How Investors Can Balance the Risk and Reward of Investing in Cryptocurrency

Updated on November 25th, 2020
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Over the last few years, cryptocurrency has evolved from a buzzword to a notable investment. Still, financial analysts across the board agree crypto is a speculative play — some going so far as to call it the next dot-com bubble. I don’t believe that it’s a bubble like we saw in the dot-com era, but I understand why cryptocurrencies’ volatility can leave many investors feeling uncomfortable.

With large risk can come massive reward, and in the scramble to enter a boom market, some people are betting big. Joseph Borg, president of the North American Securities Administrators Association, states that most buyers he speaks with invest between $5,000 and $20,000 in cryptocurrency, and he’s even seen people take out high-risk second mortgages and HELOC loans to move their money into digital coins.

These examples offered by Borg are not to be emulated. While an investment with a high return can be tempting, the old adage of never investing more than you are willing to lose certainly holds true when it comes to the crypto market.

Each person’s definition of — and tolerance for — risk is different, but just as you may not want to invest entirely in low-risk investments, it’s not wise to bet the house on crypto, either. To determine what percentage of your investment portfolio to put into high-risk investments, it’s critical to assess your risk profile. This is a fairly extensive process; you must take into account things like your age, number of years to retirement, income, family needs, financial resources, etc. Once you’ve gathered this information, you can determine what percentage of your portfolio to expose to crypto.

However, diminishing risk and maximizing rewards is not just about predicting price swings or adjusting percentages, but also about understanding the greater market and crypto space as a whole. The risk of investing in crypto is evening out, and as the market continues to correct itself, we’ll see more legitimate crypto investment opportunities rise to the top.

If you do decide to fold digital coins into your long-term investment wallet, choose the crypto players that are equipped to survive long term. Typically, that means those with the highest market caps, the greatest potential for use case, and the best chance of mass adoption in the future.

Since its meteoric price spike in 2017, the crypto market has already seen significant stabilization. For instance, in June, Bitcoin’s 10-day deviation average dropped to 270. To put that into perspective, that number stood at 3,000 just seven months earlier. While some are arguing that this is a byproduct of the Bitcoin bubble slowly deflating and the overall market deteriorating, I believe we’re seeing volatility draining from the system and the crypto market stabilizing as a whole. And for those looking to add crypto to a diversified portfolio of long-term investments, this sort of behavior is key.

When evaluating investment risk, your time horizon is a crucial consideration. Generally speaking, shorter time horizons call for enhanced caution. Until now, the focus around cryptocurrencies has definitely been on the short term, and as such, the potential risks and rewards were very high. Moving forward, however, I see cryptocurrencies behaving more like other asset classes — meaning that risk will be greatly diminished if you’re willing to invest long-term.

While the potential for great reward has been the key factor driving investors to the cryptocurrency market until now, the sort of swings we’d been experiencing made it hard to add crypto to any long-term investment plan — even if cryptocurrency was considered one of your riskier investments. Market performance was judged in days, and the long-term potential of any investment was decidedly unclear. That’s starting to change. A cryptocurrency is unlikely to become a “safe” bet in the immediate future, but with a decrease in volatility comes the opportunity to start thinking about crypto investment over the longer term.

Cale Moodie

Cale Moodie

Cale Moodie is CEO and director of Neptune Dash, a leading cryptocurrency company that constructs and operates masternodes of Dash, a digital currency built on the blockchain.

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