, since you asked, why did I say 5% is the upper limit? I'm not saying it's an upper limit. What I'm saying is that it's an efficient limit. The historic price performance of bitcoin tells us that from a risk-reward perspective, when you invest more than 5% of your portfolio into bitcoin, you get a disproportionate impact on risk measurements, such as the Sharpe ratio or Sortino or max drawdowns, standard deviation and so on. Meaning, if you want to follow modern portfolio theory, if you want to emphasize the efficient frontier, 5% looks like the ideal number.

If you invest more than 5% of your portfolio, you're taking more risk than you're really benefiting from in terms of potential return. That doesn't mean you shouldn't own more than 5%. It simply means your portfolio isn't going to be optimal compared to a portfolio that is 5% or less. Sounds like a lot of gobbledygook. Probably just read up, do some studying on Modern Portfolio Theory, The Efficient Frontier, and you'll get a sense of what I'm talking about. So, how much you should invest, when you should rebalance, etc., that's all up to you my friend.

Let's go down to New Jersey, into Glassboro, the home of my alma mater, Rowan University. Let's talk to Michael.

Michael: “Hi, Ric. A few months ago, I heard you talking about reporting crypto when filing your tax return. If I invest in a crypto ETF, am I required to report this?”

Ric Edelman: So, as we all know, Michael, on page one of your 1040, the very first question you are asked after you enter your name and address and social, the first question the IRS asks is about crypto, because the IRS knows tens of millions of Americans own bitcoin and they are not reporting it on their tax return.

Now, if you invest in a crypto ETF, you do not have to check the box “yes”. The IRS doesn't want to know if you invest in it. They don't want to know if you buy it. They want to know if you acquire it in other ways. So if you buy it, you don't have to check the box “yes”. But if you sell it, you absolutely have to check the box “yes”. Go talk to a tax advisor who's knowledgeable about crypto and can help you answer that question properly based on how you deal with this. We do a full two-hour webinar on crypto taxation. You'd be amazed how complicated some of this stuff is.

Lots of great questions that we've had from all of you. Thank you so much. There were a lot more. It's all I want to share with you today from a time perspective. Don't want to bore you to death, but because we have so much interest in all of this, because bitcoin has been rising so dramatically ever since the election, now that we know Trump's going to be the next president, the Congress will be fully in Republican control.

We know there's going to be a continuing massive amount of activity in crypto, lots of new legislation, lots of new regulation, a new SEC chair. Trump may even shift this regulatory authority over to the CFTC. I mean, a lot's going to happen in 2025.

What's it all going to mean for the price of bitcoin next year? We're going to give you a deep-dive answer Monday, December 9^th at 2:00pm (EST). Yeah, we're doing a webinar called “What the Election Results Mean for Crypto”. I'll be joined by Steve Kurz, the Global Head of Asset Management at Galaxy. We're going to tell you the right crypto allocation for you and your clients, the investment options to consider, because after all, there's a lot more than just bitcoin and Ethereum, whether you ought to choose the bitcoin ETFs or just buy bitcoin directly, and whether you should choose active or passive strategies, plus all your questions. So, it's Monday, December 9^th at 2:00pm (EST). It's free. You get one CE credit if you're an advisor. You can register at DACFP. com. The link is in the show notes.

And then the very next day on Tuesday, December 10 at 2:00pm (EST), our webinar, “The Retirement Revolution: ETF Solutions for Modern Retirement Planning”. So we're going to give you this additional conversation the day after our crypto chat. We're going to talk about the fact that we're living so much longer than retirees ever did. We've got to evolve how we strategize our money management. Tim Urbanowicz, the Head of Research at Innovator ETFs is going to join me to talk about how you can protect and grow your retirement assets, what to expect from the stock and bond markets next year and the new risks for investing for retirement.

That's next Tuesday, December 10 at 2:00pm (EST). It's also free, also one CE credit. You can register for this as well at theTAYF.com. You can get the links to both of these webinars so you can sign up for each one of them. The links are in the show notes.

And it's hard to believe that it's been 35 years on the air. I've done more than 1,500 radio broadcasts over the last three decades, more than 500 podcasts in the last three years alone. And my podcasts are winding down. My last one, as I've told you is December 27. I'm so glad you've been with me all these years. If you want to stay connected with me, be sure to join my distribution list. Just click on the link in the show notes. I'll make sure you continue to get the latest that I offer on exponential technologies, crypto, Alzheimer's, longevity, investing, all the topics that matter most to us all. Thank you for being with me all these years. I'm looking forward to many more with you. Please subscribe today so we can stay connected.

If you like what you're hearing, be sure to follow and subscribe to the show, wherever you get your podcasts, Apple, Spotify, YouTube, and remember leave a review on Apple podcasts. I read them all. Never miss an episode of The Truth About Your Future. Follow and subscribe on your favorite podcast app.  

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Links from today’s show:  

Certified in Blockchain and Digital Assets including Crypto Taxation Course Webinar:  https://www.dacfplearning.com/#/online-courses/d397a0c0-05c6-499e-86db-0f7722bee1e3

12/9 Webinar - What the Election Results Mean for Crypto: https://dacfp.com/events/what-the-election-results-mean-for-crypto

12/10 Webinar - The Retirement Revolution: ETF Solutions for Modern Retirement Planning: https://www.thetayf.com/pages/the-retirement-revolution-etf-solutions-for-modern-retirement-planning

2/24-2/26 Wealth Management Convergence-2025 https://www.thetayf.com/pages/convergence-2025

11/13 Webinar Replay - An Innovative Way to Generate Income in a World of Declining Rates: https://www.thetayf.com/pages/november-13-2024-an-innovative-way-to-generate-income

10/9 Webinar Replay - Crypto for RIAs: Yield, Staking, Lending and Custody. What’s beyond the ETFs? https://dacfp.com/events/crypto-for-rias-yield-staking-lending-and-custody-whats-beyond-the-etfs/

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