Should You Hold Cryptocurrency in Your Portfolio?
“I don’t think we fully understand the impact that crypto has had” — Mark Cuban
5 min read
Should You Hold Cryptocurrency in Your Portfolio?
“I don’t think we fully understand the impact that crypto has had” — Mark Cuban
5 min read
Cryptocurrencies like Bitcoin and Ethereum have surged in popularity in recent years, sparking a debate among investors about their role in a well-rounded portfolio. This article explores the pros and cons of including cryptocurrencies in your investment mix, helping you make an informed decision. So, join us as we embark on a comprehensive journey through the enigmatic world of cryptocurrencies. We’ll examine the driving forces behind their ascent, dissect the intricacies of blockchain technology, and delve into the considerations that every investor must weigh when contemplating a crypto-infused portfolio.
The Crypto Phenomenon
In recent years, cryptocurrencies have transcended their niche origins to become a focal point of global financial discussions. Bitcoin, the pioneer of the crypto realm, ignited a digital revolution, transforming the way we perceive and interact with money. Yet, alongside its rise, the crypto space has witnessed unprecedented turbulence, making it essential for investors to tread cautiously.
Whilst the allure of striking it rich in the volatile crypto markets is present for some, the path to success is fraught with pitfalls.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual form of currency that relies on encryption techniques for secure transactions and the creation of additional units. Unlike traditional currencies issued by governments (such as the US dollar or the Euro), cryptocurrencies are decentralised and typically operate on technology called blockchain.
Some popular cryptocurrencies include: Bitcoin (BTC), Ethereum (ETH), Cardano (ADA), Polkadot (DOT) and Dogecoin (DOGE).
Okay, So What is Blockchain?
At its core, blockchain is a decentralised and distributed ledger system that fundamentally changes how information is recorded, stored, and verified. Unlike traditional centralised databases, which rely on a single authority for control, blockchain operates on a network of computers, or nodes, that work together to maintain a shared and continuously updated record of transactions and data.
One of the central features of blockchain is its decentralised nature. Instead of a single entity governing the database, multiple participants in the network validate and record transactions. Each participant, or node, holds a copy of the entire blockchain, ensuring transparency and redundancy. This decentralisation is a key factor in blockchain’s security and resilience against tampering or data loss.
In addition to decentralisation, blockchain ensures security through advanced cryptographic techniques. Transactions on the blockchain are securely encrypted, making it extremely difficult for unauthorised parties to alter or access the data. Each transaction is grouped into a “block” and linked to the previous block in a chronological chain, creating a secure and immutable ledger. Once data is added to the blockchain, it becomes nearly impossible to change, enhancing trust and reliability.
What Are The Benefits of Investing in Cryptrocurrency?
Whilst it’s essential to recognise that the cryptocurrency market is highly volatile and speculative, investing in cryptocurrency has gained popularity due to several potential benefits. Here are some of them:
Potential for High Returns: Cryptocurrencies have the potential for substantial price appreciation over a short period. Historically, some early investors in cryptocurrencies like Bitcoin have experienced significant gains.
Diversification: Cryptocurrencies offer a new asset class for diversifying investment portfolios. They may not be correlated with traditional financial markets, providing a hedge against market volatility.
Accessibility: Cryptocurrency markets are open 24/7, allowing investors to trade at their convenience. This accessibility can be particularly appealing to those who prefer trading outside traditional market hours.
Decentralisation: Cryptocurrencies operate on decentralised blockchain technology, reducing the control of central authorities like governments and banks. This appeals to those who value financial independence and privacy.
Security: The blockchain technology underlying cryptocurrencies is designed to be secure and resistant to fraud. Transactions are recorded in a tamper-resistant ledger, enhancing the security of digital assets.
Global Reach: Cryptocurrencies can be transferred globally with relative ease and speed, making them suitable for international transactions and remittances.
Innovation: The cryptocurrency space is continually evolving, with ongoing developments in blockchain technology, decentralised finance (DeFi), non-fungible tokens (NFTs), and more. Investing in cryptocurrencies can provide exposure to innovation and emerging technologies.
Ownership and Control: Cryptocurrency investors have full ownership and control of their assets. They can manage their wallets, private keys, and transactions without relying on third parties.
Liquidity: Many cryptocurrencies are highly liquid, meaning they can be quickly bought or sold on various exchanges. This liquidity can be advantageous for active traders.
Portfolio Growth: Some investors believe that cryptocurrencies have the potential to grow into mainstream assets, similar to gold or traditional currencies. Investing in cryptocurrencies could be seen as a long-term strategy for portfolio growth.
Alright, Tell Me The Drawbacks of Investing in Cryptocurrencies
One of the most notable drawbacks of investing in cryptocurrencies is their extreme price volatility. Unlike traditional assets like stocks or bonds, cryptocurrency prices can experience wild fluctuations in a matter of minutes or hours. While volatility can present trading opportunities for some, it also means higher risk. Investors may see significant gains, but they can just as easily experience substantial losses.
In addition, there is currently a lack of robust regulation in place. Whilst there are plans to introduce regulations in the future in many countries, this can currently lead to various issues, including market manipulation, fraud and scams. Investors are susceptible to becoming a victim to such schemes due to the lack of comprehensive investor protections in place.
A common type of scam in the cryptocurrency space is colloquially referred to as a “pump and dump” scheme, whereby the price of a particular cryptocurrency is artificially inflated (pumped) by a group of individuals or coordinated efforts. Once the price has been driven up to a certain level that benefits the individuals, the same group then sell off their holdings at a profit (dump), leaving other investors with overpriced or worthless assets. Such market manipulation is a serious concern, especially for those with less knowledge about cryptocurrency.
Having mentioned knowledge levels, successful cryptocurrency investing usually requires a solid understanding of blockchain technology, secure wallet management, and best practices for safeguarding assets.
Investors who lack this knowledge may make costly mistakes, which leads us to the next point about the emotional stress that such volatile markets can cause to an investor. Price swings can trigger fear and greed, both of which influence decision-making. Emotional reactions may lead to impulsive actions and financial losses.
The extreme volatility and emotional impacts associated with cryptocurrency investments often draw comparisons more alike to gambling rather than traditional investing. In the world of cryptocurrencies, price swings of 10% or more within a single day are not uncommon occurrences. Investors may find themselves chasing quick profits or panic-selling during market downturns, behaviors often associated with gamblers rather than calculated investors.
The speculative nature of many cryptocurrencies, which lack intrinsic value and rely heavily on market sentiment, can also make the experience akin to placing bets in a casino. Thus, it is crucial for individuals considering cryptocurrency investments to recognize these factors, understand their risk tolerance, and approach the market with caution and a well-thought-out strategy rather than relying on speculation or emotions.
I Know The Risks, But Still Want to Buy Cryptocurrency. How Do I Do it?
To buy, sell, and trade cryptocurrencies, you’ll need to use a cryptocurrency exchange. Select a reputable exchange with a user-friendly interface, strong security measures, and a good track record. Some popular exchanges include Coinbase, Binance, Kraken, and Bitstamp.
Next, sign up for an account on your chosen cryptocurrency exchange. You may need to provide personal information and complete identity verification steps, depending on the exchange’s regulatory requirements. You will also need a cryptocurrency wallet as this is essential for securely storing your digital assets. There are two main types of wallets: hardware wallets (physical devices) and software wallets (applications or online platforms). Hardware wallets are generally considered more secure for long-term storage, while software wallets offer convenience for active trading.
Once you have funded your account on your chosen exchange, you can then start buying cryptocurrencies.
How Much of My Portfolio Should I Have in Cryptocurrency?
There is no universally recommended cryptocurrency allocation, but some financial experts suggest that a small allocation (e.g., 1% to 5%) of your total investment portfolio may be appropriate. On the other hand, some financial experts suggest between 5% and 20% of your portfolio, so you don’t often find a concrete answer to this question.
Additionally, for those with long-term strategies in place, having no cryptocurrency at all may also be advisable due to the highly volatile nature of cryptocurrency being unsuitable, or even simply unwanted, for a large percentage of investors.
Ultimately though, your cryptocurrency allocation should align with your overall financial plan and risk tolerance. It’s essential to regularly review and adjust your portfolio to ensure it remains in line with your financial objectives and changing market conditions, which is true for any type of investment.
Navigating The Ever-Changing Cryptocurrency Landscape
Patterson Mills believe in providing our clients with comprehensive financial guidance that encompasses all investment options. Our team of experts can offer you the knowledge and strategies needed to make informed decisions that align with your financial goals and risk tolerance. Whether you choose to venture into the world of crypto or explore more traditional investment avenues, we are here to guide you.
So, get in touch to book your initial, no-cost and no-obligation meeting. Or, send us an e-mail to info@pattersonmills.ch or call us direct at +41 21 801 36 84 and we shall be pleased to assist you.
Below you can see the performance history of Bitcoin and Ethereum, two of the most well-known cryptocurrencies.
At the present moment, Patterson Mills do not utilise cryptocurrency in our investment management recommendations. However, as wholly independent Advisers, should any of our clients wish to individually include cryptocurrency in their portfolio, we are able to provide assistance on request.
Please note that all information within this article has been prepared for informational purposes only. This article does not constitute financial, legal or tax advice. Always ensure you speak to a regulated Financial Adviser before making any financial decisions.
*Performance Data from CoinDesk, 2023
