Why Crypto Should Still Be A Part Of Your Portfolio

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Crypto is a speculative investment that has emerged as an alternative to classic and safer aspects of a portfolio such as stocks, bonds and gold. Crypto can be thought of as a digital representation of value.

There’s no doubt that crypto has made its stake among investment opportunities. Since its inception, the most classic cryptocurrency, Bitcoin, generated average annual returns of 186.7% as of 31 August 2022. While it’s true that the growth has seen a downturn with returns dropping to 8.8% since 2018 when the Bitcoin Futures Market was launched, there’s still a strong argument for including crypto in your portfolio.

Top considerations before you start

The primary consideration when looking at including crypto in your portfolio is your tolerance for risk. Crypto is a highly volatile market with prices fluctuating to both highs and lows daily. Many experts recommend considering the portion of your earnings invested in crypto as “lost” money to hedge against any potential downturns.

Long-term perspective is key for crypto. It’s not well suited to investors who agonize over every price drop, but if you’re willing to place investments aside and look to profits over months or years, crypto is an essential part of any portfolio. Between January 2014 and September 2020, the average portfolio containing Bitcoin produced a greater annual return than those without.

As an emerging market, and a currently bearish one experiencing declines, there are huge discounts on offer for purchasing crypto with potentially lucrative results. It’s true that crypto has been facing losses recently, but historically, it has always recovered.

Balance in all things

Most experts recommend adding no more than 5% crypto to your portfolio. As even a 1% inclusion of Bitcoin can raise volatility by 3%, the low percentage inclusion buffers the risk of volatility and gives a more stable growth rate to a traditional 60/40 portfolio. This measure is generally based on the percentage at which crypto will outperform stocks and the probability that it will do so, meaning that more risk averse investors will want to minimize this even further.

Also Read: Learn Everything There Is to Know About Binance Coin BNB

On the flipside, portfolios with greater risk can justify larger proportions of Bitcoin at a smaller annual real return. Some investment experts even suggest a 60/20/20 model of stocks to bonds and crypto. If bonds are coming to a decline, then the emerging market of crypto may be the key to an investment boom.

Diversification is key

Diversification is a fundamental key in trading, and the addition of crypto will already add diversity to any portfolio. Fidelity found that Bitcoin generally has a 0.6 correlation to stocks and 0.32 to bonds, so it doesn’t move strongly in line with either aspect. However, recently the correlation seems to be increasing with the trends of Bitcoin following those of the stock market, just far more dramatically.

You can also diversify widely within the crypto market itself. The simplest method is through diversification of tokens. There are classic payment tokens such as Bitcoin and Ethereum, but investors also have the option to buy alternative tokens such as NFTs which are most noted for their emerging use in digital art, utility tokens, gaming tokens and security tokens which are backed by real ownership for more security.

Crypto can be diversified by industry like traditional investments, or by the vehicle by which the investment is made, such as digital wallets, crypto IRAs and blockchain-based decentralized finance (DeFi). This helps to lower the price volatility of your crypto holdings and provides greater visibility to adjust your portfolio based on the performance of each.

Also Read: The basis of a crypto analysis [Beginners’ Guide]

While it does require a greater time commitment to do the proper research before diversifying, it’s well-recommended to educate yourself on crypto before investing regardless, especially within the national market, such as the best crypto South Africa has to offer.

As a side note, there are also options to invest in crypto-related stocks or pre-established IRAs which profit from the benefits of crypto without being a direct investment.

Investment targets

Bitcoin is the household name for crypto, but while it still holds sway over the majority of the market, its dominance is fading as new competitors emerge. It’d be wise to consider investing in other cryptocurrencies as a means of diversification.

Ethereum is the second largest by market cap with 18% market dominance. It’s expected to grow further due to its applications in global commerce and the ubiquitous presence of Ethereum blockchains.

One good recommendation is an even or near-even split between Bitcoin and Ethereum, with a smaller percentage being invested in alternative coins.

As a caveat, avoid purchasing stablecoins such as Tether which are designed to maintain a consistent market value.