Nowadays, it’s not uncommon to see many of your friends, families, and peers sharing their thoughts on cryptocurrency news and their latest ICO investments, trying their best to convince you that their digital gold will soon revolutionize the financial world and outperform most investment markets. And while there have been equal amounts of success stories as there are to losing out during an episode of panic selling, it just comes to show the dominant presence cryptocurrencies have established within these past months.
However, before you start the process of diversifying your portfolio and including cryptocurrencies into the mix of investments you will hold for the long term, we strongly recommend that you take a step back and understand what you’re getting into first. And that’s because despite the amazing returns the luckiest 1% of high-risk crypto investors are sharing online, there are steep downsides and threats that don’t parallel with traditional investment instruments.
Relying On Past Performance Alone Can Be Deceiving
Understandably, many would assume that studying historical data and referencing the past performance of cryptocurrencies would provide you with the best baseline knowledge of knowing how your investing strategy will fair in the active crypto markets. However, while some coins can attest to this principle being true, many coins experience extreme bullish momentum and gains, only to be followed by a climactic sell-off that never manages to recover.
Driven By Volatility And Strong Fundamentals:
Firstly, given that cryptocurrencies are still young compared to other debt instruments, equity securities, and traditional investments, a large portion of market momentum can be attributed to volatility and major shifts in fundamentals. In fact, just these past few days, Bitcoin suffered from major losses as large holders began selling their coins, with the price hovering below $50,000 and only recently gaining back bullish sentiment. And due to its volatile nature, this fuels the ROIs that reach upwards of 1000% but also create the opposite as well.
Utility Is Constantly Changing And Innovating:
Secondly, cryptocurrencies are digital assets of which their application and utility in banking, finance, and e-commerce is rapidly evolving and transforming every single day. And while innovation and integration of blockchain development and crypto into different industries and business sectors encourage an increase in price, it also introduces equal risks of new regulations and policies being imposed. As a result, despite the decentralized and safe characteristics of these investments, further restrictions by governments and countries could lead to the detriment of any progress made.
Employ A More Conservative Investing Perspective
Likewise, the reasons mentioned above are not to say that you should avoid cryptocurrencies entirely because that would lead to a big opportunity cost, especially accounting for the stellar returns coins like BTC and ETH can provide. But, instead of appealing to the approach of day-trading or incessantly surfing the latest threads regarding ICOs and trending investments, we recommend a more conservative investing strategy.
Limit Your Exposure And Avoid Double-Digits:
In terms of portfolio diversification, we suggest that you limit your exposure to cryptocurrency to around 5% of your total investments, taking care to avoid double-digits. Of course, there’s nothing stopping you from going above the suggested cap, but given the volatile nature of the crypto market, limited exposure will allow you to reap the gains but also avoid worrying too much when the market enters a bearish cycle. Therefore, the majority of your investments should still come from more traditional holdings like stocks, real estate, and bonds, balancing these securities according to risk-off or risk-on.
Follow The Prices By Their Market Cap:
As for deciding which cryptocurrencies to invest in, it is in your best interests to follow the price by their market cap because the top ten usually provide for more stable returns, much like blue-chip stock investments. Sure, these cryptocurrencies aren’t exempt from bearish dips due to speculation, but consider these as opportunities to buy back in and increase your stake instead. Furthermore, don’t forget to do your research on further developments made to the underlying infrastructure that supports these cryptocurrencies and any other related crypto news, just as you would analyzing the S&P 500 and the Dow.
Modernize Your Investment Portfolio Little By Little
In conclusion, the goal of diversifying and including cryptocurrencies into your portfolio shouldn’t be motivated by future economic benefits and the promise of life-changing returns alone because this investing mindset only introduces more unnecessary risk. Instead, you should consider the modernization of your investment portfolio and capital preservation that aligns with current market opportunities so that your time spent with your accounting team and preferred process servers will be for reporting capital gains instead of filing for bankruptcies.