Getting Started With Crypto: How Much Do You Need?

Cryptocurrency investing is often seen as a rich person's hobby, with a high barrier to entry. However, this is not necessarily the case, and it is possible to start investing in cryptocurrency with a small amount of money. For example, Erik Finman started investing in cryptocurrency at age 12 with only $1,000, and by age 18, he had a net worth of $3.4 million. While it is important to consider factors such as risk tolerance, profit tolerance, and market timing when investing in cryptocurrency, it is also crucial to remember that there is no minimum amount of Bitcoin or other cryptocurrency that needs to be purchased. The only minimum is the one set by the platform, which can be as low as a few dollars. However, it is worth noting that investing in cryptocurrency is complex and challenging for newcomers, and there is a significant learning curve involved.

Risk tolerance

The crypto market is known for its high volatility, with extreme price fluctuations. For example, in 2017, the total market capitalization of cryptocurrencies surged by almost 4,500%, only to crash and lose 80% of its value in 2018. Such volatility makes it essential for investors to understand their risk tolerance before entering the crypto market.

When considering investing in cryptocurrencies, ask yourself how much money you are comfortable losing entirely. If the thought of losing your full investment keeps you up at night or causes severe emotional distress, you should reconsider the amount you plan to invest. It's important to keep your investments at a level where they don't affect your judgment and lead to impulsive decisions like panic selling.

Additionally, your risk tolerance should align with your investment goals and time horizon. If you're saving for a short-term goal, such as a house or a car, investing in volatile assets like cryptocurrencies might not be suitable. On the other hand, if you're investing for the long term, you may have a higher risk tolerance as you can weather the short-term fluctuations.

It's worth noting that even within the crypto space, different assets have varying levels of volatility. Bitcoin, for example, is considered a relatively safer investment than many other cryptocurrencies due to its wider adoption and higher market capitalisation.

Experts in the field, like Mike Novogratz and Tim Enneking, suggest that a small allocation of 1% to 2% of an investment portfolio in cryptocurrencies is reasonable for everyday investors, with a threshold of 5% to 10% for enthusiasts. These recommendations highlight the perceived risks associated with crypto investing and the potential impact on an investor's overall financial position.

Profit tolerance

When it comes to investing in cryptocurrency, it's important to consider your profit tolerance alongside your risk tolerance. While risk tolerance refers to how much you are willing to lose, profit tolerance is about how you will respond to gains.

The cryptocurrency market is highly volatile, and prices can soar or plummet in a short span. For example, in 2017, the total market capitalization of cryptocurrencies increased by almost 4,500%, only to lose 80% of its value in the following year.

Some investors might become overly greedy during a market boom and hold on to their investments for too long, hoping to make even more money. This can lead to significant losses when the market inevitably corrects itself.

Therefore, it is crucial to assess your profit tolerance before investing in cryptocurrencies. Ask yourself how you would react if your investment increased 20 times its initial value within a year. Would you make impulsive decisions, such as renting a bigger apartment or buying an expensive car? Or would you remain level-headed and stick to your investment strategy?

A good investor should be emotionally detached from their investments, whether the market is performing well or poorly. This will help you make rational decisions and avoid costly mistakes.

It's also important to remember that investing in cryptocurrencies is just one part of a diverse investment portfolio. Even if you have a high-profit tolerance, it's wise to allocate only a small portion of your capital to cryptocurrencies and invest the rest in more stable assets like stocks, bonds, or real estate.

By understanding your profit tolerance and keeping a diversified portfolio, you can make more informed investment decisions and improve your chances of long-term financial success.

Free capital problem

The free capital problem is a significant consideration when thinking about investing in cryptocurrency. Simply put, you need to have disposable income to invest. While you can purchase fractions of a single coin, you still need to have the money to spare in the first place.

If you are living paycheck to paycheck or are struggling financially, saving enough to invest in cryptocurrency may be challenging. There are several ways to address this problem. You could consider taking on a second job or a side hustle to boost your income. Alternatively, you could reduce your expenses by moving to a cheaper location or cutting back on non-essential costs. Even taking advantage of online discounts can help you save enough to start investing.

It's important to remember that investing in cryptocurrency is risky and there are no guarantees of returns. As such, you should only invest what you can afford to lose. For example, Erik Finman, a 19-year-old bitcoin millionaire, recommends investing 10% of your income in cryptocurrencies, while others suggest a range of 5% to 30% of your investment capital.

Additionally, it's worth noting that you don't need a large sum of money to start investing in cryptocurrency. Some exchanges allow you to buy fractions of a coin, with initial investments as low as $25 or even less. However, it's important to consider the fees associated with buying, selling, and transferring cryptocurrencies, which can quickly eat into small investments.

Before investing in cryptocurrency, it's crucial to understand your risk tolerance and investment strategy. It's also recommended to diversify your portfolio and not put all your eggs in the cryptocurrency basket.

Portfolio balance problem

Even if you have the money to invest in cryptocurrency, it doesn't necessarily mean you should. Cryptocurrency is a highly volatile and uncertain investment option. It is prone to large and fast swings in value, which can result in significant gains or losses. There is also a high risk of "pump-and-dump" schemes, where predatory investors convince amateurs to pour money into Bitcoin, causing a surge in prices, and then sell all their holdings before the buying surge ends, leading to a collapse in prices.

Additionally, cryptocurrency is not backed by any physical assets or a central regulator, and its value is entirely dependent on market demand. This makes it a risky investment, and you could lose money if you're not careful. Therefore, it is crucial to consider your risk tolerance and investment strategy before investing in cryptocurrency.

If you're interested in protecting your investment and maximising your long-term gains, it is recommended to diversify your investment portfolio. Allocate only a small portion of your funds to high-risk investments like cryptocurrency and focus more on low- and medium-risk investments. For example, your primary investments should be in low-risk options like government bonds or index funds, followed by medium-risk investments such as real estate or corporate stocks.

High-risk investments like cryptocurrency should be a minor part of your portfolio. This way, you can still benefit from the potential gains of cryptocurrency without putting your entire investment at risk. It's important to remember that even with careful planning, there are no guarantees in the volatile world of cryptocurrency.

Investment time horizons

An investment time horizon is the period of time an investor expects to hold a particular security or investment. This can range from a few days or hours to several decades. Time horizons are largely dictated by investment goals and strategies, and they are important because they determine the types of investment products that are most suitable for the investor's goals.

For example, saving for a down payment on a house over two years would be considered a short-term time horizon, while saving for college or a first home would be a medium-term time horizon (3-10 years). Investing for retirement is typically a long-term time horizon (10+ years).

The longer the time horizon, the more aggressive or riskier an investor can be in their portfolio choices. For instance, with a long-term time horizon, an investor can afford to take on more risk in exchange for greater potential rewards. On the other hand, shorter-term investments are more suitable for investors who are approaching retirement or who need access to their money in the near future, so they tend to favour more conservative or less risky investments.

When it comes to cryptocurrency investing, a longer time horizon generally leads to a greater propensity to own crypto. This is because cryptocurrency is considered a speculative or non-productive asset, and investors with longer time horizons tend to favour productive assets that can generate compounding gains over time. However, it's important to note that cryptocurrency investing is complex and volatile, and there are significant risks involved. Therefore, investors should carefully consider their investment goals, risk tolerance, and financial situation before deciding how much to invest and for how long.

Frequently asked questions