How much should you invest in cryptocurrencies? 7 factors to consider

If you follow financial news, it may seem like every day you hear a story about a self-made crypto millionaire. However, smart investors know that the reality is a little more complicated. The cryptocurrency market offers great rewards, but it also comes with high risks. To succeed, you need to do your research and make smart choices. In this guide, we’ll cover one of the most basic questions you need to decide before jumping into the world of cryptocurrency: how much to invest in cryptocurrency.

Main conclusions:

• Cryptocurrency is a new asset class that is a digital currency stored in a decentralized cryptographic system. Most types of cryptocurrency tokens rise and fall in price depending on market demand.
• Understanding how much to invest in cryptocurrency can be even more important than deciding which coins you want to purchase.
• When deciding how much to invest in cryptocurrency, factors such as acceptable risk, acceptable return, diversification and investment time frame should be considered.

What is a crypto currency?

Cryptocurrency is a type of digital asset stored in a decentralized cryptographic system. Most types of cryptocurrency tokens rise and fall in price depending on market demand, making them a popular investment.

How much should you invest in cryptocurrency?

Determining how much to invest in cryptocurrencies can be even more important than choosing the specific coins you want to purchase. The amount of investment in cryptocurrency not only affects other financial indicators, but also determines what strategies you can afford to use.

The simple answer to the question of how much to invest in cryptocurrency depends on your wealth. A person with a million-dollar fortune can easily risk much more than, for example, a college student without any savings. According to traditional investment recommendations financial expert Douglas Feldman, you should not invest more than 1%-5% of your total net assets in cryptocurrency. However, some cryptocurrency enthusiasts, such as Erik Finman, count them. It is reasonable to invest up to 10% of your income in cryptocurrency.

Factors to consider when deciding how much to invest in cryptocurrency

Recommendations regarding how much to invest in cryptocurrencies vary widely. To find the right investment amount for your specific situation, you need to stop and consider the following important factors.

Tolerable risk

One of the most important factors when determining how much to invest in cryptocurrency is the level of risk you are willing to take, or your risk appetite. If you have a high risk tolerance, you can invest more. Risk tolerance is partly a matter of personal preference. Some people are naturally cautious, while others are more comfortable taking risks. However, age is also a factor to consider. A high risk tolerance may work well when you are younger, as the gradual gains in the market over the years will help balance out losses. However, if you are older and approaching retirement, a lower risk tolerance may be appropriate.

Acceptable Profit

When planning to invest in cryptocurrencies, you should consider both the best and worst case scenarios. Ask yourself: What would happen if my crypto assets suddenly skyrocketed in value and I made thousands of dollars overnight? If you are the type of person who is willing to invest more money or hold onto cryptocurrency until the bubble bursts, then you may want to reduce the percentage of your funds invested in cryptocurrency. The flashy returns associated with cryptocurrencies can lead to overly emotional decisions, which can create problems for some types of crypto investors.

Potential risks are diversified

Since in cryptocurrency there is big variety, the types of coins you own make a big difference. Not all types of cryptocurrencies have the same level of risk. If you intend to create a risky investment portfolio that contains nothing but meme coins, then you probably shouldn’t take all of your assets and put them into cryptocurrency. However, if you’re looking to invest in a wide range of reliable coins, especially blue-chip cryptocurrencies, then allocating the majority of your assets to cryptocurrency is a smart choice.

Investment period

In the crypto world, things change quickly, so the same advice doesn’t always work in every situation. Every time you’re considering investing in cryptocurrencies, you need to research the state of the cryptocurrency market. In a crypto bull market, prices are consistently high, so it might be worth investing less. Whereas in a crypto bear market, prices are low, and you can often make big profits by investing more in crypto investing.

Liquidity

Liquidity refers to the amount of easily accessible funds you have. Cryptocurrency markets are fairly liquid, as you can withdraw your funds at any time. However, since cryptocurrencies are a volatile asset class, attempting to withdraw funds during a bear market could result in significant losses. Before investing large amounts in cryptocurrency investing, consider when you will need liquid funds. For example, if you need a large lump sum soon to put towards a home deposit or other large purchase, you should invest less money in cryptocurrency.

Personal budget

It is worth remembering that many recommendations to invest 1% to 10% of your funds in cryptocurrencies are based on income. However, the reality is that different people have different budgets. Some of them need almost all their income for food and housing, so taking all the money and investing it in cryptocurrency is unwise. However, those who have more funds available after meeting other budgetary needs may want to invest in cryptocurrencies more frequently.

Research level

The cryptocurrency market as a whole follows certain trends, but investing in cryptocurrencies is always better if you really understand the projects before investing. Putting a significant portion of your funds into obscure cryptocurrencies that you know nothing about is a bad decision. Informed investors only invest heavily in specific cryptocurrencies if they take the time to research the project, understand its real-world utility, study its price history, and see how well it is performing on cryptocurrency exchanges.

What is the allocation of funds in a balanced crypto portfolio?

Once you have determined how much money you want to invest in cryptocurrencies in general, you need to think about how much money to invest in each specific cryptocurrency. It is important to have a diversified portfolio so that one coin that has problems does not ruin your entire crypto investment portfolio. There are many different ways to invest in cryptocurrencies.

The simplest investment advice offered Techopedia, is to simply invest 60% of your money in Bitcoin and 40% in Ethereum. This is a completely viable option if you don't know anything about crypto assets but still want to invest in cryptocurrency. However, if you're willing to study individual coins and pick favorites, try this asset allocation:

60% in well-established, non-volatile cryptocurrencies such as Bitcoin and Ethereum
20% in popular cryptocurrencies with market capitalization from $1 billion to $10 billion.

10% into new, trendy cryptocurrencies with a market capitalization of less than $1 billion.

5% - in stablecoins, the value of which is based on stable assets

5% in non-flammable tokens (NFTs) such as Bored Ape Yacht Club or CryptoPunks

How risky are cryptocurrencies?

Compared to some other investments, such as bonds, cryptocurrencies are considered risky. A survey of people who invest in cryptocurrencies found that 38% of investors lose money on cryptocurrencies, 13% break even and 28% make a profit. The remaining 21% continue to hold onto their crypto investments.

Investing in cryptocurrencies is often considered risky due to significant price volatility in the market. There are countless examples of people investing in cryptocurrencies jumping on trends and losing their money when cryptocurrency exchange prices drop. One professor's story illustrates this danger: He became interested in cryptocurrencies during the pandemic and quickly became hooked after seeing the value of his portfolio rise. He invested $50 thousand in cryptocurrency and eventually formed an impressive portfolio worth $300 thousand. After the collapse, only $5 thousand remained in his account.

Additionally, cryptocurrency markets are still not fully understood by the public and are less regulated than traditional investments, making it easier for criminals to take advantage of naive investors. For example, crypto lending company Celsius promised to hold clients' assets, but when the company went bankrupt, many users found that the company refused to return their deposits. A similar problem arose during the collapse of FTX, when investors could no longer withdraw funds from their accounts.

Is cryptocurrency a good investment?

Despite the risk, cryptocurrencies occupy an excellent niche in the financial world. Investing in cryptocurrencies allows you to diversify your portfolio and protect yourself from stock market crashes and other problems associated with traditional investments. Deciding to invest in cryptocurrency is also a viable option if you want to deal with riskier investments. Even novice traders can benefit from placing a small portion of their investment funds in reliable cryptocurrencies.

Additionally, cryptocurrency allows people with technical knowledge to make highly informed decisions. Finding your niche is always a useful investment strategy. Those who do not follow manufacturers and foreign exchange rates can find a specialization for themselves by choosing to invest in cryptocurrency. If you enjoy learning about the latest tech news and following internet memes, investing in cryptocurrency can be a great way to turn your knowledge into profit.

However, while cryptocurrency investments often turn out to be successful, some caution should still be exercised when dealing with cryptocurrency exchanges. If you want to invest in cryptocurrency, you should follow the classic rule: “Only invest money you can afford to lose.” Those who borrow money to buy puts or put their entire retirement account into cryptocurrency could end up losing everything if the market turns for the worse. As with any other volatile asset class, cryptocurrencies need to be approached with a certain amount of common sense.

Сonclusion

Deciding how much money to invest in cryptocurrencies is an important part of your investment strategy. By considering factors such as risk tolerance and liquidity, you can create an investment portfolio that meets your unique needs. If you invest the required amount in cryptocurrency, you will have the opportunity to make impressive profits without risking all your savings.