3 reasons to invest in crypto and 3 reasons not to

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It’s incredibly difficult to get into finance without knowing what the history of crypto is. You’ve probably heard stories of people becoming millionaires overnight as a result of Dogecoin price moves (CRYPTO: DOGE), and you’ve also heard of people losing most of their money during one of the volatile times. of Bitcoin (CRYPTO: BTC). The big question: is crypto investing right for you?

Here, we’ll take a look at 3 reasons to invest in crypto and 3 reasons to stay away.

3 reasons to invest 1. You will treat it like a lottery ticket and you can afford to lose

Some people think that cryptocurrency in 2021 is a lot like the internet in 2000: you can do without it now, but you won’t be able to do it in 10 years (or maybe even sooner). Price calls for Bitcoin have been seen to run into the millions, so there is certainly a significant portion of the financial community who believe this will be the case. Assuming you have the extra cash to invest, a small allocation of 5% or less could be a speculative game worth doing.

2. It offers a certain level of diversification to an already diversified portfolio

A 2018 study by researchers at Yale University concluded that, based on the risk and reward profile of certain cryptocurrencies, a 6% crypto allocation can help reduce portfolio volatility. The study also showed that the Sharpe ratio (a measure of risk-adjusted return) for cryptocurrencies was actually higher than that of stocks and bonds over similar time periods. And the researchers found that the factors determining the performance of crypto were totally different from those of other asset classes as well as those of other fiat currencies.

3. It’s interesting and worth learning

Whatever your specific take on the future of crypto, it’s pretty hard to argue that it’s not an amazing phenomenon. The concepts around it, including blockchain and decentralized finance, are emerging ideas that are likely to be central to how we do business in the future (price projections aside). While it’s probably not a good idea to bet on crypto for the sake of diversification, having a bit of skin in the game could lead to more interesting learning on the subject.

A Bitcoin miner. Image source: Getty Images.

3 reasons not to invest 1. There are big questions about its underlying value

When you buy Bitcoin, you are actually buying a series of 1s and 0s that can be moved seamlessly across the internet. There is no underlying activity, no dividend payable and no price / earnings ratio. Can most people even say they really understand cryptocurrency? Given the sharp price swings, lack of day-to-day stability, and its uncertain future, there are some very good reasons to stay away, especially if you are nearing retirement.

2. You see no value in holding another currency

You probably don’t own other currencies like Japanese Yen, Chinese Yuan, or Russian Ruble, so why hold Bitcoin? There is an argument to be made that Bitcoin is, in fact, a legitimate currency, given its durability, storage capacity, and divisibility. But if you don’t invest in other currencies, why would Bitcoin be any different? The option of sticking to basic buy and hold index funds will likely give you some benefits even if crypto takes off, so you don’t necessarily need to own the crypto directly to profit from its potential surge.

3. You are not sure if you want to maintain a crypto wallet

There are horror stories on the internet of people losing crypto wallet passwords and losing millions (if not billions) of Bitcoin dollars. Hearing these stories can make you a little nauseous, so if you are unsure whether you can manage and safely keep your crypto wallet passwords and / or API keys you might want to stay away. . There are online brokerages (including Robinhood) that will allow you to hold Bitcoin without the need for more complicated storage.

There are a lot of good arguments on both sides

Like anything worth discussing, there are plenty of good reasons to invest in Bitcoin and plenty of reasons to shy away from it like the plague. Some people cite not investing as a failure of the imagination, while others think that investing too much can be one of the biggest financial mistakes you can make.

Whatever your final decision, it’s a very good idea to simply learn about Bitcoin and its underlyings first and then make a call based on your relative tolerance for risk. As long as you are careful in the decision (including not investing too much), you are likely to come out in a good position.

This article represents the opinion of the writer, who may disagree with the official recommendation position of a premium Motley Fool consulting service. Were motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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