Liston Newton Advisory are financial advice experts, so our role is to stay abreast of where our clients are looking at investing their assets.
Recently, we’ve had a lot of interest in cryptocurrency.
The biggest questions we find people asking are around what cryptocurrency actually is, how it fits into an investment portfolio—and how much to invest in crypto to make money.
Much like cash, property, shares, and other assets, when utilised correctly cryptocurrency can make up a valuable part of your investment strategy. Contact Liston Newton Advisory today to discuss including cryptocurrency in your long-term investment plan.
So, how much money should I invest in crypto?
The answer to this question isn’t that simple.
Much like any other form of investment, it all depends on your financial goals, your timing window, and your risk appetite. To gain an idea of these, ask yourself:
- How much money are you comfortable with investing?
- How much money are you comfortable losing?
- Do you have the stomach to watch the crypto market rise and fall, sometimes as much as 30% in a day?
Owning cryptocurrency is a way to diversify your portfolio with the inclusion of an exciting new asset. It may even enable you to tap into a potentially lucrative future market.
But it can be expensive. Bitcoin, for example, at the time of writing is worth somewhere in the vicinity of AU$50,000+ each coin. Ethereum, one of the other major players, is worth in the area of AU$4,000.
There are cheaper cryptos, and these may even be on an upwards trajectory. But it all depends on how much you’re willing to invest upfront.
Age-old advice tells us that it’s best to never invest more than you can afford to lose. And with crypto, you may never know what’s coming—so this advice is still prudent today.
But, as crypto is still effectively in its infancy, we can’t say for sure where the market is ultimately headed. So instead, we’re going to look at how to invest in cryptocurrency, rather than how much.
What is a good allocation across my investments?
Like most investments, this really depends on your level of knowledge about the product.
For most people, cryptocurrency is still somewhat of an unknown. So unless you’re doing your research, and tracking the market, you may not have the requisite knowledge that makes investing a larger portion of your capital worth your while.
Common investment advice states that anywhere from 1% - 5% is a safe allocation when considering an investment with higher risk. And as a market with marked volatility, crypto certainly carries a level of risk.
While 1% - 5% invested in crypto may not seem like a lot, it has the potential to build over time. Just imagine what you could be sitting on if you’d allocated 3% into Bitcoin when it first came out.
A small percentage like this is advantageous, as it allows you to gauge your risk appetite, but also likely isn’t enough to neutralise the value of other investments, if this goes awry.
How risky is cryptocurrency?
Crypto is a high-risk investment, and is notoriously volatile. After all, it’s new. It’s unknown. And it’s in high demand.
But as we’ve seen with Bitcoin and other alt coins, it’s not easy to pin down.
Take Dogecoin. Created as a joke, this alt coin was given value just through sheer force of interest, particularly when Tesla CEO Elon Musk got on board.
Bitcoin, for example, has suffered numerous losses. In June 2011 it fell to just 1 US cent. In June 2021, it dropped almost 50% in value.
However, price fluctuations like this aren’t uncommon in the cryptocurrency world. So, like any investment, it’s prudent to ride the waves, and hold out for the future.
It’s all about managing your level of risk.
When is it a good time to take a risk?
Looking at it from a wider point of view, the cryptocurrency market is still relatively new. And compared with the global stock market, it’s still quite small. But it’s growing stronger over time.
So if one was to invest in cryptocurrency now, they would still effectively be investing early in the piece. And looking at a long-term horizon, it may deliver high yields in the future.
Is cryptocurrency a stable investment?
The value of most cryptocurrencies all comes down to interest and demand. They’re not tied to any one tangible asset.
Many of the larger cryptocurrencies have proven to be reasonably stable, so far. The larger, most established cryptocurrencies like Bitcoin or Ethereum, while riding their own waves, have been proven to deliver consistent growth.
But there’s also another, newer class of cryptocurrency, known as Stablecoins. These are cryptocurrencies that are actually tied to a physical asset. Stablecoins like Binance USD are actually tied to the US dollar, so there’s real value there. These coins marry the idea of fiat currencies and tangible assets with the modern blockchain world.
Stablecoins are designed to work in a way that protects against the volatility most cryptos are known for. So it’s more than just a perceived value: it’s real-world value.
However, these are not known for delivering large returns, like traditional crypto. Given their tether to real-world assets, they’re designed more to hold value, rather than for growth.
The final word
Like any new investment, if you’re trying to identify how much you should invest in crypto, it’s always a safe idea to start slow. Consider how much you’re willing to invest, and what your appetite is for crypto volatility.
A low crypto allocation can still deliver opportunities not seen with traditional investments. And even if it’s just 1% of your allocation, you’re still going to get a taste of how the crypto market works.