By late 2017, Grant Sabatier was a crypto millionaire. The 69 bitcoins he had bought in 2013 at about $72 per coin were trading for $16,600 apiece when he wrote a piece for CNBC Make It urging investors not to buy bitcoin.
But a few things have changed since then. For one, bitcoin has been on a tear: A single coin recently traded for more than $57,000. The entire crypto market has boomed. The total market value of digital currencies recently topped $2 trillion for the first time.
And as crypto prices have risen, so has public awareness, Sabatier points out. "It's become a huge part of our culture," he says. "In the past year, it's gone from a subculture to the forefront of our culture."
But though cryptocurrencies have blown up in price and prominence, Sabatier doesn't think that they should occupy a prominent place in your portfolio. "I still don't recommend that new investors — anyone with less than $25,000 to invest — invest in cryptocurrency," he says. "The one thing that's changed is I think cryptocurrency should be treated like any other alternative asset class and be used as a way to diversify your portfolio."
Sabatier's main concern with cryptocurrencies is the lack of history that can clue investors in to how the asset will behave. "Crypto doesn't have a very long track record," he says. "With stocks, bonds, and real estate, there is immense historical data that helps us understand how markets perform."
Because those more established assets deliver consistent returns, long-term investors would be wise to allocate the vast majority of their portfolios to diversified, low-cost funds that track them, he says. "If you invest in a total stock market index fund, you're investing in companies that have products, customers, and employees dedicated to growing those businesses," he says. "There are tangible assets there."
That doesn't mean that cryptocurrencies have no place in your portfolio, says Sabatier — they just shouldn't be headlining the show. "My big problem is with people investing large portions of their portfolio in crypto, which is more of a short-term gamble," he says. "New investors should be saving for the long term. Would you go to Vegas and put your life savings on red or black at the roulette table?"
Because crypto prices aren't tied to fundamentals and instead move purely based on investor speculation, any investment in digital currency is bound to be an extremely volatile one. But owning small allocations of asset classes that behave differently from the investments in your core portfolio adds diversification and can boost your returns over time. That's why Sabatier recommends treating cryptocurrencies like an alternative asset, akin to an investment in precious metals, commodities, or collectibles.
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"Maybe put 1% to 5% of your portfolio into bitcoin and etherium," he suggests.
If you do decide to place a small bet on cryptocurrencies, be prepared for any outcome, Sabatier says, from striking it rich to losing it all.
"People who have read Satoshi's bitcoin paper and have studied what the blockchain is outside of Twitter may understand the underlying technology and want to make a bet on the future," he says. "But humans are extremely bad predictors of the future. Even a large group of intelligent people saying this or that will happen doesn't hold a lot of sway."
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Sabatier says that cryptocurrencies, and especially the blockchain technology that they run on could very well be the way of the future. But major risks to the value of digital coins are looming, he says, including government regulations that could cripple crypto.
"The last thing the government wants is for its currency to be devalued," he says. "All it takes is the U.S. government to make it illegal to transact in crypto or to slap a 70% tax rate on them for them to become essentially useless," he says, pointing out that the SEC recently put the approval of a bitcoin ETF on hold.
In the meantime, Sabatier acknowledges that there's plenty of money to made in the short-term trading coins. "A lot of people are getting rich very quickly," he says. "But view it as a gamble. People in dogecoin would have been buying lottery tickets. I'd only put a small amount of money on any of it."
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