How to Manage Digital Assets: Avoid Mistakes

How to properly manage digital assets

By Peter Eberle, President & Chief Investment Officer — Castle Funds

In the face of economic uncertainty, growing numbers of investors are turning to digital assets like Bitcoin as ideal alternatives to traditional securities. However, if investors approach managing these digital assets as they would traditional assets, they could face unexpected obstacles.

Understanding the risk of the crypto market

Although the volatility of the crypto market is well-documented, it is worth noting that any asset for investment involves a level of risk. Additionally, with the broader economic conditions we are experiencing and the improving regulatory clarity surrounding the crypto market, many investors are finding digital assets like Bitcoin an exciting prospect.

One reason Bitcoin is becoming such an ideal investment for many investors in the current economic conditions is the capped supply of the coin. Compared to traditional fiat currencies — where the Treasury can increase the supply, causing price to decrease and interest rates to increase — there is a set number of Bitcoin that will be created, and that number will never be increased. As a result, when the demand for Bitcoin increases, the price can be expected to rise along with it.

Still, in navigating a new financial landscape such as the crypto market, investors — especially those with little experience managing alternative investments — may be overwhelmed. If one does not properly manage their digital assets, the consequences could be more drastic than the potential. While it is common to make mistakes when first dipping one’s toes into the waters of digital assets, knowing what these frequent mistakes are is a great way to avoid them.

Common mistakes in crypto investing

One of the most common mistakes an investor might make when looking into digital assets is choosing a different coin than the one desired, and in the crypto market, many coins share similar names — which could confuse imprudent investors. For example, an investor seeking Bitcoin (BTC) exposure may search “Bitcoin” on their broker platform and come across similarly-named assets, such as “Wrapped Bitcoin” (WBTC) or “Bitcoin Cash” (BCH). Although these assets do contain “Bitcoin” in their name, they are based on different underlying technologies and, as such, behave very differently.

Investors should also take care to manage their feelings of greed. In a search for unrealistic returns, unscrupulous investors might put a large sum of money into an asset they heard about on social media, but has no real utility or technology. These investments tend to be even greater gambles, with far less chance of success. Investors must know what they are buying. The “name” digital assets like Bitcoin and Ethereum have real use cases and world-changing technology.

Still, position sizing remains a critical consideration in a market as volatile as digital assets. In the long run, BTC and ETH seem likely to offer superior investment returns, but in the short term, drawdowns are possible. A portfolio composed of 5% of digital assets will be relatively unscathed if the price of said assets drops by 50%. However, if an investor has a high percentage of assets in their portfolio that are down 50%, that could cause significant pressure or even pain.

Another common mistake is to use one’s primary banking accounts to purchase digital assets. Many investors fail to realize that banks are allowed to close accounts and end relationships with those who send and receive money from digital asset brokers — even without prior notice. As such, investors should avoid directly connecting their primary banking accounts (where they deposit their paychecks and pay their bills) to digital asset brokers, as this type of disruption could prove catastrophic if unmitigated.

Similarly, investors would be unwise to keep large, static balances at digital asset brokers. Investors holding significant balances in digital assets should consider using independent dedicated custodians, hardware wallets, or other “cold-storage” mechanisms to keep their digital assets safe. This would protect against their account or broker being hacked or experiencing financial difficulties. Granted, these alternative methods have their own risks — such as the loss of private keys or passwords, rendering investors unable to recover assets — but investors with large balances will likely find this arrangement ideal.

Finally, investors should not attempt to time the market. Unwise investors try to buy at the bottom, but especially for investors who are not professional market analysts, doing so is inadvisable. It is generally much safer to invest over a period of time and achieve a lower average cost. For example, if one hopes to invest $50,000, instead of buying the amount in a single transaction, it is better to make 12 equal purchases of $4,166 on the first of each month. This way, you buy a lower number of units when the price is high and more units when the price is low.

In the light of economic conditions right now, which have seen inflation tamed and become less of a threat — as well as the potential of the Federal Reserve to lower interest rates not to be responsible for a recession — it seems that Bitcoin and Ethereum seem headed for a tailwind. If investors learn how to manage their digital assets properly, these could prove exciting investments.

— Peter Eberle, President and Chief Investment Officer of Castle Funds, has extensive experience in portfolio management, derivatives trading, and risk management. He earned his MBA from the University of Pennsylvania’s Wharton School of Business.