Should You Buy Cryptocurrencies?
If there is one investment on the minds of investors today, it is undoubtedly cryptocurrencies. And for good reason. The market values of these digital currencies are on fire.
A whole ecosystem is blooming around these new digital currencies. For instance, Coinbase is a company that started trading on the Nasdaq stock market in April. Coinbase provides a service to hold and trade cryptocurrencies. The company, started in 2012, is worth nearly $50 billion today.
One thing I especially love about cryptocurrencies are the names. There is Bitcoin, Ethereum, XRP, Dogecoin, and even Stellar Lumens. Sometimes it seems like the name itself, or the story behind the cryptocurrency, drives investor demand more than anything else.
Like I said, the values of cryptocurrencies are on fire.
Case in point: As of May 5, if you would have invested the three government stimulus checks into Dogecoin, which was initially created as a joke, your investment would have been worth just over $500,000. Yes, that’s true.
(Update: I wrote that preceding paragraph last week. Dogecoin fell about 20% over the weekend. By the time this article is printed, who knows, maybe it will be at all-time highs again.)
That actually represents an important point about cryptocurrencies in general at this juncture. They are incredibly volatile. If you thought the coronavirus market meltdown last March was jarring, just take a look at a cryptocurrency price chart. Declines of 20-30% happen about as often as the weather in Kansas changes.
So the question is, should you invest in cryptocurrencies?
Actually, I’m not sure that ‘invest’ is the right word to use in this context. I think ‘speculate’ is probably more accurate.
There’s nothing wrong with speculation, as long as it’s done in moderation. And that’s my advice on purchasing cryptocurrencies. If you feel compelled, buy in moderation.
As a general rule, I would not risk more than 5% of an investment portfolio in cryptocurrencies at this stage. Maybe cryptocurrencies will continue to rocket higher, and that advice will look ignorant years from now. So be it. There is still a meaningful chance many of these cryptocurrencies will end up defunct at some point in the future, so risking a large sum of money, in my mind, is playing with fire.
According to one report, there are more than 7,800 cryptocurrencies on the market today. I don’t see why we would need any more than a handful of them over the long-term – maybe even just one or two.
If that’s true, the vast majority of the cryptocurrencies trading today won’t be around years from now. When plausible outcomes are that wide in a potential opportunity, it makes sense to buy in moderation – and perhaps even diversify your holdings among several different cryptocurrencies.
You might also want to buy in over time. That spreads your bets in case these currencies are currently trading at unnaturally high altitudes. Then again, if you are a true believer and think prices can only increase going forward, the best time to get in is now.
Looking back 10 years from today, I would not be shocked if the price of Bitcoin, for instance, has quadrupled. I also would not be surprised if it’s worth substantially less than it is today.
There are plenty of people with convincing arguments on either side of the cryptocurrency debate, but no one really has a clue how it will ultimately play out.
Here’s what I know: You don’t have to be a hero on this. If it interests you, or if you fear missing out on the party, buy some.
But risk only what you can afford to lose.