Continuing our Illumination Wealth Blog series on cryptocurrency, we want to look at crypto as a legitimate investment opportunity. It has turned into something similar to the stock market with so many new cryptocurrencies and trading platforms available, as well as daily rises and drops in value. It seems a new crypto trend shows up just about every week, so it can be hard to keep up with.
The main difference between investing in crypto compared to investing in stocks and bonds is that cryptocurrencies are purely speculative. Of course, speculation is a major part of stock investment, but there are more tangible assets on the line. You can own a stock in a publicly traded company. Stock values go up and down, usually in conjunction with that business’s successes and failures.
Cryptocurrency is a different type of speculation because it is largely unregulated. The decentralized aspect of crypto is what makes it more attractive to some investors, but that can also be its downfall. Not every new cryptocurrency introduced is destined to grow in value like Bitcoin has since its original ICO (initial coin offering) that many traditional investors scoffed at. Crypto is new. It’s different. And that can be a little scary for some investors who like to stick with what they know.
However, the crypto investment trend is not going anywhere anytime soon. It is growing rapidly and some savvy investors are making a lot of real money with strategic buying/mining, trading and selling of various tokens like Ether, Dogecoin and many others.
So, how much crypto should be in your investment portfolio? The answer may be different for every type of investor. Because it is still a purely speculative investment, you are assuming plenty of risk. You probably don’t want to dump all of your life savings into cryptocurrencies or sell off all your stocks and bonds in trade for tokens. Crypto investors need to face the reality that they could end up losing everything they invest if these digital currencies don’t end up being that valuable in the long-term.
Since cryptos are decentralized and largely unregulated, it’s hard to say what will happen to them in 5, 10 or 20 years. The government may impose regulations. Tax liabilities for trades and NFT purchases could be costly. Data that seems ultra-secure may be breached. There is still so much we don’t know about what some think is the “currency of the future.”
At the same time, it’s smart to understand how cryptocurrencies and blockchain technology work and consider investing on some level. Some investors may want to be more aggressive if they truly believe in the potential of crypto. Others may be more conservative. It’s all about understanding your personal investment strategy and building our portfolio the way you want to build it.
Most successful investment portfolios are built on diversification. You don’t want to put all your eggs in one basket—especially a basket as uncertain as crypto! Diversify your funds, explore different investments and do your research. Those making money in the crypto market right now are a lot like stock traders. They are monitoring the trends and making purchases, sales and trades at strategic times to try and get the most out of their investments. Some moves work out great. Some are later regretted. It’s all part of the game.
Speaking of diversification, this is also something you can practice in the crypto market. There are many different types of tokens and trading platforms, so you can diversify your crypto holdings and protect yourself when one fails and another thrives.
Getting back to our original question of how much crypto should be in your investment portfolio, it’s up to you. As an investment advisor, I have been paying a great deal of attention to the crypto market and it is an excellent investment for some of my clients. It is not ideal for others. The important thing to remember is diversification within your investment plan as a whole and potentially within the crypto world, as well.
If you are interested in cryptocurrency investment and reviewing your overall investment strategy as you seek financial independence, contact Illumination Wealth today!