On one side, the digital currency market is largely unregulated and investing in it is widely speculated. On the other side, this is a market that can turn people rich overnight, and its popularity is growing as we speak.
While we cannot tell you the right amount of crypto you need in your portfolio, we created this article to help you make a smart, informed decision about this.
Things to consider before you invest in crypto
Investing in crypto can be life-altering for you if you make the right decision. Still, before we get into how much you should invest in it, it’s important to go through how you should be investing in it. One mistake in terms of where you buy your crypto or where you store it can cost you a fortune, as well as your chance at big winnings.
Nowadays, buying crypto is as simple as it can be. Thanks to safe platforms like Moonpay, you can buy bitcoin with a debit card and store it in your crypto wallet. Moonpay is a great place to keep track of the rise of different currencies, as well as invest in hundreds of different coins of your choice.
In addition to using the right place to buy, sell or exchange your coins, you should also stick to secure portfolios or crypto wallets. Do your research before you pick your favorite one. Some popular choices today are Coinbase, Ledger, and Exodus.
Some crypto owners choose to keep their coins in different wallets and portfolios to further minimize the risk. If you decide to opt for this step and have a significant amount of crypto to store, you should keep track of every change and note it down in an organized manner.
This doesn’t have to be anything complex. A simple graph in Excel can help you keep track of different wallets and currencies you’ve stored in your financial portfolio.
The amount of crypto you should have in your portfolio
Now that you know where to buy and store your coins, let’s move on to how much you should have in your portfolio.
Advisors were entirely dismissive of cryptocurrency when these coins first came on the scene in 2009. It all started with Bitcoin. At that point, there was a lot of speculation about whether or not digital currencies will succeed, and how safe it is to purchase and store them.
A lot has changed ever since. Some will still argue that the performance of the stock market thrives and there’s no need to invest in digital currencies. There’s truth to that, too, considering that the performance of stocks, bonds, and bills averaged around 20% a year in the last three years.
However, if we stop to look at the crypto market in the last couple of years, it’s obvious why many advise investing in it, too. Let’s stop considering Bitcoin as the oldest currency. A coin that was worth a couple of dollars at the beginning reached its epic all-time-high of over $68,000 per coin.
Cryptocurrency is not like any asset class in the world, so the same rules certainly don’t apply. At this point, it is up to the individual’s preference what they want to invest in – as well as up to their abilities how much they want to have in their portfolio.
Naturally, if you have a lot to invest with, you can purchase something from everything including crypto, stocks, gold, real estate, and more. You should also stop to consider where you want to allocate most of your money to minimize risks and maximize gains.
What we can offer you are some recommendations from experts and studies for safer, smarter crypto allocation.
Recommendations for crypto allocation
Many studies recommend an appropriate amount to allocate to crypto in your portfolio. This will essentially depend on your financial abilities. A Yale study from 2019, for example, found that 4-6% is a smart amount to allocate. This study included a variety of digital currencies like XRP, Bitcoin, and Ethereum.
Most financial advisors and money experts rally around the percentages 1% as the lowest and 5% as the highest recommended allocation for crypto.
Even cities and countries are investing in crypto for their treasury reserves. For example, Rio de Janeiro has invested 1% of the treasury reserves in cryptocurrency. If you consider the city’s budget, this is a tremendous investment despite the small percentage.
An allocation of 1% can be too small if you have a smaller budget, but it is of high significance and has a huge potential if you have more money to invest in this. This is why the percentage in your portfolio should depend on the money you have to allocate in the first place.
Let’s look at a hypothetical scenario made by Edelman for a 1% allocation of crypto in your portfolio. Those that had a typical portfolio of 60/40 asset mix around the 2017 historic bull run of Bitcoin will get returns of around 7% in a single year. These will be the people that haven’t invested a single percent of their money in BTC. If we change the asset allocation for just 1% and give it to crypto, these people would have potential gains of 22% in a single year.
Since it’s a very small percentage, even if crypto crashed entirely in that year, the 59/40/1 or 60/39/1 allocation would result in a 6% return.
Yes, there’s a discrepancy that can mean a lot of money for bigger investors. However, the amount that these investors won could never result from the traditional currencies, so the risk is minimal compared to the gain.
Making investments based on your budget
Essentially, you should base your decision on how much you can afford to spend. If you have a smaller budget to allocate but are willing to take the risk with crypto, you’ll need a bigger percentage than 1% for your investment to actually make a difference in your budget. Alternatively, you can start small and keep investing if your currency’s worth increases.
Before you start investing, you should follow a few basic principles. The main one is to never put more into your portfolio, no matter what type of investment you are choosing than you can afford to lose. Different types of investments come with different risks, but there are some regardless of what you choose.
If you cannot afford big risks, it’s smart to allocate most of your funds into investments with minimal risks like savings accounts and series I savings bonds. If you can afford to invest at least a small portion into high-risk, you should decide on the percentage and go with it.
Advisors point out that it is not too smart to pour most of your savings into one place, no matter how promising it looks. During the crypto market boom, many were eager to pour high amounts of their savings into cryptocurrencies. Many of them lost most of their savings when the assets plunged.
Yes, these losses were extreme, but that’s no reason to give up on investing in crypto altogether. Cryptoassets are a great opportunity to get large winnings due to their asymmetric risk. If you put a small fraction of your money into crypto and store them in your personal portfolio, you are giving yourself a chance to win a lot of money, and the risk to lose a minimal portion of them.
Small vs. large allocations to crypto
Your first option is to make small allocations to digital currencies i.e. put a maximum of 9%-10% of your portfolio into crypto. This is appropriate for people with smaller budgets that aren’t willing to take big risks, as well as those who aren’t very experienced in investing.
In fact, many advisors point out a range between 1% and 5-6% for someone who is considering their first investments. Keep in mind that you can balance and add to the portfolio every year after tracking how the crypto market progresses.
Your second option is to make large investments into digital assets and invest over 10% or even 50-60%. Such aggressive figures are usually found in the portfolios of experienced investors as well as people with tremendous budgets. In most cases, even experienced investors allocate between 6% and 18% to cryptocurrencies.
People with more experience and better financial situation with professional background in investment usually allocate around 30% to cryptocurrency. Naturally, this isn’t a written rule and different investors can make very diverse choices.
How much will you be investing?
No one can tell you what you should invest in or how much you should invest. However, based on how the crypto market works, as well as research data and advisors, you should consider having at least 1% or 2% of your portfolio in crypto assets. If you are more comfortable with higher risk, you can have up to 10%. Anything higher than this is reserved for experts and people that are investing for at least a couple of years.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.