How Many Cryptocurrencies Are in Your Investment Portfolio?
While there is still a lot of room for discussion about the long-term value of cryptocurrencies, many financial advisors are now proposing to include a small amount in your investment portfolio. Cryptocurrency remains a highly speculative investment, but it is commonly used as a hedge against inflation and to diversify investment away from stocks. But how to properly distribute cryptocurrency in your portfolio? The generally recommended range is 1 to 5% of your total investment, assuming you are still comfortable if you lose it all.
Case for investing 1-5% of your portfolio in cryptocurrency
Cryptocurrency , if for some reason you don’t know, is a digital currency secured in a decentralized network of computers that allows peer-to-peer transactions to be carried out without government intervention. The long-term bet on crypto is that it is the future of finance and will eventually supplant traditional fiat. Since these cryptocurrencies have a limited or closed supply, theoretically anyone who makes the right cryptocurrency bet can get sky-high returns on their initial investment (e.g. 10,000 bitcoins, which were known to have been spent on two Papa Johns pizzas in 2010 . today will cost 571,671,000 dollars). …
Similar to gold, cryptocurrency is also seen as a hedge against inflation and as a way to diversify a portfolio away from stocks. As Barron’s points out , from 2015 to 2020, Bitcoin’s performance was virtually uncorrelated with U.S. and international stocks, high-yield bonds, real estate, or gold. For this reason, financial advisors generally recommend setting aside 1-5% of the cryptocurrency in your total investment portfolio, provided that you can afford to lose it all, given that this is an extremely volatile investment.
“I consider it a valid asset class in a portfolio due to its lack of correlation with traditional equity and bond investments,” Michael Kelly, CFO at Switchback Financial, told NextAdvisor . “While this is high volatility, the lack of correlation [with stocks] lowers the overall volatility of the portfolio and offers the opportunity to have significant upside potential for profitability. A small number of investments in a portfolio can have a huge potential for profitability with minimal risk of worsening the situation. “
Case for 0% cryptocurrency in your portfolio
While JPMorgan Chase is poised to sell cryptocurrency products , CEO Jamie Dimon believes that Bitcoin, the most popular cryptocurrency, is “worthless.”
“It doesn’t matter what anyone in the audience thinks, or what any libertarian thinks, or what anyone thinks about it, the government is going to regulate it. They are going to regulate it for [anti-money laundering] purposes, for [Bank Secrecy Act] purposes, for tax purposes, ”Daimon said, hinting at the uncertainty surrounding renewed interest in regulation under the Biden administration .
In addition, it can hardly be guaranteed that cryptocurrency will become a reliable “store of value” that replaces fiat currencies. As Eswar Prasad, professor of trade policy at Cornell University, explains to the Wall Street Journal , “Bitcoin depends on the faith of investors and nothing more. Tomorrow it may fall to zero if 10% of investors are sold. “
It also remains to be seen which cryptocurrencies will be the “winners” in the market in a few years (many people who invest in cryptocurrency just stick to it until it becomes more widespread). While scarcity is an advantage for this cryptocurrency, it looks like there is no scarcity in the number of cryptocurrencies you can bet on. Assuming the average investor knows little about how these currencies work, how can they predict which currencies will flourish and find wider acceptance?
Bottom line
As with any investment, your decision to invest in cryptocurrency should be based on your risk tolerance, as discussed with an investment advisor. Crypto poses risk to your portfolio, but its volatility can work in your favor in the short term, especially for diversification purposes. If you decide to invest in cryptocurrency, be it a buy and hold strategy or short-term trading based on price fluctuations, do your research and develop a clear understanding of why it might make sense to invest in cryptocurrency in the first place. …