Almost every investment portfolio has taken a hit in the past few weeks as global markets have plummeted, and cryptocurrency portfolios have been no exception. What is certain however is that at some point all markets will recover, and when they do, cryptocurrency markets will recover with them.
This means that now is a great time to revisit your investment thesis and decide how much of your portfolio you should dedicate to cryptocurrencies to enjoy the potential benefits while mitigating risk. While there is no easy answer to how much of your portfolio you should dedicate to cryptocurrencies, there are some guidelines that can help you make a decision that’s right for you and your bank balance.
Cryptocurrencies Are High risk
The first thing to remember about cryptocurrencies is that they are a high-risk asset. In many ways it is like buying into a startup early doors – the chance of failure (thus sending the token to zero) is high, but so are the potential returns if you manage to hit a winner. It is for this reason that anyone considering a cryptocurrency investment should follow the golden rule – never invest more than you are willing to lose.
With that in mind, we believe that a well-balanced portfolio for someone of average risk tolerance should not have more than 25% in cryptocurrencies, with bulk being formed of traditional forms of investment and precious metals.
The Tortoise vs the Hare
The reasons why we suggest that cryptocurrency holdings should be so low are two-fold.
Firstly, the gains on a small amount of a fast-moving asset like cryptocurrencies can equal or exceed the gains of a larger amount of a slower-moving one. This means that your crypto holdings will likely outpace the earnings of other much larger holdings of traditional assets, so you don’t need as much of them to keep parity.
On the flip side, if your cryptocurrency holdings were to massively underperform, as is much more likely to happen than with traditional assets, you would only lose 20% of your portfolio. This is a small price to pay for the potential upside.
Dividends
The second reason for only allocating a small amount of your capital to cryptocurrency is that, as Warren Buffett is fond of saying, cryptocurrencies don’t produce anything. Of course, some coins can be staked, but the long-term viability of such schemes has yet to be tested, whereas shareholders of traditional stocks get dividends – regular payouts dependent upon the company’s performance.
For someone of low to medium risk tolerance, it is far better to have the bulk of your portfolio in these types of schemes where your money is much safer. Those with higher risk tolerances (or with money to burn) may want to risk more of their capital in cryptocurrencies for the potential of a massive return, but this is not something that would suit the average investor.
Do Your Own Research
Whatever your investment goals, don’t forget that we here at BitStarz News are not financial advisers, so you should do your own research when it comes to deciding where to put your money. We do however know the cryptocurrency market extremely well, which gives us some authority on being aware of the potential risks and benefits of investing in this exciting new asset class.
When it comes to picking which cryptocurrencies to invest in, you should not invest in something you don’t understand, so make sure you have a grasp on your target projects before you take the dive and buy up their tokens.
