What is Crypto and Should it Be in Your Investment Portfolio?

Whether you’re a novice trader, a veteran investor, or someone who has started saving up some money you have definitely heard of and are considering investing in cryptocurrency. Crypto caught the world's attention in 2017 when Bitcoin reached a high of $20,000 and fell below $3000 in less than a year. As Bitcoin recovered all losses in 2020 many investors have taken a serious look at crypto as a long-term investment and potential currency. The question remains:

What is Crypto and Should it Be in Your Investment Portfolio?

Cryptocurrency is a peer-to-peer form of digital payment that allows for high-speed transactions between two parties without relying on banks or other institutions for verification and in moderate amounts can be a fantastic addition to your investment portfolio if you invest in the right tokens.

It looks like cryptocurrencies are here to stay but a lot of questions still remain unanswered especially for long-term or risk-averse investors who like to buy and hold. It’s also not completely clear which tokens are worth putting money into. Read below to find out more about crypto, whether it’s the right investment for you, and what percent of your funds should be allocated towards this digital payment system.

What is Cryptocurrency?

We can say without a shrivel of doubt that even those individuals who have invested in the crypto space are still shaky on what exactly is cryptocurrency. Most people seem to understand at first until terms like ‘blockchain’ are introduced into the conversation that only serve to confuse and upset potential investors.

Simply put, cryptocurrency is a digital payment that allows for transactions between anyone, anywhere without banks or other financial institutions having to verify anything. The word cryptocurrency stems from the fact that the transaction system is based on encryption which verifies transactions. It’s this encryption that cuts out the middle-guy or banks and provides an additional level of security.

Your currency is stored in a digital wallet so all transactions have to happen through digital entries and everything is recorded in a public ledger. Issued currencies are referred to as tokens and run on something called Blockchain technology which is basically everything described above: a decentralized network spread across computers that manage and record payments and transactions by said technology.

Pretty simple right? So what’s all the fuss about when it comes to crypto? Well, a large number of supporters believe that cryptocurrency could one day replace traditional fiat currency and become the default payment method that governments, companies, and people adopt at scale.

Supporters also believe in the underlying blockchain technology as a means to not only record transactions but to have other implementations like contract executions independent of any third party and storage of data like medical records.

People also seem to like the fact that banks are not involved as a third party, making the currency more secure from inflation. Transaction speeds are also favored since traditional banks take longer to verify and transfer funds.

Then there are those who don’t really know much about cryptocurrency or blockchain technology and just want to take advantage of the volatile nature of tokens and make fast money.

If you are part of this last category of people then this article probably isn’t for you. However, if you have considered adding cryptocurrency to your portfolio as a serious investment then keep reading to find out if that is the right course of action for you.

Should You Invest in Crypto?

The short answer is yes. Despite the risks associated with cryptocurrency currently, a smart investment into the space could prove highly lucrative. However, there are several factors to keep in mind.

If you are a low-risk long-hold kind of investor then crypto might not be the right choice for you for the following reasons:

1. Cryptocurrencies Are Extremely Volatile

If the DOW falls 20% in one day we call that a recession. If a large-cap token falls 20% in a matter of hours, we call that a Tuesday. Cryptocurrencies, even the famous ones like Bitcoin and Ethereum are extremely volatile and can swing in the double digits over the course of a few weeks or even days. While there is a lot of opportunity to grow with crypto, you have to understand that this is a very high-risk asset and you have to be prepared to weather the storm.

2. Cryptocurrencies Are Not Index Funds

Any long-term investor knows that an S&P index fund is a golden ticket that, if invested consistently over a long enough period of time will, at the very least, set you up for retirement. Index funds have decades of history that we can track and analyze making them a safe bet for the future. As long as you are long in America then your money is relatively safe in an index fund where you know you are historically likely to be in the green 8% year over year.

Crypto has been around for just about a decade so we just don’t know what the future holds. Now some may argue that we don’t know how the stock or real estate market is going to perform in the future either, which is true. However, we know what we can most likely expect. It would be hard to create a model that could predict an accurate price for say Bitcoin in 30 years.

That being said, crypto is still a fantastic investment for mid to high-risk investors. Many investors and financial institutions had their doubts about the future of tech after the internet bubble which held so many back from investing heavily in the space. Today, those investors wish they had gotten in early.

You don’t want to look back in a decade or three and realize you might have missed out on what could possibly be the greatest financial shift in human history or even the best investment of your lifetime. So it is definitely a wise choice to add a well-researched and popular cryptocurrency with real-world application to your portfolio.

This brings us to the final question:

What Percentage of Your Portfolio Should Crypto Makeup?

As it stands today, cryptocurrency as an asset class or individual token is an extremely high-risk asset. Meaning that crypto should only make up between 5 and 10 percent of your portfolio. This gives you enough skin in the game where you can win and win big but still keeps your portfolio in the green as a whole if things go sideways.

Here is a breakdown of what could potentially bring your crypto investment into the red:

• Regulation: Most governments have not passed any serious legislation that restricts or regulates crypto trades or transactions. With the introduction of regulation, we could see a less volatile asset class or crypto could be made strictly illegal which would crash the entire industry in a matter of days.

• Security: In theory blockchain technology should be very safe and secure; however, as it stands today crypto transactions are highly susceptible to hackers and cyber-attacks.

• Competition: Several currencies are built on the idea of utility beyond just financial transactions; however, competition is fierce as similar projects are being launched every day. It’s difficult to know which will survive and which offers the best technology.

• Fraud: Like anything involving money you are going to have a lot of schemes and scams that are intentionally created to rob people. Right now there are a lot of ‘snake oil salesmen’ in the crypto sphere.

In all, cryptocurrency is an innovative approach to traditional financial transactions, and investing in tokens can prove highly profitable both in the near future and long term. We recommend doing your own research into specific tokens and seeing how they fit in your portfolio. For more investment advice and opportunities contact us today and build your investment portfolio.