A Beginner's Guide To Cryptocurrency Investment: How Much To Invest?

Cryptocurrency is a hot topic in investment circles, with its popularity increasing significantly in recent years. It is a digital currency that operates outside the regulation of any individual company or government. While it can be a risky investment, some people view it as a legitimate option for inclusion in an investor's portfolio. The most significant advantage is the potential for high returns. However, cryptocurrencies often experience dramatic price swings, and investors need to be able to stomach these price swings. So, how much should a beginner invest in cryptocurrency? Some experts recommend investing no more than 1% to 5% of your net worth, while others suggest not investing more than you can afford to lose. At Stash, we recommend holding no more than 2% of your overall portfolio in any one crypto to limit crypto-specific risks.

Understand what you're investing in

As with any investment, it's important to understand exactly what you're investing in. Before you buy stocks, for example, it's standard practice to read the annual report and other SEC filings to analyse the companies thoroughly. The same level of scrutiny should be applied when investing in cryptocurrency.

There are thousands of cryptocurrencies, and they all function differently. New ones are being created every day, so it's important to understand the investment case for each trade.

Cryptocurrencies are not like stocks, where a company can grow its profits and drive returns for investors. Many are not backed by hard assets or the cash flow of an underlying entity. Bitcoin, for instance, relies exclusively on someone paying more for the asset than the previous buyer paid for it. In other words, the market must become more optimistic and bullish for you to profit.

Some of the most popular coins include Ethereum, Dogecoin, Cardano, Solana, Binance Coin, and Tether. Before investing, understand the potential upside and downside. If your financial investment is not backed by an asset or cash flow, it could end up being worth nothing.

Each cryptocurrency has its own investment thesis, consensus mechanism, and use cases. It's important to understand the unique investment proposition of each cryptocurrency before you get involved.

Vetting cryptocurrencies

Cryptocurrencies have become a popular vehicle for fraud, such as pump-and-dump schemes. It's critical to analyse the investment risk of a given cryptocurrency and be wary of social media promotions. Although you may minimise your exposure to fraud by investing through a large, reputable platform, it's impossible to eliminate this risk completely.

Stablecoins

Stablecoins are cryptocurrencies whose value is usually pegged to another store of value, most often a government-issued currency like the US dollar in the case of Tether (USDT). In theory, the stablecoin will have a method of maintaining its value equivalent to its peg. In the case of Tether, the token's value is maintained by reserves of US dollars equivalent to USDT's total value.

Stablecoins are expected to exhibit greater stability than other cryptocurrencies, making them a preferred choice among investors concerned about the volatility of digital assets.

Don't fixate on past performance

When it comes to investing in cryptocurrency, it's important to remember that past performance does not guarantee future results. Here are some reasons why you shouldn't fixate on past performance when considering investing in cryptocurrency:

• Survivor Bias: It's easy to look at the success stories of people who dropped out of college and became industry titans, like Gates, Jobs, and Zuckerberg. However, for every successful college dropout, there are thousands who didn't go on to start a trillion-dollar company. Focusing solely on the winners can distort our ability to calculate the odds of success and ignore the many failures.
• Correlation vs. Causation: Just because two things are correlated does not mean that one caused the other. For example, many successful founders may have previously exited startups, but that doesn't necessarily mean their past success is the sole reason for their current success. There are likely other factors at play, such as experience, connections, and skill.
• Unpredictable Market: The cryptocurrency market is highly volatile and unpredictable. Just because a cryptocurrency had a good performance in the past doesn't mean it will continue to do so in the future. Many factors can influence the market, such as regulatory changes, security breaches, and liquidity issues.
• Individual Circumstances: Everyone's financial situation is unique. What worked for someone else may not work for you. It's important to consider your risk tolerance, investment goals, and financial circumstances when deciding whether to invest in cryptocurrency.
• Technological Changes: Cryptocurrency is based on blockchain technology, which is constantly evolving. A cryptocurrency that performed well in the past may not be able to adapt to new technological advancements, causing its performance to suffer.
• Regulatory Changes: The legal status of cryptocurrency is still evolving, and regulations can vary by country. Changes in government regulations or tax policies can significantly impact the value and accessibility of cryptocurrencies.
• Diversification: It's generally recommended that high-risk investments like cryptocurrency make up a small portion of your overall portfolio. Diversifying your investments can help mitigate the risk of fixating on a single asset's past performance.

Be wary of volatility

Volatility is one of the most significant risks of investing in cryptocurrencies. The price of cryptocurrencies can fluctuate dramatically in a short period, and these price swings can be challenging to predict. For example, the value of most cryptocurrencies fell sharply in 2022 after strong gains in 2021, only to rise again in 2024.

This volatility can be challenging for new investors to navigate. It can be difficult to make rational investment decisions when prices are fluctuating wildly, and it is easy to make emotional decisions that may not be in your best interest. For example, you may be tempted to buy when prices are rising out of fear of missing out or sell when prices are falling to cut your losses.

Additionally, volatility can be exploited by sophisticated investors to their advantage, which can put newer investors at a disadvantage. These investors may have the skills and tools to execute trades rapidly and profit from short-term price movements, while newer investors may struggle to keep up and end up losing money.

Therefore, it is crucial to understand the risks associated with investing in cryptocurrencies and to carefully consider your risk tolerance before investing. It is generally recommended that you only invest what you can afford to lose and that you take a long-term perspective when investing in volatile assets like cryptocurrencies.

To manage risk, you can consider implementing strategies such as setting stop-loss orders or diversifying your investments across multiple cryptocurrencies. It is also important to do your research and understand the unique characteristics and risks of each cryptocurrency before investing.

Only invest what you can afford to lose

Investing in cryptocurrency is risky, and it's important to only invest what you can afford to lose. This is because cryptocurrencies are extremely volatile and can gain or lose significant value in a single day.

For example, the recent crash of the Luna stablecoin saw its price drop by more than 99% due to technical anomalies. Similarly, the world's largest cryptocurrency, Bitcoin, has experienced tremendous boom-and-bust cycles. It was worth pennies when it debuted and is now valued at over $60,000 per coin as of May 2024. However, it's unclear if the growth will continue, and investors need to look to the future rather than the past.

Cryptocurrencies are also prone to scams and fraud. Fake identities, apps, crypto wallets, and emails are all designed to lure victims into giving out their private keys. Additionally, if a crypto exchange holds your assets, there's a risk of losing all your capital.

Therefore, it's crucial to design a risk tolerance plan and only invest what you can afford to lose. This means investing a small portion of your earnings and ensuring that even if you lose all your money, your financial stability isn't jeopardized. It's also essential to diversify your investments across different coins and exchanges to reduce the overall risk profile.

• Be prepared to wait for returns: Investing is not like gambling, where you place bets and instantly see results. It's a long-term game, and you need to be prepared to wait for profits. Most good investments will show returns over time.
• Make informed decisions: Always be aware of what you're investing in. Ask yourself if you believe in the company, if the stock is overvalued or undervalued, and if you can expect the value of your investment to increase.
• Diversify your portfolio: Don't put all your eggs in one basket. By investing in multiple stocks or funds, you can further mitigate the risks.
• Have a long-term mindset: Investing is about playing the long game. Don't get carried away and put all your liquid assets into investments hoping for quick returns. Be patient and focus on sound long-term investments.
• Do your research: Understand the technology behind cryptocurrencies and the potential risks and rewards. Stay up-to-date with new technological developments, regulatory changes, and legal cases related to crypto.

In summary, investing in cryptocurrency is risky, and it's crucial to only invest what you can afford to lose. This means doing your research, diversifying your portfolio, and being prepared to wait for returns. By following these tips, you can help reduce the risk of significant financial loss.

Take a long-term perspective

When investing in highly volatile assets, it's easy to make the mistake of letting emotions drive your decisions, such as buying when the price is rising for fear of missing out, or selling when prices go down. These emotional decisions are usually not good for your investments.

When you invest, it's critically important to take a long-term perspective. This is especially true for things like cryptocurrencies, which can quickly go up or down in value.

Some experts recommend investing no more than 1% to 5% of your net worth in crypto. At Stash, we recommend holding no more than 2% of your overall portfolio in any one crypto in order to limit crypto-specific risks.

With that in mind, diversification within crypto is another aspect to consider. The specific cryptocurrencies you choose to invest in matter as some coins have better long-term potential and are less likely to be manipulated in price.

While the entire cryptocurrency market tends to be very unpredictable and volatile, there may be less risk with the bigger, more commonly traded cryptocurrencies compared to the smaller-cap, more speculative cryptocurrencies. However, even the biggest and most well-known cryptocurrencies can have big price swings up and down. So, it's a good idea to think about the variety of cryptocurrencies you have in your portfolio, as well as the total amount you invest in them.

Frequently asked questions