Wish to learn more about the Crypto world? Want to know how much money should you invest in Cryptocurrency? Let’s dig into it.
Cryptocurrency: An Overview
As the name suggests, cryptocurrencies are digital currencies or tokens which are secured by a complex encryption method known as cryptography. These coins are transacted and exchanged online on a digital platform known as the blockchain.
Blockchain is a tamper-proof distributed ledger technology that ensures the security of these tokens. It also makes sure no one can forge a transaction or alter the data on the blockchain. The first and most popular cryptocurrency was Bitcoin. It was introduced in 2009 by an unidentified individual named ‘Satoshi Nakamoto.’ In the last decade, the price of Bitcoin has increased from $10 to more than $65,000 in 2021. Such a stellar rise is witnessed on the back of robust technology and real-world use cases.
There are thousands of other cryptocurrencies (known as alt-coins) out of which some of the most common ones are Ethereum, Cardano, Ripple, etc. All individual crypto coins possess unique characteristics and features.
Cryptocurrency – Advantages to Look at
Let’s look at some of the advantages of cryptocurrencies:
The blockchain network works on an algorithm that does not reveal the identity of the person behind the transaction. This means that you can carry out any transactions on the network using cryptocurrencies without disclosing your actual identity.
The main reason for the success of cryptocurrencies is they are not regulated by any central bank or government. The blockchain runs on a collective network of computers, spread across the globe and connected via the internet. This creates a separate ecosystem of finance where people can transact in different cryptocurrencies without actually using fiat currency.
Blockchain technology is famous for its security. It is an absolute tamper-proof system that does not allow anyone to alter, erase, or edit any data that is added to the blockchain. On the flip side, it is a public network, which means anyone with an active internet connection can verify or locate the transaction of the blockchain.
Cryptocurrency – Drawbacks to Know
By looking at these fascinating features of cryptocurrencies, you much be convinced to put all your money into them. But hold on to that thought, until you consider the other side of the asset.
Here are some of the drawbacks of cryptocurrencies.
1. Extremely volatile
Cryptocurrencies are traded round the clock and due to the small market cap, the price swings are extremely huge. Many coins have fallen or increased by more than 40-50% in a single day. This kind of volatility might not be suited to the majority of the moderate risk-taking investors.
2. Storage issue
As cryptos are digital assets, you have to either store them online or in a physical wallet. There is a constant risk of your wallet getting hacked if you keep your cryptos online. On the other hand, you can lose or damage your physical wallet that will lead to a permanent loss of your assets. Because of the following reasons, storing cryptocurrencies have been a constant problem for investors.
3. Unregulated nature
One of the most significant drawbacks of investing in cryptocurrencies is their unregulated nature. Due to this, there is a fear of laws and regulations that might work against it. The lack of regulation also means that there are no bodies that look after the security and authenticity of these currencies. If your cryptocurrencies are hacked or stolen, getting proper legal resolutions might be hard.
How much money to invest in cryptocurreny?
Now that you have gone through the advantages and disadvantages of cryptocurrencies. Let’s figure out how much money should you invest in them.
The ideal allocation of cryptocurrencies would depend on your risk tolerance and age. However, cryptocurrencies fall under extremely risky assets and financial experts suggest allocating anywhere between “2-5%” of your portfolio value towards cryptocurrencies.
Though this is a basic framework and not a ‘one size fits all’ approach. You can constantly make some modifications to this percentage depending on your risk appetite and overall portfolio size.
The guideline of 5% won’t work if your portfolio is very small (for example RS 10,000 or Rs 50,000). In this case, you can start small and invest the majority in blue-chip cryptocurrencies like Bitcoin and Ethereum. Post this, you can allocate the remaining on other alt-coins.
You must have heard stories of crypto millionaires who have turned a thousand dollars into millions. This might be true, but that doesn’t mean you will put all your savings into a cryptocurrency with FOMO (fear of missing out) and expect it to quadruple in price.
By allocating a small percentage of your portfolio to cryptocurrencies, you will be able to maintain a balance between growth and safety. The high volatility of cryptos won’t affect your overall portfolio. Therefore, you should only invest the amount which you would be comfortable losing.
Do share your opinions on how much should one invest in cryptocurrency. Any feedback and experience shared could help other investors and traders.