almost 3 years ago • 3 mins
Cryptocurrency prices have been on fire over the past year: bitcoin’s risen 550%, while ether’s up 1,250%. But whether you’ve been a crypto lover, hater, or just a rational skeptic to date, I think there are now three compelling reasons for investing at least a very small part of your portfolio in this most controversial of markets.
As entrepreneur Richard Branson succinctly puts it, you learn by doing. By owning even a small amount of crypto, you’ll move from being a passive observer to an active participant – and having skin in any game forces you to think more widely and more deeply about what’s really making things tick.
And why is learning more about cryptocurrencies important? First, because there’s a small but growing probability that they’ll soon supersede at least some current uses of traditional fiat currencies. Second, because their underlying blockchain technology is already well on the way to disrupting multiple industries, from finance to shipping to insurance. An increasing number of major institutional investors now think that ignoring the crypto economy is just too big a big risk – and who are you to disagree?
While you can more or less estimate the “fair value” of stocks, bonds, and even commodities, gauging the intrinsic worth of cryptocurrencies is close to impossible. Investor sentiment is a much more important factor in crypto prices than it is for other assets. Experiencing that as an owner yourself could carry useful lessons for your other investments – but even more significant is what you’ll learn about your own psychology.
Crypto prices’ high volatility will put your emotional control to the test. I’ve always advocated taking a disciplined approach to investing: defining in advance your criteria for selling or buying more is, in my opinion, one of the secrets to long-term success. Implementing those sorts of rules in crypto markets will teach you a lot about how hard such discipline is in practice.
The first two reasons were educational, but this one’s financial: cryptocurrencies’ recent return profile makes them a great wildcard addition to a conservative investment setup. For a start, it’s asymmetric: in the worst-case scenario, you lose 100% of your money. But in the best case, you could make multiple times your initial stake.
You can therefore justify investing a smaller amount in crypto than you would in a traditional asset class. Should you put 1% or even 5% of your portfolio in crypto and lose it all, the world won’t end – but if prices quadruple, those gains will make a real difference to your bottom line. What’s more, crypto could be a canny hedge against scenarios that’d really put a hole in your pocket, like rapidly rising inflation. While that’s not my base case, I think reducing the potential impact of such “tail risks” is more like sound mitigating management than irrational speculation.
Sure, you can read all about cryptocurrencies and psychology online, but you’ll never learn as much and as fast as you would owning even a small amount of crypto yourself. I’m not saying you should rush out and plow in all your savings – far from it. What I’m suggesting instead is investing a small amount you’re comfortable with, as much for educational purposes as for insurance against bad scenarios (or anticipation of good ones).
Precisely which cryptocurrencies you should look at buying depends on your objectives – but if you’re a total beginner, I’d suggest starting with bitcoin and ether, both the largest tokens by market cap and quite complementary to each other. Investing in these cryptocurrencies has also never been easier, although others are increasingly nipping at their heels: with numerous so-called “altcoins” in the ascendant, bitcoin has just lost its majority position of crypto market dominance for the first time since mid-2018. Happy learning...
Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.