“Tama, how much should I invest in cryptos?”
It’s one of the most common questions I’m asked about cryptocurrencies.
And I get it. A lot of people think cryptos are in a big bubble. They’re some of the most volatile asset markets have ever seen. And with so many different types of cryptos out there, it can be hard to know how much of your portfolio you should allocate to any one of them.
So today, I’m clearing up the confusion…
The first thing to keep in mind when you’re investing in cryptos is to start small. And when I say small, I mean with a few hundred bucks. (Remember that you can buy a fraction of a bitcoin… the minimum lot size is not one bitcoin.)
Using a small sum, get used to the process of transferring, trading and safely storing cryptos. Once you’re comfortable, then you can start to level up to bigger sizes.
You see, the process of buying, moving and storing cryptos it is not like traditional online banking or investing. In the world of crypto, if you make a mistake you can lose your money in an instant. If you send bitcoin to the wrong address, it’s gone. That’s it. There’s no recourse. And there are very few, if any, “I forgot my password” options in the crypto world. So it’s critical to familiarise yourself with the mechanics of buying crypto and moving it around first with a relatively small sum, before moving on to larger dollar amounts.
Never invest more than you can afford to lose
By that I mean, if you woke up tomorrow and your entire crypto portfolio was worthless, you’d be fine financially. It would sting of course, but it wouldn’t be ruinous or anywhere close. So be conservative.
The table below is a very general portfolio allocation guide…
Now, before I get a slew of angry emails, let me point out that the left-hand column denotes the MAXIMUM PERCENTAGE of a portfolio that should be invested in cryptos depending on your experience AND your market bullishness.
Even the most enthusiastic beginner who’s in the process of learning the ropes should not allocate a position that exceeds one percent of their total investment portfolio to begin with… at an absolute maximum. If your portfolio grows to exceed your maximum allocation, that’s fine – but I’m talking about the hard dollars you initially commit to crypto. AND remember, never invest more than you can afford to lose.
So how much do you allocate amongst different cryptos?
There’s bitcoin, and then there’s everything else
In my opinion, bitcoin should be the largest single position of any crypto portfolio – even after its recent price surge.
You see, bitcoin is still the “reserve” currency of all cryptocurrencies. So it makes sense to understand bitcoin first.
Let me share an example.
You might have heard about ethereum. It’s a virtual currency network that’s been in the press recently as a wave of top blue-chip I.T. and financial companies (including J.P. Morgan and Microsoft) have announced the formation of an alliance that will use ethereum for blockchain-related opportunities.
Ethereum soared over 3,500 percent in the six months leading up to June 2017.
But if you want to buy ethereum (and I have an unusual view on that… you’ll need to become a subscriber to Crypto Capital to find out more, though) you typically have to buy bitcoin first.
That’s why you should take out the time to figure out bitcoin.
It’s the global crypto reserve currency. And it’s the first crypto asset that tens of millions of people who enter the space after you will be buying.
So you should buy it before them.
If you are looking to become an active crypto investor, I think you should hold anywhere from 30 to 70 percent of your crypto portfolio in bitcoin, with other crypto assets taking up the rest.
And note: The newer you are to the space, the higher the percentage of bitcoin you should own.
Total beginners will start by allocating 100 percent into bitcoin as that’s the first crypto they buy. Then they’ll get more comfortable and start to buy other cryptos.
So the proportion of bitcoin will fall below 100 percent as you begin to diversify. Over time, your portfolio will change in size and bitcoin as a proportion of your portfolio may further decline: but don’t forget that bitcoin is the “bedrock” of any crypto portfolio. So anyone just starting out should be predominantly long bitcoin.
And please remember: Do not allocate more personal capital to this sector than you can afford to lose. This is as speculative and risky as it gets… that’s the price we pay for the kind of returns on offer.
Take a look at your crypto portfolio and ask yourself if you could stomach a 50 percent (at a minimum) decline tomorrow without spinning into a panic. If the answer is no, then you need to do something about it.