Cryptocurrencies represent a new asset class. As a result, it’s no surprise that some people are trying to figure out if investing in cryptocurrency is right for them.
Before you make that decision for your portfolio, it’s a good idea to review the pros and cons. Let’s take a look.
Pros of Investing in Cryptocurrency
Potential for growth
One of the biggest reasons for investing in cryptocurrency is the growth potential. Depending on the crypto you choose, there’s a big potential upside. This is especially true if you choose a cryptocurrency likely to be widely adopted. If the crypto you choose takes off, you could see a big profit.
The idea of becoming a millionaire quickly is alluring. However, it’s important to note that this isn’t the norm. You could see big profits, and the potential is there, but you need to be in early.
Early adoption of web3
There’s still some disagreement over whether blockchain technology can truly power the next iteration of the internet (called web3). However, if the technology does become viable, being invested in cryptocurrency could provide benefits.
Part of whether you see the benefits, though, depends on whether you invest in a crypto that does become adopted. If a specific crypto is connected to web3 development, it could lead to investment success.
Portfolio diversity
Adding an alternative asset like cryptocurrency increases portfolio diversity. While cryptocurrencies are still strongly correlated to stocks, they still offer some diversity. When investing in cryptocurrency, you can add a little something different to your portfolio.
Cons of Investing in Cryptocurrency
Price volatility
Crypto prices are widely volatile. Price swings are common. You could easily see big changes in value in your cryptocurrency holdings. For some investors, that constant rollercoaster is a drawback.
Saturated market
There are more than 20,000 cryptocurrencies. Trying to decide which ones will “win” is difficult. It’s impossible to tell which cryptos will be viable in the future. When investing in cryptocurrency, you need to do careful research.
No guarantee of widespread adoption
You could invest in a great crypto with a solid use case and still lose. There’s no guarantee that any crypto will reach critical mass. If you invest a lot and the hype turns out to be overrated, you could lose.
Regulation
Crypto asset regulation remains vague. More regulation appears forthcoming, but there are still gray areas. Additionally, while some people believe that clear regulation will boost crypto, others feel that it could stifle development.
It will be interesting to see whether central banks adopt their own digital currencies. That could also have an impact, driving crypto prices lower.
Tips for Investing in Cryptocurrency
If you still want to invest in cryptocurrency, even after understanding the pros and cons, there are some tips you can use.
- Limit your crypto exposure. Experts recommend limiting speculative assets to 5% to 10% of your portfolio. This applies to crypto. Don’t let crypto become too big a part of your portfolio.
- Harvest your gains. Because cryptocurrencies are so volatile, you might be able to harvest gains. Set a target for harvesting. For example, you might decide to take profits when you double your money or if you see a 50% gain. Whatever that threshold is, take profits and invest them in other assets. You can still leave some money in crypto.
- Only invest what you can afford to lose. Crypto is risky. Only risk what you can afford to lose.
- Consider the use case. Don’t get caught up in memecoins. Instead, look at the use case to find coins likely to remain viable. Invest in cryptocurrencies that solve a problem or advance technology.
- Use major exchanges. While you might turn to less-known exchanges for some transactions, major exchanges can be places to use fiat to buy crypto easily. Review exchanges and choose the one that works for you.
- Consider your overall portfolio strategy. Make sure you understand how crypto fits into your strategy. Don’t invest just to invest. Figure out how to incorporate crypto in a way that makes sense.
Bottom Line
Investing in cryptocurrency can be one way to improve your portfolio. However, it’s important to consider your overall goals and strategies carefully. Cryptocurrencies are still new and speculative. So, while you could see gains from investing in crypto, there’s also potential for loss.
Before you move forward, establish your rules for investment. Make sure you aren’t over-extending yourself. Finally, make sure your most important goals are being funded by less-risky assets. Build a more traditional retirement portfolio and consider other assets before putting money into crypto.