We’ve heard a lot about cryptocurrency over the past couple of years, and it seems like everyone is investing in it. But before you add crypto to your portfolio, try to familiarize yourself with the upsides and pitfalls of this digital currency.
What is Cryptocurrency?
Cryptocurrency, or “crypto,” is a decentralized digital currency that’s secured by cryptography. That means there isn’t one main authority determining the value of the currency. Crypto transactions are kept track of via a blockchain, which is like a digital ledger. These transactions are verified and secured using encryption.
The first crypto on the market was Bitcoin, which was introduced in 2009 and is still the most well-known cryptocurrency. Ethereum, Ripple and EOS are a few of the other major digital currencies available.
How Should You Invest in Cryptocurrency?
Some people are putting enormous amounts of money into crypto right now because they believe it’s going to explode in popularity in the coming years. Others think it’s just a trend that’s too risky to get involved with.
I believe crypto is an extremely speculative investment that has characteristics of commodities, like gold. It may have the potential to be a diversifier in a portfolio, but only time will tell. If you’re really curious about crypto, invest a small amount of “fun money” – money you’re okay with losing – and see how it goes. I usually recommend less than 1% of your overall portfolio for speculative investments like crypto.
If you’re risk-averse, cryptocurrency probably isn’t for you. It’s definitely a better fit for someone who’s comfortable with more volatility in their portfolio and has a longer time horizon to invest, because we don’t know which currency will prevail in the long run.
How is Cryptocurrency Performing?
We saw some cryptocurrencies skyrocket in value over the past couple years. Bitcoin hit its all-time high of $68,000 on Nov. 10, 2021. But as of January 2022, Bitcoin has tumbled 40% since then, and Ethereum has also fallen significantly.
What does that mean for crypto investments? Not much, honestly. It confirms what we already know: cryptocurrency is a volatile investment, and it will continue on a trail of highs and lows.
The safest way to invest in digital currency is to make it a very small component of your portfolio, and watch how it behaves over time. Knee-jerk reactions rarely work out for any kind of investment, and crypto is no exception.
How Would Cryptocurrency Fare in a Recession?
One of the risky components of cryptocurrency is that it has a very limited history to look back on. Because it started in 2009, we have yet to see how it would react to a recession.
That’s important to consider, because it’s very possible that we could experience a recession soon. The Fed is expected to raise interest rates to slow down inflation. That, paired with the recent S&P 500 struggles, could signal a period of economic or market turmoil ahead.
If you do want to invest in cryptocurrency, it could be smart to watch how it behaves in down times. That will determine if crypto really does have longevity, or if it’s more of a passing trend.
Do you need help planning for your financial future? Contact me today to set up a meeting to talk about your goals.