The general principles such as liquidity management, diversification across several asset classes or the consideration of life cycle-specific needs and goals are the key elements of solid financial planning. There are some additional aspects to consider if there is an intention to invest in digital assets:

1. Direct vs. indirect: There are two ways to invest into digital assets: directly or indirectly. Direct investment involves owning digital coins or tokens through a digital asset exchange or in a private wallet. For substantial investments or certain digital assets (e.g. NFTs) direct holding tend to be preferable.  In this context, a trustworthy and highly regulated custodian is of enormous importance. This regulation ensures the highest level of security, availability and functionality. Those who do not have much experience with digital assets or want to use them purely as an addition to diversify an existing traditional portfolio are well served by indirect investment vehicles like digital asset-based mutual funds or ETPs.

2. Risk-ability: Digital assets are subject to higher risks than usual of market abuse, market manipulation and insider dealing by market participants, due to a lack of regulation, supervision, market control and/or liquidity. Therefore, the risk capacity of the investor must be elevated. A total loss must not lead to the fact that important financial goals are no longer achieved or even the livelihood is endangered. As with other major investment decisions, it pays to have a financial planning expert reviewing your individual financial situation and determine the objective risk tolerance. It also gives an indication of what proportion of assets can be invested in a risky asset class without major consequences in the event of major losses.

3. Volatility: Digital assets, especially crypto coins, are exposed to excessive price volatility. It is impossible to predict which way the digital asset market will move or by how much. Hence the most sensible way to invest is over a period of time in a staggered manner.

4. Review and rebalance: In order to keep the risk level, monitoring and rebalancing a digital asset portfolio, but also the share of digital assets in total assets, is crucial. With periodical rebalancing, the allocation is adjusted on a predefined time period, e.g. semi-annually. Another way is to define thresholds and adapt the portfolio when an asset’s value crosses a certain proportion. A combination of periodic and threshold rebalancing adjusts a portfolio on a schedule but also when an asset’s value crosses a particular threshold.

When it comes to investing, whether in traditional or digital assets, it is important to remember that the fundamental law relating risks to returns always applies. It therefore helps to approach the matter systematically and, on an initial basis, to clarify the general risk capacity as part of an overall asset assessment.

In any case we believe that investing in cryptos or other digital assets is only suitable for individuals who have the ability and willingness to bear the related risks. However, these risks might have the potential to be rewarded with appealing returns due to the potential disruptive power of the blockchain technology.

Investors’ conclusion

In summary digital assets offer a high degree of optionality, and they appeal much more to risk seekers than safe-haven seekers. While in the longer-term rising regulation should instill trust in the asset class and foster adoption, we are not there yet. Also, risk seekers should exercise caution, as digital assets are still a very unregulated area.

Please note: the information provided is for educational purposes only.