People who are not entirely sure about investing in the stock market may look for other investment options — such as cryptocurrencies like Bitcoin, Litecoin and Ethereum. While taking cryptocurrencies into consideration, however, make it a point to calculate your investment goals and risk tolerance as well.
Take the time to learn about investing in cryptocurrencies, such that you know for sure whether having a cryptocurrency in your portfolio will be beneficial or not.
Cryptocurrency Risk vs. Stock Risk
To mention the obvious, investments come with risk. The market could end up crashing for reasons beyond casual comprehension. Companies going bankrupt is not a novelty. On the other hand, a particular stock could shoot up at any time, or even grow gradually. Assessing these risk and gain factors is essential when deciding on the assets to be added to your portfolio.
Although there are risks common to most investments, stocks differ in that to some extent you can be guided to gain some understanding of how prices may change. Things like the ratio of stock price and earnings provide a good understanding of a company’s financial health.
It is this particular indicator that cryptocurrencies lack, when compared to stocks. As it is entirely based on supply and demand, cryptocurrency is speculative in nature. To some degree, all currencies get their value from the willingness of people to pay for it, but this does not necessarily hold true for a cryptocurrency. As it operates in a much smaller market, certain big swings can influence it as a whole.
All said and done, cryptocurrencies are a relatively new development that has not yet been widely adopted. This adds an altogether new level of risk as it is possible that they could get replaced by other efficient alternatives, or could even be banned due to regulations!
Cryptocurrency History vs. Stock History
While past performance is certainly not a surefire indicator of the future, it can help assess how well investments have done over a period of time. For convenience, let’s take the case of the most prominent cryptocurrency out there itself — Bitcoin.
Bitcoin price was seen fluctuating between ₹15000 and ₹40000 per coin in 2015. Come 2017, and the value shot up, to a high of nearly ₹1450000. However, it dropped down to below ₹255000 in December 2018! In 2020 itself, the prime cryptocurrency’s value has shuttled ₹280000 and ₹660000. So no matter how high the price of any cryptocurrency stands right now, an abrupt drop is all but to be expected.
On the other hand, stock growth spurts and drops are not nearly as dramatic, and have been quite stable. The S&P 500 index, which was at $2,000 in early 2015, grew steadily to around $3,100 mid 2020, although it did go through some ups and downs along the way. Similarly The Dow Jones Industrial Average (DJIA) also grew from $17,000–18,000 to around $25,000 during the same period.
Historically, stocks have given more or less 10% returns annually (6–7% considering inflation). However, in the case of Bitcoin and cryptocurrencies, this is far from being true.
Who Is a Good Fit for Cryptocurrencies?
People in search of some serious diversity in their portfolio can definitely do with some Bitcoin or Ethereum, as they provide a potent alternative to more traditional assets. They also help if you want assets which are not denominated in terms of regular currency.
Generally, even if you gravitate towards having a lot of cryptocurrencies in your portfolio, it ideally shouldn’t be the primary focus of your investment drive. The extent of it must depend on how your risk-tolerance, i.e., you should be comfortable losing the amount you invest in cryptocurrencies. If nothing else, try to keep it to 1–5% of your portfolio.
Who Is a Good Fit for the Stock Market?
Most investors tend to keep stock options as a majority of their portfolio, and experts agree that that is the way to go as well. Thanks to its base characteristics, it is a more stable and reliable investment that you can account for in terms of profits over time. Even in the face of short-term irregularities, it is safe to assume that most companies will continue to exist, if not flourish, hence providing a decent amount of stability. Broad-based index funds & exchange-traded funds (ETFs) constituted by stocks, chances are that your investments will hold up well long-term.
Is It Still Worth Investing in Cryptocurrencies?
Affording even a whole unit of a certain cryptocurrency is quite a feat these days — that is to say the prices have gone up really high. Considering this fact, and combining the idea that even such a large investment is not a safe bet, you’d be forgiven for wondering if it is already too late to invest in cryptocurrency.
Here, again, it has to be said that the call is yours. If you believe in the concept of blockchain technology and cryptocurrency, certainly devote whatever you can spare to have them as a small share of your investment portfolio. If you are still doubtful, it is better to not invest in cryptocurrencies at all.