Cryptocurrencies are a relatively new asset class, and they don't generate cash flow like traditional investments. This makes them a risky investment, and it's important to understand the potential risks before investing. Several factors make cryptocurrency a risky investment, including its volatility, lack of intrinsic value, and the complexity of blockchain technology. It's important to do your research and understand the risks before investing in cryptocurrencies.
When creating an asset allocation for your portfolio, you may want to limit your alternative assets to 10% to 20% of the total portfolio value. Others may be more comfortable assigning a lower percentage to alternatives. For example, I like to keep my alternative investments between 8 and 10% of my portfolio. Cryptocurrency markets are notoriously volatile, and the price you pay for an item today may not be the value of your purchase tomorrow.
In addition, many companies that experiment with crypto payments only accept Bitcoin, which experts say is one of the worst cryptocurrencies you could choose to pay for something. When it comes to its true value, its greatest vulnerability is that it has no intrinsic value. Unbanked individuals can transfer money to others, even internationally, using their crypto wallets, or make cryptocurrency purchases with participating merchants using applications such as BitPay, all without needing to go through traditional financial institutions. If you have historically chosen to ignore investing in cryptocurrencies due to its high volatility or the complexity of blockchain technology, this could be a good time to reconsider whether it aligns with your short, medium or long-term risk goals and tolerances, as cryptocurrencies become more common in both trading retail and institutional investors.
On top of that, because cryptos are so in vogue, there are investment plans around these currencies. Investing in cryptocurrencies that are not particularly well known or that are not well supported is fraught with serious risks. If you're more interested in trading cryptocurrencies than holding onto them, a broader investment app like Robinhood can help you. However, the proportion of retail investors or individuals who have invested, traded or used cryptocurrencies is not high compared to equity investments. In terms of the cryptocurrency regulatory environment, there is a possibility that the new SEC regulations will have an impact on the cryptocurrency market, however, it is important to note that the US regulatory environment and other countries such as China may have short- and long-term impacts on cryptocurrency volatility. There are also some funds and investment funds that are exposed to cryptocurrencies, which is a less risky way to invest than buying the coins themselves.
For example, having some technical knowledge to understand the value of projects can help you make more informed decisions about investing in crypto. Although investments in these companies can be profitable, they do not have the same upside potential as investing directly in cryptocurrencies. For every cryptocurrency you invest in, make sure you have an investment thesis on why that currency will stand the test of time.