With celebrities like Elon Musk and Mark Cuban talking about cryptocurrency on the regular, it’s no wonder many investors are eager to dip their toes into the crypto waters. Crypto is an emerging asset class that is becoming more interesting to investors looking to diversify their portfolios over the long term.
But despite the rising popularity, some financial experts view cryptocurrency as a riskier asset. Crypto can be volatile and prone to major bull or bear runs. It’s important that investors—no matter how seasoned or knowledgeable—approach investing in crypto with as much context as possible.
TL;DR
- Cryptocurrency is considered an alternative investment, in contrast to traditional assets like stocks, bonds, and real estate.
- Retail investors are often intrigued by crypto as a means to diversify their portfolios, but they should recognize that investing in crypto comes with higher risk along with the potential for greater gains.
- In general, most financial experts recommend investing only a small percentage of your portfolio in cryptocurrency because it is an emerging and volatile asset class.
- Financial experts also say that cryptocurrency should generally be considered as a part of your investment portfolio only if you continue to meet all your other financial obligations.
- One’s appetite for crypto investments will depend on many factors, including their financial circumstances and risk tolerance. Some advisors advocate for allocating 5% or less of one’s total portfolio toward crypto.
Is crypto a risky investment?
If you’re curious about the benefits of investing in cryptocurrency, you should first ask the question: Is crypto a risky investment?
Most financial planners and investing experts would agree that crypto carries more risk than traditional investments.
Bitcoin and other cryptocurrencies are overall riskier investments compared to securities that exist within the stock market. This is because crypto is generally volatile in nature. It hasn’t been around as long as the stock market and there’s much less historical data to help investors build smart portfolios. There are also some lingering questions and debates around regulatory policy with respect to crypto.
James Ledbetter, CNBC contributor, has said that Bitcoin is a “highly volatile, highly risky investment.”
This is largely due to the frequency of sharp increases in crypto share prices followed by sudden drops in value. These rapid swings, though they can present an opportunity for impressive gains, also depend on ideal timing and could just as easily cause severe losses for investors.
Billionaire investor and Shark Tank host Mark Cuban is a cryptocurrency supporter and says he has invested in Bitcoin, Ether, and various altcoins. (Note: Altcoins are emerging crypto assets that tend to be smaller and thus more volatile than other offerings.) He cautions that anyone planning to invest in crypto, particularly in altcoins that may be less established, must do their research before investing.
While you may not have several hours a day to spend on crypto trend research, you should do more than read a Reddit thread or blog post before you buy into a cryptocurrency.
Experts recommend these crypto portfolio percentages
Plenty of financial planners and other experts recommend that their clients keep their cryptocurrency investment allocation minimal. In fact, investing 5% of your portfolio in crypto is an often-quoted percentage of your net worth to tie up in crypto assets.
Some experts recommend starting much lower, with just a 1% investment in cryptocurrency and the remaining 99% of your portfolio going to stocks and other traditional investments. Crypto investors may start small to test out the market and see how their investment performs in the swing term.
Financial planners often quote these rules of thumb for retail investors interested in crypto:
- Get your finances in order first. This may entail having a healthy emergency fund, investing regularly in retirement accounts, paying off debt, or saving for a home down payment.
- Ask yourself: How much can you afford to lose? This will vary from person to person. Think about the worst-case scenario before jumping into a crypto investment.
- Younger investors with a longer time horizon may be comfortable with a bit more risk than older investors, who have less time to recover from deep swings and potential downturns in the market.
- Anjali Jariwala, a CFP and CPA, told CNBC that she recommends no more than 3% of a client’s portfolio be in crypto, though the range advised can span from 2–5%.
- If you’re retired or otherwise dependent on your portfolio—or simply can’t afford to take any risk—take a hard look at your portfolio and determine whether an aggressive asset fits your needs.
Related: Check stocks that use blockchain technology in our themes section.
Bottom line
If you’re hoping to invest in cryptocurrency to capitalize on the hype or snag an “opportunity of a lifetime,” don’t be afraid to slow down. Most financial advisors and planners recommend that you only invest a limited chunk of your total portfolio in crypto due to its volatile nature. Meanwhile, others are more comfortable with the risk, so it’s all about what you’re willing to take on.
Crypto is as regulated as securities, and crypto exchanges or wallets aren’t insured. If something happens to your position, there’s no guaranteeing you’ll get it back. Not everyone is like the miners who returned $24 million in Ether to Bitfinex after the exchange made an accidental overpayment for gas fees.
In short, it’s okay to bookend your portfolio with crypto investments without putting your entire net worth on the line.