The Crypto Investment: Your Portfolio's Worth And Future

Investing in cryptocurrencies has become an increasingly popular topic, with some people making millions and others losing it all. However, it is important to note that investing in crypto is risky due to its high volatility and potential for fraud. Despite the risks, some people recommend investing a small percentage of your income in crypto, while others suggest investing a larger sum. Ultimately, the decision of how much to invest depends on various factors, including risk tolerance and financial situation.

How volatile is cryptocurrency?

Cryptocurrency is a rapidly growing market, but it is also incredibly volatile. Volatility, in financial terms, refers to the rate at which the price of an asset increases or decreases over a given period. The more volatile an asset is, the riskier it is considered to be as an investment. Cryptocurrency is a relatively new asset class, and crypto markets are highly volatile, with significant price swings that would be considered major events in traditional financial markets.

All cryptocurrencies experience huge fluctuations in their valuation. For example, in one day, Bitcoin’s value dropped by 30%. This volatility is due to several factors. Firstly, cryptocurrency is not intrinsically valuable, as it is not backed by any physical commodity like gold or diamonds. Its value is based solely on how much people are willing to trade for it. Secondly, the crypto market is still in its infancy and is going through a high growth phase. It is still finding its feet, and prices will continue to fluctuate as new participants enter the market and try to establish a consensus on the fair value of digital assets.

Another factor contributing to crypto volatility is the limited supply of certain assets, such as Bitcoin, which has a supply cap of 21 million coins. This limited supply can create conditions where sudden increased demand can put upward pressure on prices, increasing volatility. Additionally, the actions of large investors, known as "whales," can significantly impact the market. If a whale were to buy or sell a large quantity of a particular asset, it could send its price soaring or tumbling. The crypto market is also heavily influenced by investor sentiment, and positive or negative views can spread like a contagion, impacting prices.

Factors such as media coverage, earnings reports, and trading volume can also increase volatility. Positive or negative news coverage about a cryptocurrency can impact public perception and influence prices. Earnings reports that are better or worse than expected can also affect market sentiment and volatility. Unusually high or very low trading volumes can also correspond with high volatility.

While crypto is a volatile investment, it also offers the potential for significant returns. Higher trading volumes and increased institutional participation seem to be reducing Bitcoin's volatility over time. Additionally, there are now cryptocurrencies specifically designed to have low volatility, called stablecoins, which are pegged to a reserve asset like the US dollar.

How to safely store your crypto?

There are several ways to store your cryptocurrency safely. Here are some detailed instructions and best practices to ensure the security of your crypto investments:

Types of Crypto Wallets:

• Hot Wallets: Hot wallets are connected to the internet and can be accessed at any time. They include online cloud wallets, mobile and software wallets, and exchanges. While hot wallets are convenient for frequent trading, they are more susceptible to hacking and theft.
• Cold Wallets: Cold wallets are not connected to the internet and allow you to store your crypto offline. You can still receive funds, but no one can transfer them out without accessing the wallet directly. Examples of cold wallets include hardware wallets, paper wallets, USB drives, and physical bearer items like physical bitcoins. Cold wallets are ideal for long-term storage and reduce the risk of hacking.

Choosing the Right Wallet:

• Hardware Wallets: Hardware wallets, such as Ledger, Trezor, and SafePal devices, are considered the most secure option for storing crypto. They store your private keys offline and require you to confirm transactions on the device itself, providing an extra layer of protection. While they may be less convenient for active trading, they are ideal for long-term holding.
• Software Wallets: Software wallets are downloaded on personal computers or smartphones and can be accessed via web or mobile apps. While they offer a high level of security, they cannot protect against hacks and viruses, so it's important to maintain malware-free devices.
• Custodial Wallets: Crypto exchanges like Coinbase, Gemini, or Robinhood control custodial wallets. These are convenient and safe for beginners, but you don't have direct access to your private keys. There is also a risk of the exchange being hacked or going bankrupt.
• Paper Wallets: Paper wallets are physical copies or printouts of your public and private keys. They are considered outdated and risky, especially for large amounts of cryptocurrency.

Best Security Practices:

• Two-Factor Authentication (2FA): Always enable 2FA for an extra layer of security when accessing your crypto accounts.
• Strong Passwords: Use hard-to-guess PIN codes for your hardware wallets, and never store your recovery seed phrase online.
• Discretion: Avoid boasting about your crypto holdings publicly, especially if it can be linked to your real name or address.
• Device Security: Treat your devices with caution, assuming they could be compromised at any time. Avoid accessing online wallets or exchange accounts via public Wi-Fi or insecure networks.
• Backup and Recovery: Regularly back up your private keys or seed phrases and store them in secure, offline locations. Keep your software and operating systems up to date to patch security vulnerabilities.
• Phishing and Scam Protection: Be wary of phishing attempts and scams. Always double-check website URLs and use secure connections when connecting to exchanges or wallets. Never share your seed phrase or multifactor authentication (MFA) codes with anyone.

By following these guidelines and choosing the right combination of wallets for your needs, you can safely store your crypto and protect your investments.

What to do if your crypto investments are successful?

If your crypto investments are successful, there are a few things you can do to maximise your profits and minimise your risks. Here are some suggestions:

• Diversify your portfolio: While it's great to have a successful crypto investment, it's important not to put all your eggs in one basket. Diversifying your portfolio by investing in other assets such as stocks, bonds, or real estate can help reduce your risk and increase your potential for long-term gains.
• Take profits: If your crypto investment has grown significantly, consider taking some profits by selling a portion of your holdings. This way, you can lock in your gains and potentially reinvest them in other opportunities.
• Reinvest your profits: If you believe in the long-term potential of cryptocurrencies, you may consider reinvesting your profits into other crypto assets or back into the same asset to increase your overall position.
• Practice risk management: Successful investments can give a false sense of security. It is important to continue practising risk management techniques such as setting stop losses and taking profits at predetermined levels to protect your capital.
• Stay informed: The crypto market is highly volatile and subject to rapid changes. Stay informed about market trends, news, and developments that may impact your investments. This will help you make more informed decisions about buying, holding, or selling.
• Consider tax implications: Depending on your jurisdiction, you may be subject to taxes on your crypto gains. Consult with a tax professional to understand your tax obligations and plan accordingly.
• Secure your holdings: As your crypto investments grow in value, ensuring their security becomes even more critical. Consider using a combination of hot and cold wallets, enabling two-factor authentication, and regularly backing up your wallet data to protect your holdings from theft or loss.
• Review and rebalance: Periodically review your crypto investments and overall portfolio to ensure they align with your investment goals and risk tolerance. You may need to rebalance your portfolio by adjusting the allocation of your crypto investments relative to other assets.

How much crypto should you invest in?

The amount of money one should invest in crypto depends on a variety of factors, including their financial circumstances and risk tolerance.

Some financial experts recommend allocating only a small percentage of one's portfolio to crypto, citing its high risk and volatility. Others suggest investing a larger sum, but only if one is comfortable with the potential losses. It is generally agreed that one should not invest more than they can afford to lose.

• Invest 10% of your income into the top cryptocurrencies, especially Bitcoin.
• Invest 5% of your portfolio in crypto.
• Invest 1% of your portfolio in crypto, with the remaining 99% in stocks and other traditional investments.
• Invest somewhere between 5% to 30% of your investment capital in crypto.
• If you are retired or otherwise dependent on your portfolio, or simply cannot afford to take any risk, carefully evaluate whether an aggressive asset fits your needs.

It is important to note that the value of cryptocurrencies can fluctuate greatly, and past performance is not a guarantee of future returns. Before investing in crypto, individuals should consider doing their research and consulting with a qualified financial professional.

How risky is crypto?

Investing in crypto is risky for several reasons. Firstly, cryptocurrencies are highly volatile, with their value fluctuating dramatically and frequently. For example, if you had invested in 1 Bitcoin at the start of 2020, you would have experienced the following ups and downs: an increase to $63,577 (up 784%) on April 14, 2021; a decrease to $29,972 (down 53%) on July 21, 2021; another increase to $69,045 (up 130%) on November 10, 2021; and a decrease to $18,562 (down 73%) on November 9, 2022.

Secondly, cryptocurrencies are still a relatively new and largely unregulated financial ecosystem, which makes them more vulnerable to instability. For instance, China's crackdown on crypto-related activities in the summer of 2021 coincided with a drop in Bitcoin's price. The lack of regulation also means that crypto exchanges are not subject to the same security protocols as traditional financial institutions, making them a popular target for scammers.

Thirdly, cryptocurrency transactions are generally not editable or reversible. If you pay someone with crypto and things go wrong, there is typically no way to get your money back, unlike with credit and debit cards, which offer legal protections and allow you to dispute purchases.

Additionally, there is a risk of losing your crypto investment due to factors such as losing your private key, a hard drive crash, or a virus corrupting your wallet.

Lastly, the environmental impact of crypto mining has also come under scrutiny, with Bitcoin mining alone consuming a significant amount of electricity and contributing to carbon emissions.

Given these risks, it is recommended that investors exercise caution and consider a diversified portfolio with crypto playing a smaller and more speculative part.

Frequently asked questions