My Thoughts On Investing In Cryptocurrencies

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Bitcoin and other cryptocurrencies have made considerable splashes among investors in recent years. Similar to how investors trade stocks and funds, cryptocurrencies are now considered assets within investment portfolios as well. However, before you step foot into the cryptocurrency market, here are four things to consider:

  • Be Aware Of The Increased Volatility

    • In a given day, the price of most cryptocurrencies can swing by double-digit percentages in either direction. If you extrapolate that daily price movement across several months, this can lead to massive swings in price. To help illustrate, in just 12 months the price of Bitcoin fell nearly -75% in 2018. Conversely, the price of Bitcoin has surged over +90% so far this year (as of the time I am writing this). If we compare this to the overall U.S. stock market, the worst multi-month decline for the S&P 500 index is -50% and that has only happened three times over the past 50 years (in 1974, 2002, and 2008). For as volatile as many investors may believe the stock market is, they may be surprised to learn that cryptocurrencies are much more volatile than the average stock.

    • If you are considering investing in cryptocurrencies, think about how you would react if those particular investments fell 25% or more overnight. While it is easy to conceptualize what you might do, your actions may differ when real money is at stake. The emotional price you will feel cannot be calculated. To an extent, all investments carry some degree of risk, but as it relates to cryptos, be prepared for higher-highs and lower-lows in any given year.

      • Price data via coindesk.com & stockcharts.com

  • Ask Yourself… “Why?”

    • This may be the most important question. Do you actually think cryptocurrencies are good investments for you and your portfolio? Or are you largely interested because Bitcoin and similar coins are trendy investments right now? If you have done your homework and have ultimately reached a well-founded conclusion, trust your analysis. However, if you are only investing because of the social buzz and are afraid of missing out, pump the brakes. Just because cryptocurrencies are gaining popularity among investors does not mean it is the right investment for you. Tune out the hype, take time to do your research, and consider your investment goals before diving in.

  • If You Treat It As Gambling, Don’t Forget That

    • If you do not plan to do any research and instead plow ahead with no game plan or rationale, be prepared for the worst. As a result of being highly volatile and possessing limited history, it is extremely challenging to predict how cryptocurrency prices will evolve over time. Just as easy as it is to win big on a slot machine, the same could be said for the cryptocurrency market. Where there is huge upside potential, there exists huge downside risk.

  • Start Small

    • The best way to manage against risk is to invest smaller amounts over longer periods of time. If you decide to invest in cryptocurrencies, start with a lesser amount rather than dumping your entire savings or investments all in at once. Get your feet wet. This will help minimize the emotional toll that I mentioned and will prevent you from putting all your eggs in one basket.

If you have any questions about cryptocurrencies, please feel free to contact me directly. I hope you enjoyed reading!

Joshua J. Baird
Investment Adviser Representative