Cryptocurrency is a hot investment area that can potentially improve the risk adjusted returns of a well-diversified portfolio. However, it is important to keep in mind that cryptocurrency investments are highly volatile and could lose value in the short term. It is also important to diversify within the space, as some coins may have better long-term potential than others. In addition, it is important to understand that the cryptocurrency market can be manipulated in price and many people have been defrauded by scammers.
Unlike traditional currency that you can carry around or put in your wallet, crypto is digital and stored on a computer or smartphone. You can purchase cryptocurrencies on an exchange, which connects to your bank account and converts your U.S. dollars into crypto. You can then send the crypto to someone else, or use it to pay for goods and services on a website that accepts it as payment. The process is often much faster and easier than going to a physical bank. And you can do it all without having to give up your social security number or undergo a background check.
But that doesn’t mean it’s easy. There are lots of ways to get ripped off, including fraud, Ponzi schemes, pump and dump scams, and phishing attacks. Moreover, it can be hard to distinguish between legitimate and fraudulent projects, since there are no regulatory bodies that oversee the industry and most investors are on their own. So, it’s essential to understand how to spot red flags and learn about basic cybersecurity best practices before investing in any crypto.
In some cases, the wild shifts in price may cut against the basic ideas behind a particular project, such as reducing poverty in developing countries by enabling micropayments or giving people control of their digital IDs instead of being subject to privacy invasions and corporate surveillance. In addition, cryptocurrencies can require a lot of energy to operate, with Bitcoin alone using an estimated 200 terawatt-hours per year, which is equivalent to the total electricity consumption of Thailand.
The good news is that cryptocurrencies are still young and there are a lot of exciting things they can do, from providing a secure way to store data on a blockchain to creating a new kind of internet that’s faster, more reliable, and more privacy-preserving. And while they’re not as widely used as cash or credit cards, it’s possible that crypto will become the default option for online transactions in the future.
So, it’s worth learning about crypto and considering adding a small allocation to your portfolio. But it’s crucial to keep in mind that you should invest no more than 1% to 5% of your net worth, and that diversification is key. Because cryptocurrencies can move up and down so dramatically, they might not be the right fit for your overall portfolio or your mental wellbeing. Also, don’t just put all of your money into one cryptocurrency; spread it out among thousands of different options to minimize your exposure to volatility.
