How to Invest in Cryptocurrency Without Losing Everything
Art by Jonan Everett
Buying bitcoin has reportedly made thousands of people around the world millionaires. Yet it’s a high-risk, high-yield investment, and the outcome of competition between different cryptocurrencies (or digital currencies), such as bitcoin and ethereum, is still unfolding.
“The rate of return for digital currencies, especially in 2017, has far exceeded anything a brokerage or banking product can produce in a short period of time,” says Evander Smart, the founder of Bitcoin University in Miami.
Investing in Cryptocurrency
Bitcoin and ethereum are digital currencies that were originally created as alternatives to traditional payment methods when buying and selling online. But because they mask the identity of the person buying and selling goods online, bitcoin in particular is increasingly being used as an investment.
According to Smart, millennials have a level of comfort in cryptocurrencies’ network design because they operate much like the web.
“There are many clear advantages to buying bitcoin or other digital currencies that a younger investor may see that a more mature investor may ignore or not pick up on,” Smart says.
Although the risks are high, millennials are increasingly willing to throw caution to the wind, according to a Swell Investing study. “Millennials are used to immediate gratification, and patience isn’t all that important when you have everything you need at your fingertips,” says Eric Roberge, a certified financial planner in Boston.
“Why wouldn’t they jump at something that is new, innovative, and seemingly enriching people around them?”
Some 12 percent of millennials would put a $5,000 investment into cryptocurrency over any other type of investment. That may be because young investors have time on their side.
Mitigating the Risk
“It’s often said that young people shouldn’t worry about making mistakes, but the problem is that critical mistakes can greatly affect their future opportunities,” says Lucas Casarez, a certified financial planner in Fort Collins, Colorado.
Experts say that millennials should implement stopgap measures before following the bitcoin road. “Like investing in any particular equity, it’s best not to invest your entire portfolio into bitcoin or any other digital currency,” Smart says. “Until you are comfortable with the digital currency space, I would recommend limiting your investment to 10 to 20 percent of your portfolio at the most.”
That’s because investing in stocks provides millennials with ownership in real companies and a share of any future profits, while buying cryptocurrency is merely an endorsement of an electronic medium of exchange.
CoinMarketCap tracks more than 1,450 cryptocurrencies. As a result, Morgen B. Rochard, a certified financial planner in New York City, advises investing only one to five percent of net worth, depending on your risk tolerance.
“This is a buy-and-hold investment, not something to trade around,” Rochard says. “We talk a lot about being choosy about which crypto-investments to get involved in. There are a lot of scams out there, and I want to make sure my clients avoid them.”
Learning How to Invest in Cryptocurrency
One way to learn is by watching videos about cryptocurrency on YouTube. You can also read about it on sites such as Bitcoin University.
“Bitcoin is the biggest financial bubble I have ever seen,” says Robert Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania. “The danger is that millennials who commit funds to bitcoin and other cryptocurrencies may lose all or a significant part of their investment and eschew investing altogether.”
When millennials ask about investing in cryptocurrency, Mike Zeiter, a financial planner in Carthage, Missouri, starts by identifying the amount of money they are willing and able to lose.
“The key is determining the amount of money that won’t ruin their goals if they were to lose it all,” Zeiter says. “Once we identify that amount, I advise them to buy these cryptocurrencies in increments. Start with 50 percent of the designated amount, then add more if the price goes down, until they reach their limit.”