MOMENTUM September 2021 | Page 40

FINANCIAL FOCUS
KRISTI TREVINO Financial Advisor Edward Jones
www . edwardjones . com / kristi-trevino

BITCOIN Investing or speculating ?

Many people have decided that bitcoin is the next big thing – and they are backing up their enthusiasm with dollars . Should you , too , consider putting money into bitcoin or other cryptocurrencies ?

First of all , keep in mind an essential piece of financial advice : Don ’ t invest in something you don ’ t understand . And bitcoin is not easily understandable . There ’ s no physical bitcoin , nor is it backed by a bank or government . It ’ s a digital currency , used for transactions on a decentralized network of computers . The market ’ s demand for bitcoin largely determines its price , though other factors are also involved .
And this price can vary widely . Since bitcoin was introduced in 2009 , it has gone through periods of enormous gains and precipitous declines . Its short history has reminded market watchers of the bursting of the “ dot . com ” bubble in 2000 and the housing market bubble in 2007 . These results have raised the following question about purchasing bitcoin : Is it investing or speculating ?
There ’ s a big difference between the two . Speculators engage in risky transactions with the hope of profiting from short-term price fluctuations in various financial vehicles . Investors , on the other hand , stick with these practices :
• They follow a long-term strategy . Real investors follow a long-term strategy based on their goals , risk tolerance and time horizon . Generally speaking , long-term investors don ’ t do a lot of buying and selling , saving on fees and potential taxes . But this “ buy and hold ” approach doesn ’ t mean investors put their portfolios on autopilot . Instead , they review their portfolios at least once a year to make sure their investment mix is still appropriate for their needs .
• They focus on quality . Long-term investors stay away from the flashier – and riskier – financial instruments . Instead , these investors seek quality . When they ’ re considering stocks , for example , they look for companies with solid fundamentals , including strong
management teams , competitive products and services and business plans that bode well for the future . When they buy bonds , they seek those with high credit ratings issued by the independent rating agencies . Focusing on quality doesn ’ t yield quick results , but it can instill confidence in one ’ s investment choices .
• They diversify their holdings . If a downturn in the financial markets affects one type of asset particularly hard , and your portfolio contains a high concentration of that asset , your financial strategy could be jeopardized . Long-term investors reduce this risk by owning a variety of investments . While diversification can ’ t guarantee profits or protect against all losses , it can help reduce the impact of market volatility on your portfolio . And here ’ s one more difference between investors and speculators : track record . Investors put their money into companies that provide tangible goods and services , and these companies have historically grown with the overall economy . Stocks and bonds are established investment vehicles with well-defined and regulated markets . Consequently , investors can assume a certain degree of predictability , though , of course , stock prices will always fluctuate in the short term and there are no guarantees against loss of principal . Cryptocurrencies , on the other hand , are relatively new , largely unpredictable and will likely face increased regulation in the future , with the ultimate risk being an outright ban by some governments .
You work hard for your money – so think carefully about how you can best put it to use to help you reach your lifetime goals .
This article was written by Edward Jones for use by your local Edward Jones Financial Advisor . Edward Jones , Member SIPC
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