Since coming on the scene, cryptocurrencies have become a huge part of the investing discussion, on both ends of the spectrum. There are enthusiasts who swear by the assets’ utility and potential, and then there are skeptics who wouldn’t touch crypto with a 50-foot pole. The one undeniable thing, though, is the increase in crypto’s popularity across the globe.
Here are two reasons you should invest in crypto and one reason you absolutely should not.
1. You can benefit from more diversification
Diversification is one of the key pillars of investing. You never want your portfolio to depend too much on too few single investments. You should aim to have diversification in industries, company size, and growth potential, as well as asset classes. While questionable at first, the growth of cryptos as an asset class has become so prevalent that the Securities and Exchange Commission (SEC) is now building out a 50-person Crypto Assets and Cyber Unit team to protect investors in the niche.
Although crypto should be a small part of your portfolio, if you’re looking to add some diversification to it, look no further. Ideally, you don’t want more than 5% of your portfolio in crypto. Your portfolio should be able to survive if you lose 5% for whatever reason. Losses bigger than that can affect you too much, especially given the extreme volatility of cryptocurrencies.
2. There’s a chance for hypergrowth
Crypto as a whole is still in its early stages. Bitcoin (CRYPTO: BTC) — the first and by far the most valuable crypto by market cap — was launched in January 2009. Since then, its value has soared. Should you expect to receive similar returns from investing in that token or others? Absolutely not. But, what you can expect is a chance at hypergrowth on your investments simply by the nature of how young the crypto space is.
The global crypto market was valued at over $1.78 trillion in 2021 and, a report published early this year by Research and Markets forecasts that it will reach over $32.4 trillion by 2027, experiencing a compound annual growth rate (CAGR) of 58.4% along the way. For perspective, the S&P 500’s CAGR has historically been around 10%.
By no means is that to say crypto makes for a better investment than the S&P 500 — it doesn’t — or that the two options are even comparable. Moreover, the projection could turn out to be incorrect. However, it does point out how much growth potential there is for crypto over a relatively short period. You can only benefit from that potential if you give yourself a chance. High risk, high reward.
Be aware of the risks if you’re nearing retirement
One situation in which you may want to avoid investing in cryptos is if you’re close to retirement. Most financial advisors suggest that people should begin shifting away from riskier investments and become more conservative about their portfolios at that point in their lives. The focus should be more on preserving the money you’ve made through the years than taking on risks to try and grow it. Unfortunately, risk and crypto go hand in hand.
Imagine having a large fraction of your portfolio in a cryptocurrency — one that plunges in value by more than half in a matter of months, as Bitcoin has since November 2021. If you’re a long way from retirement, that decline may not matter as much to you, because you have time on your side. You can wait for years for the asset’s value to recover. However, there’s no telling how long it might take to recover. If you’ll be retiring soon and will need to start drawing down on your portfolio to cover your living expenses, a big plunge in its overall value could be a problem.
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