The interest in cryptocurrency-related investing has grown in recent years, but profitability isn’t always guaranteed. A measured approach can potentially improve the chance your investments will be successful, according to Kevin DeMeritt, founder and chairman of Los Angeles-based gold and precious metals firm Lear Capital.
Cryptocurrency assets allow money to be circulated via blockchain technology, using a digital ledger that records transactions, in lieu of a traditional bank structure.
As of 2022, federal officials estimate 16% of Americans have purchased digital assets. Approximations suggest the global cryptocurrency user base for bitcoin, arguably the most well-known type of cryptocurrency, may have grown by 190% from 2018 to 2020 alone.
Younger consumers have shown particular interest in digital currency assets. In 2021, 38% of Americans aged 18 to 24 had owned — or owned at that time — bitcoin; 36% said they planned to invest in it in the future.
Digital Currency Pros and Cons
Cryptocurrency has provided opportunities for profitability in the past. In 2017’s fourth quarter, bitcoin returns totaled 23.9%, significantly more than the stock market’s average annual returns of roughly 10%.
Crypto’s performance, though, has also been somewhat rocky. After its price spiked to more than $65,000 in 2021,it fell to under $17,000 by the end of 2022. In November 2022, crypto trading platform FTX faced withdrawals and liquidity issues, and the year-over-year cryptocurrency cumulative market cap was roughly 70% lower than it had been in 2021.
As a series of reports released by the White House in September 2022 noted, cryptocurrency prices can be volatile, and sellers may misrepresent some features and the potential returns investors will receive. The White House also cited FBI statistics that indicate approximately 600% more digital asset scam-related losses occurred in 2021 than in 2020.
Similarly, a 2018 Wall Street Journal analysis of 1,450 digital coin offerings found roughly 271 had transparency or disclosure issues, such as the inclusion of plagiarized documents. Nine times greater crypto value was lost between 2020 and 2021 due to security issues; in August of that year, one incident alone involved the theft of $610 million.
While there can be some inherent risk, cryptocurrency offers a few benefits, Kevin DeMeritt says — such as serving as an alternative to governments printing more money. Yet given the unpredictability it’s shown at times, and the fact it’s only been in existence for approximately seven or eight years, he advises cautious crypto investing practices.
“It doesn’t have a 5,000-year track record like gold does,” the Lear Capital founder says. “So if you’re going to own some cryptocurrency as an inflation hedge, that’s fine. Make it part of a diversified portfolio of precious metals, cryptocurrency, and maybe a couple of other things that are good hedges as well. Don’t put all your eggs in one basket.”
Creating a Balanced Portfolio
Today’s high inflation level makes diversification particularly important. However, because the stock market is often affected by unexpected events like conflicts between two nations — and even a low level of inflation will affect your earnings’ value — including safety measures in your investment plan is always a good idea, according to Kevin DeMeritt.
“An inflationary hedge is just protection of purchasing power,” he says. “Slowly but surely, purchasing power drops through higher interest rates; your bills go up, everything else is going up. Every year, we’re still losing value, so we need something to offset that. I can’t tell you when the stock market or home values are going to fall. You need something that has that inverse relationship to those kinds of assets.”
Physical gold, silver, and platinum assets, purchased as coins or bars, are one option. Consumers can invest in them through a self-directed IRA in which precious metal assets that contain a certain degree of fineness — at least 0.995 for gold and 0.999 for silver, as outlined in this Lear Capital guide — are held in an IRS-approved depository vault until the owner is ready to retire and opts to either have the items returned or liquidated.
“We’re starting to see more people become concerned about the volatility in the stock market, which happens when you have high inflation,” Kevin DeMeritt says. “At today’s inflation rate, around 7%, in seven to eight years, your money would drop almost in half. Each year, if I’m losing 7% of the value of my paper money purchasing power, I need something to offset that. Gold, in the past, happened to be one of the better assets that can offset that inflation rate.”
Gold is sometimes viewed as a safe, and therefore subdued, investment option; however, that’s not necessarily an accurate depiction, according to Kevin DeMeritt.
“One of the biggest misconceptions is that gold is this relic and doesn’t have this great performance record,” he says. “From the year 2000, if you invested $100,000 in stock, it would be worth around $320,000 today. But if you invested $80,000 in stock and $20,000 in gold, it would be worth $385,000. You picked up an extra $65,000 in your bank account just with 20% of your assets in gold. It has dramatically outproduced the stock market.”
Gold, DeMeritt says, can potentially help buffer interest rate increases.
“The second misconception is if interest rates go up, the gold market’s going to fall because it doesn’t generate any interest,” he says. “If you go back to 1974, when interest rates went all the way up to around 15%, gold had gone from $50 an ounce in 1974 to $850 an ounce at the peak of inflation in 1980.”
Although today, cryptocurrency may be a more trendy asset class, Kevin DeMeritt advises against embracing it as your sole investment vehicle. While some consumers might assume gold has been in use for so long that it’s no longer as advantageous, Lear Capital’s DeMeritt says its staying power is actually its strength.
“People think this cryptocurrency looks like maybe it’s the next, newest, best thing,” he says. “What are the central banks holding? Gold — because they understand the paper and the digital [currencies] could potentially go away. It has in the past. We’ve had hundreds of currencies collapse or go away, and the gold is still there in all of the central banks’ accounts. They need something that’s physical and worth value.”