Is it Time to Add Cryptocurrency to Your Portfolio?
Is it time to add cryptocurrency to your portfolio? It is January 3rd 2020 and all things crypto related are in the news again.
The difference this time is that to a large extent the news is good. Bitcoin has increased about 300% in 2020. The 2nd largest cryptocurrency Ethereum has increased even more. How does 465% over that past year sound?
That’s a serious return on investment in a seriously short space of time.
By now most people have heard about cryptocurrency. In fact, it was hard to avoid in latter part of 2020 when Bitcoin reached new high after new high, so if everyone’s heard of it and it goes up so fast why isn’t everyone investing in it?
The trouble with cryptocurrency is that, though it can rise at break neck speeds, it hasn’t gone unnoticed that it manages to fall even faster.
At the time of writing Bitcoin is priced at about $30,000 per coin. Yet it was only months (not years!) ago that it was priced more like $4,000, so it is certainly not for the faint hearted. It’s volatile with a capital V.
Like any investment, cryptocurrency has its fair share of bulls and bears. I think it is safe to say Warren Buffet falls into the latter category when he says:
In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.
Is it time to add cryptocurrency to your investment portfolio?
So what are people suffering with a severe case of FOMO (fear of missing out) expected to do? Well, you could stop all interaction with the outside world in attempt to block out all knowledge of of anything related to cryptocurrency or you could sell the house and go all in.
Both of these are a little extreme, hard to implement and not advisable, especially when there’s a third option that might just suit the more conscientious investor. Such an investor could add a little to a portfolio, and by little I mean a little.
What’s the point of that you may ask? Well there’s a couple of reasons. Firstly, you would be adding diversification to your portfolio. It would take a brave soul to surmise that crypto is the same as the other assets in their portfolio.
I don’t think we need to go back over the numbers to see crypto prices have been rising and falling pretty independently from stocks, real estate, bonds and commodities.
If we agree that this cryptocurrency can be classed as a different asset and one which moves independently from the others then it would be hard to argue that adding a bit would do anything but increase diversification.
The second and most compelling reason is the potential gains. I know it is dangerous to chase gains, but sometimes you have to weigh up the risk and against the reward. Adding a just little bit of a risky asset can give you a chance of good returns, whilst minimising the risk of loosing all your money.
Let’s say Warren invests $100,000 in stocks and Tim invests $98,000 in the the same stocks and $2,000 in cryptocurrency. They both leave their money invested for 25 years. The stocks go up 6% annually but cryptocurrency implodes and is worthless. Warren would have $429,187 and Tim would have $420,603.
It is a noticeable difference but I don’t think Warren’s life would be affected too much. However, if cryptocurrency went up by 30% annually, Warren would still have $429,187 but Tim would now have $1,831,885. It is hard to argue that kind of difference wouldn’t be life changing.
The Bottom line
Personally, I don’t like taking big risks with my money, so anything over 2% would be a no no. But if I limit by exposure to a small amount and things take a turn for the worse it shouldn’t affect my life too much, but if it continues its rapid upward trajectory, I’ll make a good return and most importantly in the meantime I won’t be suffering from any FOMO.
I’ve written about some easy ways to get access to Bitcoin and Cryptocurrency here.
