Many private individual investors are interested in how Bitcoin fits into their overall portfolio. Some believe crypto is a worthless bubble similar to the 17th-century tulip mania. But Bitcoin should not be compared to tulip mania rather, and more accurately to the dot.com boom. After that bubble burst, there were still quality companies left that went on to become giant successes. Look at Amazon, Microsoft and eBay for example.
Also these quality stocks came down heavily but eventually rallied and made long-term shareholders rich. The many junk companies collapsed and folded.
We could see a similar scenario in cryptos. The prices of Bitcoin and other cryptos could still go considerably higher but we should not be surprised when crypto prices will fall hard and shakes out the market. It could get ugly and painful in this cleaning out process. But if you are in the right currencies for the longer term, you should do well.
Bitcoin and other quality crypto-currencies should be, to a small portion, part of your asset allocation and overall, long term portfolio.
So, how should an investor proceed? Here is what I suggest:
Decide how much you’re willing to lose.
Knowing your total risk will make it easier to hold on when things get volatile or to manage a potential loss. Allocate only a very small portion of your portfolio to cryptocurrency. Definitely not more than 5%.
If things go horribly wrong and you lose the entire investment, the other investments in your overall portfolio might cover the loss and you can always come back from it.
Understand cryptocurrencies and how it they work.
If you don’t know what crypto is, learn about it before you buy it. There are many great free online resources to learn about it. Investors who got burned the worst in the dot-com bubble bust didn’t know or didn’t even care about the companies they bought and why their stock prices were moving.
Don’t just buy something because it’s going up or down.
Cryptocurrencies are an exciting and potentially lucrative investment. Just make sure you understand the opportunity and the risk.
Sven Franssen