In a word, risk. Cryptocurrencies are inherently risky investments as their prices tend to be very volatile. Volatility of index funds is around 18% annually, while the volatility of Bitcoin averages 64% over 30 days. That being said, Bitcoin has been the most explosive asset over the last decade. The ten-year return of Bitcoin is an unbelievable 533,026% at the time of writing. So how can we take advantage of some of that volatility? Does this mean I’m all in on crypto and going to the moon? No, but I do want to take advantage of increasing my risk without betting my entire financial future.
Controlling the risk
My strategy is to get exposure to the volatility of cryptocurrency without risking everything. There are some potentially massive gains, but there’s also the potential to lose 90% of your money. From weighing these risks I’m investing money that I can afford to lose and no more than 3% of my entire investment portfolio. I plan to rebalance this investment every quarter to ensure a maximum of 3% allocation. Many experts are recommending no more than a 5% exposure to cryptocurrencies in your investment portfolio. Its an effective way to get exposure to the upside without risking everything.
Rebalancing your portfolio is also recommended. My strategy is to rebalance my portfolio every quarter, based on this report. I also plan to sell part of my position if a coin hits a new all time high. With the intention to reinvest the profits when the price drops.
Do I see the risk continuing?
Yes. However, I foresee the volatility of cryptocurrency to drop over time as adoption becomes more and more prevalent. In my opinion, with the decreasing volatility, the almost certainty of regulations, and the increasing adoption from institutional investors, now is the time to start looking at cryptocurrency.
To the MOON!
Many retail investors are getting swept up in FOMO (fear of missing out) and will end up losing money on crypto scams and meme stocks. This mentality treats these markets as more of an entertainment source than an investment, in my opinion. Make sure to do your own research and know what you’re investing in. Have an exit strategy! Do not get sucked into the culture of HODLing (Hold on for dear life), there’s no shame in taking profit to reinvest later on.
Some additional thoughts:
Blockchain, the core technology behind cryptocurrency is revolutionary. This invention allows for an immutable ledger, which means the blockchain will always retain a record of the transactions that occurred on it. While the most obvious use case for blockchain technology is within the finance industry, there are numerous use cases in almost every industry. Personally, I’m excited about the potential of blockchain with in the medical data industry.
I watched the entire MITOpenCourseware on Blockchain and money. It’s a free course taught by SEC chair Gary Gensler that is extremely helpful! Learn about the three key aspects of money and whether or not you’re a Bitcoin/cryptocurrency maximalist. The entire course is available on YouTube here: Blockchain and Money
The views expressed above are my own opinions and is not to be considered financial advice.