An estimated 34 million people in the United States will own cryptocurrency by the end of 2022 (Insider Inelligence). That’s up nearly 3% from last year, and it shows no signs of stopping. With the advent of cryptocurrency and its astronomical growth, it’s tempting to invest in this exciting new asset before you miss the train. After all, investment involves risk; high risk yields high reward. However, with novelty can come naivety. Managed risks distinguish thoughtful investment from gambling by diversifying your portfolio. This article will translate some of the lingo, show you the risks involved with investment, and teach you the importance of portfolio diversification in order to help you decide whether you should invest in cryptocurrency.
What are Asset Classes?
A diversified portfolio, developed with thorough research of asset classes, stands a greater chance than a concentrated investment with all its eggs in one Bitcoin basket. But what are asset classes? And how can you use them to your advantage?
Asset classes describe several parts of the market, categorized by characteristics and market behavior. If there’s a formula for the perfect portfolio, these are the variables. They are generally categorized into cash and cash equivalents, equities, fixed income, and alternative investments. Cryptocurrencies such as Bitcoin and Ethereum fall under the alternative investments category, as their unique intangibility sets them apart. Though asset classes exhibit similarities, they lack correlation. This means that the behavior of one cryptocurrency cannot accurately predict that of another. Taking the time to study each asset class henceforth builds a diverse portfolio.
The risk averse should proceed with caution when investing in virtual currency, while those with an appetite for risk might invest more. Both routes enjoy the unique characteristics of cryptocurrency in their portfolio. No matter which route you take, don’t take the next step until you understand the volatility of your assets, and how to manage it.
What is Volatility?
Investors diversify portfolios in several ways, from incorporating different asset classes to incorporating different subcategories within an asset class. While the methods may differ, the object is the same: to manage volatility and create stability. Volatility is a measure of the amount of returns an investment makes over time that can be found by way of statistics like standard deviation, the amount something deviates from its mean. This characterizes the unpredictability of an asset class; the higher the volatility, the higher the risk and return, and vice versa. A well-balanced portfolio assesses its volatility and incorporates investments that lower the standard deviation of a portfolio.
How Much Should I Invest in Cryptocurrency?
Though cryptocurrency is new terrain, like any investment, you should only invest what you are willing to lose. You should also ask yourself what you want to get out of your portfolio. Are you seeking large returns on your investments, or simply steady growth over time? Unlike many other assets on the market, cryptocurrency is neither a tangible asset nor does it earn income. Thus, fluctuations are par for the course. When investing in cryptocurrency, expect the unexpected.
Furthermore, when investing in virtual currencies, you need to think of the big picture. Cryptocurrency’s sudden rise indicates an uncertain future. While most people hold cryptocurrency for only a few months, a long-term investment of around five years can prove beneficial. Long-term investments provide you with more accurate data of an asset’s behavior, which is especially invaluable with a newer asset like cryptocurrency. These investments also increase the possibility of your investment stabilizing overtime against fluctuations, and minimizing trading fees. If you jump onto a passing trend, your money might pass with it.
Final Thoughts
The past few years have seen the unprecedented growth of crypto currencies. Their presence as a highly volatile asset bears relevance to any investor, regardless of whether you have invested in or plan to invest in cryptocurrency. If you decide to invest, only invest what you are willing to lose. Consider a long-term investment to maximize your returns, and only do so after you’ve done your due diligence. The best decision is an informed one. Cryptocurrency’s volatility makes it an exciting asset that can diversify a portfolio that’s playing it too safe. Just keep in mind- it’s experienced astronomical growth, but it’s a long way down.
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