How To Dip A Toe Into Bitcoin

Does bitcoin belong in your financial plan?

With cryptocurrency starting to pop up in portfolios managed by institutional investors, it’s a question a growing number of individuals are asking themselves and their financial advisers.

The answer, advisers say, is: It depends—on factors including an investor’s tolerance for risk, financial capacity to absorb losses, and knowledge of the digital asset industry. Among those who use it for some clients, most recommend sticking to a small allocation, on the order of 1% to 2%.

In a recent survey of more than 500 financial advisers conducted by organizations including the Financial Planning Association, nearly half of advisers said clients have asked them about investing in cryptocurrencies, up from 17% in 2020. About 14% said they use or recommend it, compared with fewer than 1% last year.

Bitcoin “is only 10 years old,” said Ric Edelman, founder of advisory firm Edelman Financial Engines LLC and an investor in digital startups. “The focus has been on mining and trading it. But now people are beginning to go to the next level of how to incorporate it as part of a larger portfolio.”

To do it right requires more than a high risk tolerance.

Simon Tryzna, a financial adviser in San Francisco, says investors should have “an investment thesis” for why cryptocurrency belongs in their financial plan. For example, he said many of his tech-savvy clients believe that blockchain, the record-keeping technology behind bitcoin, can make the economy more efficient.

It’s also important to research the growing array of products that allow everyday investors to add virtual currencies to their nest eggs.

Because cryptocurrency is highly volatile, adding even a small amount to a portfolio may require you to revamp your asset allocation, reducing exposure to other risky investments including stocks, said Dan Egan, vice president of behavioral finance and investing at Betterment, an online advisory firm.

What follows are other steps to take before buying cryptocurrency.

Should I invest in crypto?

Cryptocurrency has the potential for significant gains. Over the past year, bitcoin’s price has risen from just over $9,000 to almost $32,000, after hitting a high in April of more than $64,000.

But Roger Aliaga-Diaz, head of portfolio construction at Vanguard Group, says “it’s a volatile investment prone to speculation that doesn’t belong in a prudent, well-balanced investment portfolio.”

Cryptocurrency is “largely unregulated and accompanied by considerable risk,” Mr. Aliaga-Diaz wrote in a recent article.

Since hitting a record high in April, bitcoin has lost about half its value as China intensified its crackdown on virtual currencies.

Yale University economist Aleh Tsyvinski, coauthor of a 2018 study that concludes that institutional investors should put about 1% to 5% of their portfolios into digital currencies, said individual investors comfortable with alternative investments, such as gold and private equity, should consider adding crypto, too.

“If you have 5% in alternatives, why not allocate 10% of that to crypto?” he said.

Because virtual currencies behave in a “completely different” manner than stocks, bonds and other traditional investments, he said they can enhance returns by rising when other assets fall. “It’s a pretty good investment for diversification.”

It’s an argument Mr. Aliaga-Diaz doesn’t buy. He warns against paring allocations to stocks and bonds to make room for something that lacks “intrinsic economic value” and generates “no cash flows, such as interest payments or dividends, which can explain their prices.”

“Cryptocurrency prices depend mostly on speculation about their adoption and use.”

John Piershale, an adviser in Crystal Lake, Ill., said while he recommends against crypto for the vast majority of his clients, he has put up to a 2% allocation into an exchange-traded fund that buys shares in companies involved in blockchain technology for a few clients who can withstand “large swings in value.”

How much should I invest?

Those who feel they can handle the risks of cryptocurrency should start small and buy a fixed amount at regular intervals until reaching their desired allocation, a strategy that reduces the odds of buying at a market high.

Mr. Egan said anything over 1% of a portfolio is “an aggressive allocation” given that cryptocurrency represents just 0.5% of the value of global stocks and bonds.

“If you become very knowledgeable and are heavily engaged, then you can go further than 1%,” said Mr. Edelman. “But for most investors building a diversified portfolio, 1% is enough.”

What should I buy to get exposure to cryptocurrency?

To buy or sell cryptocurrency, you can open an account at a cryptocurrency exchange such as Coinbase Global Inc. or a trading platform that offers it, such as Robinhood Markets Inc.

On Coinbase, an investor wanting to buy $100 of bitcoin would pay about $3.49 in fees, and potentially more with some payment methods like debit cards. Robinhood charges no commissions, but routes customer orders to trading firms that pay it, a practice critics say may result in customers not getting the best prices.

Many big brokerage firms, including Fidelity Investments and Charles Schwab Corp., don’t allow customers to buy or sell cryptocurrency. But their clients can purchase shares in trusts that invest in digital assets from companies including Grayscale Investments LLC. Grayscale Bitcoin Trust charges a 2% annual fee and can trade at a premium or discount to the value of the bitcoin it holds.

Some advisers recommend buying stock in companies including Coinbase or in ETFs that invest in digital asset companies.

Should I diversify among cryptocurrencies?

Some cryptocurrency fans favour bitcoin. Others cite the dot-com shakeout in recommending an assortment.

Because cryptocurrency scams are common, do research and invest only a token amount in unknown names, said Mr. Egan.

Does bitcoin belong in my IRA?

Some clients who trade frequently want cryptocurrency in retirement accounts, since they can reinvest the profits tax-free.

But because firms including Schwab and Fidelity don’t allow IRA owners to buy virtual currencies, such investors must use niche IRA providers that specialize in alternative investments. Be aware of the fees these IRA custodians charge.

Stick with companies regulated by federal or state banking authorities, said Mr. Edelman.

For an asset with the potential for big gains, “the best place to hold it is in a Roth IRA,” said IRA specialist Ed Slott. Investors contribute after-tax money to these accounts, but gains accrue tax-free. Money can be withdrawn tax-free too, provided a Roth owner is 59½ or older and the account has been open at least five years.

It may make sense for some investors to hold cryptocurrency in a taxable account, Mr. Slott said. Provided you hold the investment for longer than a year, you will pay the long-term capital gains tax rate of up to 23.8% when you sell at a profit and can offset gains with capital losses. In contrast, with a traditional IRA, you will pay income tax of up to 37% on your withdrawals.

How often should I rebalance?

While many advisers recommend taking a buy-and-hold, “set-it-and-forget-it” approach towards a diversified portfolio and rebalancing annually to desired portfolio allocations, it is a good idea to monitor volatile holdings such as digital currencies more often.

Mr. Tryzna said a client who bought bitcoin and ether several years ago saw these holdings appreciate from 5% of his portfolio to 50%, before paring the position to 20%.

Mr. Egan recommends using a consistent approach to rebalancing, such as doing it monthly or when your allocation drifts by one percentage point from your target.

If you hold cryptocurrency in a taxable account, it might make sense to let the portfolio drift a little longer before rebalancing, unless you can offset taxable gains with losses, said Mr. Egan. He said Betterment tries to avoid sales that trigger the short-term capital gains rate of up to 40.8% on assets held for a year or less.

First, the good news for office landlords: A post-Labor Day bump nudged return-to-office rates in mid-September to their highest level since the onset of the pandemic.

Now the bad: Office attendance in big cities is still barely half of what it was in 2019, and company get-tough measures are proving largely ineffective at boosting that rate much higher.

Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say.

More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules.

But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.

Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66%. But it was below 30% on Fridays. In New York, it ranges from about 25% to 65%, according to Kastle Systems, which tracks security-card swipes.

Overall, the average return rate in the 10 U.S. cities tracked by Kastle Systems matched the recent high of 50.4% of 2019 levels for the week ended Sept. 20, though it slid a little below half the following week.

The disappointing return rates are another blow to office owners who are struggling with vacancy rates near record highs. The national office average vacancy rose to 19.2% last quarter, just below the historical peak of 19.3% in 1991, according to Moody’s Analytics preliminary third-quarter data.

Business leaders in New York, Detroit, Seattle, Atlanta and Houston interviewed by The Wall Street Journal said they have seen only slight improvements in sidewalk activity and attendance in office buildings since Labor Day.

“It feels a little fuller but at the margins,” said Sandy Baruah, chief executive of the Detroit Regional Chamber, a business group.

Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.

“It was clearly a minority opinion that the others shook their heads at,” said Kris Larson, chief executive of Central Houston Inc., a group that promotes business in the city and sponsored the meeting.

Making matters worse, business leaders and city officials say they see more forces at work that could slow the return to office than those that could accelerate it.

Covid-19 cases are up and will likely increase further in the fall and winter months. “If we have to go back to distancing and mask protocols, that really breaks the office culture,” said Kathryn Wylde, head of the business group Partnership for New York City.

Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.

About 90% of members surveyed by the Seattle Metropolitan Chamber of Commerce said that the city couldn’t recover until homelessness and public safety problems were addressed, said Rachel Smith, chief executive. That is taken into account as companies make decisions about returning to the office and how much space they need, she added.

Cuts in government services and transportation are also taking a toll. Wait times for buses run by Houston’s Park & Ride system, one of the most widely used commuter services, have increased partly because of labor shortages, according to Larson of Central Houston.

The commute “is the remaining most significant barrier” to improving return to office, Larson said.

Some landlords say that businesses will have more leverage in enforcing return-to-office mandates if the economy weakens. There are already signs of such a shift in cities that depend heavily on the technology sector, which has been seeing slowing growth and layoffs.

But a full-fledged recession could hurt office returns if it results in widespread layoffs. “Maybe you get some relief in more employees coming back,” said Dylan Burzinski, an analyst with real-estate analytics firm Green Street. “But if there are fewer of those employees, it’s still a net negative for office.”

The sluggish return-to-office rate is leading many city and business leaders to ask the federal government for help. A group from the Great Lakes Metro Chambers Coalition recently met with elected officials in Washington, D.C., lobbying for incentives for businesses that make commitments to U.S. downtowns.

Baruah, from the Detroit chamber, was among the group. He said the chances of such legislation being passed were low. “We might have to reach crisis proportions first,” he said. “But we’re trying to lay the groundwork now.”