Synopsis: This article explains the parameters to be considered before investing in cryptocurrency. Upon completing this article, you will be in a position to decide how much percentage of your wealth you want to invest in crypto.
‘Portfolio Allocation’ is one of the most important decisions to be made by any individual or institution in managing their finances. In this article, you will understand the parameters to be considered before making this decision as an individual.
“Invest only that amount of money you can afford to lose”
Cryptocurrency is volatile in nature. You will not be able to predict the prices of cryptocurrencies like that of gold, financial markets and real estate. The demand and supply of gold, real estate and financial markets are easily predictable. Cryptocurrencies are unpredictable, hence it is important to invest only the amount that you can afford to lose.
For instance, you might have spent Rs 8,00,000 to buy 0.1 units of BTC, and then the price might have fallen by the time you decided to sell it after 1 year. This situation will be devastating for a person who earns Rs 1,00,000 per month with a total net worth of Rs 15,00,000. The same situation will be far less impactful for a person who earns only Rs 1,50,000 per month with a total networth of Rs 50,00,000.
In order to decide how much to invest in cryptocurrency, ask yourself how much you can afford to lose from your total net worth. Don’t count on any returns from this investment, treat it as money you may never see again. This mindset will help you stay financially stable.
Following are factors to consider before investing in crypto:
Age and Time Horizon:
Age is a crucial factor to be considered while making any investment decision. If you are young, you are more likely to take more risk, whereas old investors will take less risk. Young investors will invest for a longer period of time compared to old investors. The aim of any old investor will be to save capital rather than investing in a risky asset and incurring loss.
Risk tolerance and existing portfolio:
There should be a balance among all the existing portfolios. The existing portfolio can be categorised into three: conservative, balanced and aggressive. If your portfolio is aggressive, be careful about adding cryptocurrency as a significant asset into your portfolio, as this further amplifies risk exposure.
For balanced and conservative portfolios, you may consider adding cryptocurrency as a meaningful asset allocation, but only after assessing how much of your total net worth you can afford to lose.
Knowledge portfolio:
As we all have heard from Warren Buffet, ‘Never invest in a business you cannot understand’. Before investing in any cryptocurrency, try to build knowledge on the same. The size of your investment on cryptocurrency shall be positively correlated to the knowledge you possess on cryptocurrency.
Understanding the perfect allocation of your portfolio takes time. Sticking to that allocation requires discipline and consistency. It’s up to you to choose what proportion of your wealth goes into cryptocurrency.
Written by Parvati Anilkumar
