How much Should You Invest in Crypto?

By Miranda Marquit

Even though there are concerns that we’re in a crypto winter, some investors are interested in getting involved. After all, if you’re going to “buy low,” this might be the right time to invest in crypto, right?

Before you set aside too much in crypto, taking a step back is important. Make sure you understand what you’re doing and limit your risk. Let’s take a look at how to decide how much to invest in crypto.

Invest in Crypto: 3 Questions to Ask Yourself

Before you risk anything, you need to ask yourself some questions. Investing in crypto can be a risky enterprise. There’s still no true clarity around regulatory issues. Additionally, if blockchain technology doesn’t become the next big thing for technology infrastructure, cryptocurrencies will become useless.

Here are three questions to consider as you decide how much to invest in crypto.

1. How Much Can I Afford to Lose?

Yes, blockchain technology might be the future. If so, some cryptocurrencies and other crypto assets might offer big returns. On the other hand, though, crypto is a new asset class. It’s relatively new. It’s also volatile. There are more than 20,000 cryptocurrencies. How do you know which will be successful — if any become successful?

Before deciding how much to put into crypto, ask how much you can lose. When investing in crypto assets, you should only risk what you can afford to lose. Be realistic. If your chosen crypto investments take off, it will be great, but what will happen to your finances if you lose?

Don’t put so much money into crypto investments that your financial health will be in jeopardy if blockchain technology doesn’t offer the returns you expect.

2. Have I Invested in Other Assets?

Before putting money into crypto, look at your other assets. Do you have money going toward your retirement goals? Have you invested in stock and bond index funds to help you grow less risky wealth for the future?

Don’t forget to look into other types of accounts as well. If you’re eligible, are you putting money into a Health Savings Account (HSA)? Tax-advantaged retirement and health accounts can help you save up for the future — and do so efficiently.

You might even be better off setting aside money in taxable accounts with more traditional assets before risking money in crypto. Even building an emergency fund before putting too much into crypto might make sense, depending on your situation. Consider your asset allocation and risk tolerance before deciding how much to invest in crypto.

3. Does Crypto Help Me With My Financial Goals?

Every part of your portfolio should have a goal. Figure out where crypto fits into those goals.

For some investors, crypto is more of a speculation. When dealing with speculative assets, consider keeping them a small part of your portfolio. For example, some experts suggest that most investors limit crypto assets to 5% to 10% of the total portfolio.

Before deciding how much to put into crypto, it makes sense to look at your other goals. You don’t want the amount of money you put into crypto to detract from long-term goals like retirement. You also don’t want to reduce what you put into your emergency fund or what you’re using to fund goals like a down payment on a home.

Figuring out how much to invest in crypto is about making it work with your current goals and situation — not putting your other goals at risk.

Choosing Crypto for Your Portfolio

When deciding how much to invest in crypto, you also need to consider which coins you’re choosing. Don’t forget to consider items like:

  • Whether the cryptocurrency project has an underlying use case or solves a problem.
  • How liquid it is. Will you be able to sell if you need to? Even if you take a loss, you want to be sure you can sell it later, if necessary.
  • Whether there’s development on the network. You want a project that is being updated regularly and delivers on its promises.

Investing in crypto also includes NFTs. If you’re interested in non-fungible tokens, you need to be especially careful. While some NFTs confer different abilities and access to specific projects, not all are good deals. Carefully consider what you’re risking, and the cost before you put money into an NFT.

Bottom Line

Investing in crypto assets, like cryptocurrencies and NFTs, can make sense for your portfolio. And, with prices much lower than their recent highs, you have a chance to scoop up some bargains.

However, it’s important to be careful. Crypto assets might never recover from the current downturn. Before risking your money, make sure you limit the amount you invest to what you can afford to lose.