Cautionary Cryptocurrency: Diversification Is Key To Investment Strategy

Cryptocurrency is a digital currency that can be used to buy goods and services or traded for profit. Bitcoin is the most widely used cryptocurrency. Cryptocurrency investing is risky and volatile, but it has produced top returns for investors over time. If you invest all your money in crypto, your portfolio will be extremely volatile, which could be stressful. There are also tax consequences to buying and selling cryptocurrencies.

There are a few things to consider if you're thinking about investing all your money in one cryptocurrency. Firstly, crypto prices are extremely volatile, and the industry is filled with uncertainty. This means that while you could make a lot of money, you could also lose almost everything you invested very quickly. Secondly, there are tax implications to consider when buying and selling crypto. Thirdly, safely storing your crypto can be challenging, as exchanges are vulnerable to being hacked and there is a risk of losing access to your wallet if you forget your private key. Finally, there is no guarantee that the crypto project you invest in will succeed, as there is fierce competition among thousands of blockchain projects and many scams.

In conclusion, investing all your money in one cryptocurrency is a very risky proposition. It is generally recommended that high-risk investments make up a small part of your overall portfolio, and that you diversify your crypto holdings to insulate yourself from losses.

Crypto's high volatility

Cryptos High Volatility

If you invest all your money in crypto, your portfolio will be extremely volatile, which could be stressful. Crypto is highly volatile, and this volatility can be a lot to handle when it accounts for 100% of your portfolio. To illustrate this volatility, consider the ups and downs of Bitcoin (BTC) over a two-year period starting in 2020:

• April 14, 2021: $63,577 (up 784%)
• July 21, 2021: $29,972 (down 53%)
• Nov. 10, 2021: $69,045 (up 130%)
• Nov. 9, 2022: $18,562 (down 73%)

This volatility can be exciting when it's hypothetical or when crypto is only a small portion of your portfolio. However, when crypto makes up your entire portfolio, this volatility can be stressful and challenging to manage.

The high volatility of cryptocurrencies also makes it difficult to decide when to sell. Even if your crypto investments turn a profit, you'll face the difficult decision of whether to sell and take your profits or continue holding in hopes of further gains.

Additionally, the volatile nature of crypto means that you could lose practically everything you invested very quickly. As such, putting all your money into crypto is not recommended due to the high risk involved. A more prudent approach is to allocate a smaller portion of your portfolio, such as 5% to 10%, to crypto if you believe in its potential.

Safe storage options

There are several options for storing your cryptocurrency safely. The first step is to get a wallet. A crypto wallet is a device or program that keeps your crypto assets, private keys, and various wallet addresses (public keys) all in the same place.

There are two main types of wallets: hot and cold. A hot wallet is connected to the internet and can be accessed at any time. Examples include online cloud wallets, mobile and software wallets, and exchanges. A cold wallet is not connected to the internet and allows you to store your funds offline. While you can receive funds at any time, you cannot transfer them out until the wallet is connected to the internet. Examples include hardware wallets, paper wallets, and USBs.

Most cryptocurrency holders use both hot and cold wallets. Hot wallets are useful for frequent trading, while cold wallets are better for long-term storage.

• Paper wallet: Paper wallets are a form of cold storage. They are a simple and effective way to secure your cryptocurrency by physically printing the public and private keys on paper. Paper wallets are inexpensive to create and eliminate the risk of online hacking. However, they are susceptible to physical damage or loss, and they are not user-friendly for beginners.
• Hardware wallet: Hardware wallets are physical devices designed to store cryptocurrency offline, away from online vulnerabilities. They are considered the gold standard for protecting large amounts of cryptocurrencies over an extended period. While they can be expensive, they offer superior security against online theft. Hardware wallets are also portable and easy to use. However, they are less convenient for quick transactions.
• Mobile wallet: A mobile wallet is a hot wallet held on your smartphone, usually self-custodial. They are great for sending or paying with crypto and are quick and easy to use. However, they can be less secure than cold wallets and are not recommended for storing large balances.
• Desktop wallet: A desktop wallet is a program that resides on your computer. It is not the safest storage method as it is connected to the internet and vulnerable to hacks.
• Web-based wallet: A web-based wallet is hosted by a web service and is another example of a hot wallet. It is not secure as you are letting a third party store your keys, which are susceptible to hacking.

In addition to hot and cold wallets, there are also custodial and non-custodial wallets. A custodial wallet is managed by a third party, such as an exchange, which stores your private keys for you. A non-custodial wallet, on the other hand, gives you full ownership of your keys.

When choosing a storage option, consider factors such as the amount of cryptocurrency you hold, how long you plan to hold it, security, technical expertise, liquidity, supported cryptocurrencies, and customer service.

Crypto's riskiness

Cryptos Riskiness

Cryptocurrency is a risky investment. Its prices tend to fluctuate rapidly, and while some people have made money by buying at the right time, many others have lost money by investing just before a crypto crash.

Volatility

Cryptocurrency is extremely volatile. For example, if you had invested in one Bitcoin at the start of 2020, it would have cost you $7,195. The value of one Bitcoin then experienced the following ups and downs:

• April 14, 2021: $63,577 (up 784%)
• July 21, 2021: $29,972 (down 53%)
• Nov 10, 2021: $69,045 (up 130%)
• Nov 9, 2022: $18,562 (down 73%)

Security

Cryptocurrency exchanges are vulnerable to being hacked and becoming targets of other criminal activity. Security breaches have led to sizable losses for investors who have had their digital currencies stolen.

Storage

Safely storing cryptocurrencies is difficult. Cryptocurrency exchanges make it easy to buy and sell crypto assets, but many people don't like to keep their digital assets on exchanges as they don't have full control over their assets. An exchange could freeze your assets based on a government request, or the exchange could go bankrupt and you might not be able to recover your money.

Some cryptocurrency owners prefer offline cold storage options, such as hardware wallets, but there is a risk of losing your private key; without it, you can't access your cryptocurrency.

Regulation

Regulators may crack down on the crypto industry, especially if governments view cryptocurrencies as a threat. For example, the Securities and Exchange Commission (SEC) has filed enforcement lawsuits against many players in the cryptocurrency sector.

Competition

There is fierce competition among thousands of blockchain projects, and many projects are scams. Only a small percentage of cryptocurrency projects will ultimately flourish.

Adoption

It may take a while for cryptocurrencies to fulfill their original mission as units of exchange. More businesses would have to enable crypto as a payment method, and even then, investors may be more inclined to hold onto an asset that has outpaced the S&P 500 and Nasdaq 100 over the past five years.

Technology

Much of the technology behind cryptocurrency is still being developed and is not yet extensively proven in real-world scenarios. For example, many sector watchers worry that quantum computing could mature into an effective encryption-cracking tool.

Crypto ETFs

Investing all your money in one cryptocurrency is not recommended. Cryptocurrencies are highly volatile, and putting all your money into one is far too risky.

If you are interested in investing in cryptocurrencies, you may want to consider investing in a cryptocurrency ETF (exchange-traded fund). These provide exposure to spot cryptocurrencies, cryptocurrency futures contracts, and companies focused on servicing the cryptocurrency market.

Benefits of Crypto ETFs:

• Regulation and Consumer Protection: Crypto ETFs are traded on established, regulated exchanges, which means they offer more consumer protection than direct investments in cryptocurrencies.
• Diversification: Crypto ETFs can provide exposure to a range of cryptocurrencies and related companies, which can help to diversify your portfolio and reduce risk.
• Convenience: ETFs are traded on exchanges, so you don't need to worry about safe storage of your crypto assets.
• Access to Conventional Investment Accounts: With Crypto ETFs, you can usually recover access to your account if your credentials are misplaced, which is not the case with direct crypto investments.

Risks of Crypto ETFs:

• High Expenses: Crypto ETFs can come with high fees, which can eat into your profits.
• Leverage Risk: Crypto futures are leveraged products, which means you could lose more than your initial investment.
• Volatility: Like direct crypto investments, the value of Crypto ETFs can be highly volatile, and you could lose money.

Examples of Crypto ETFs:

• ARK 21Shares Bitcoin ETF
• Fidelity Wise Origin Bitcoin Fund
• Grayscale Bitcoin Mini Trust
• Bitwise's Bitcoin ETF
• Franklin Templeton Digital Holdings Trust
• Schwab Crypto Thematic ETF

In conclusion, while investing in Crypto ETFs can be a safer way to gain exposure to the cryptocurrency market than investing directly, it is still a risky and volatile investment. It is generally recommended that you only allocate a small portion of your portfolio to crypto investments.

Crypto staking

While investing all your money in one cryptocurrency can be tempting, it is not recommended due to the high volatility of the crypto market. As an alternative, you could consider crypto staking as a way to generate passive income and diversify your crypto portfolio.

There are two main types of staking: active and passive. Active staking involves locking your tokens to a network to actively participate, validate transactions, and create new blocks, which can earn higher rewards. Passive staking simply involves locking your tokens to a network to help keep it secure and efficient, requiring less time but yielding lower rewards.

Some common staking options include delegated staking, where you delegate your staking power to a validator node; pool staking, where a group of coin holders combines resources; exchange staking, where an exchange handles the staking process; and liquid staking, where you receive representative tokens that can be traded or used.

Staking has several advantages, including the ability to earn passive income, the potential for rewards to increase in value, and the contribution to blockchain security and efficiency. However, there are also risks, such as limited liquidity during the staking period, the possibility of losing value due to price volatility, and the risk of your cryptocurrency being "slashed" (partially confiscated) for violating network protocols.

Before staking, it is important to research the specific requirements and rules of each project, understand the associated risks, and be aware of the lockup period to ensure you can access your funds if needed.

Frequently asked questions