Cryptocurrency has surged in value over the past year, driven partly by the introduction of Bitcoin and other cryptocurrency exchange traded funds (ETFs) from major asset management firms. These ETFs have made it easier for investors to access cryptocurrency without dealing directly with the complexities of owning it, like managing a crypto wallet or exchange account. This development has increased cryptocurrency’s legitimacy as a mainstream investment option.
If you’re a DIY investor considering whether cryptocurrency belongs in your investment portfolio, there are key factors to evaluate:
1. Why are you drawn to this investment?
Cryptocurrency’s appeal has evolved from decentralizing banking power to enabling new business models in the “Web3” network economy. Assess if you’re investing because of a strong belief in its future potential or simply due to “FOMO” after recent price gains. If it’s more about FOMO, then it may be difficult to stick with the investment if its price declines and your odds of success will be lower.
2. Can you handle the volatility?
Cryptocurrency, including Bitcoin, is extremely volatile—far more than traditional stocks. This means significant price swings can test your resolve as an investor. For instance, in 2022, Bitcoin lost over 70% of its value in about a year. You should be prepared for a roller coaster ride.
If you decide cryptocurrency fits your investment goals and risk tolerance, consider these steps:
- Limit your exposure: Due to its volatility, it’s prudent to limit cryptocurrency to a small portion of your overall portfolio, typically no more than 5%. For example, in a $200,000 portfolio, this would mean allocating up to $10,000 to cryptocurrency. This same rule would also apply to investing in the stock of a single company.
- Time horizon: Cryptocurrency investments are best suited for funds you won’t need for spending goals in the next 5 years. This long-term approach allows you to weather market downturns without needing to sell during unfavorable conditions. If you are in your 30s or 40s, your longer investment time horizon can be a major advantage for investing in volatile, high return investments.
Bottomline:
Investing in cryptocurrency isn’t suitable for everyone due to its complexity and high volatility. However, for those who understand the risks and can tolerate market swings, it could potentially serve as a small, long-term investment within a diversified portfolio.
Disclaimer: All written content is for informational purposes only. None of the information provided is intended as investment, tax, accounting, or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. All information provided should be discussed with a registered advisor, accountant, or legal counsel prior to implementation. Opinions expressed herein are solely those of Sheer Empowerment Financial LLC (“SEF”), unless otherwise specifically cited. Presented material is believed to be from reliable sources and no representations are made by our firm as to another parties’ information accuracy or completeness.