Bitcoin and other cryptocurrencies are quickly becoming a new asset class for many people if you’re reading this you’re probably wondering how much should you invest and that question doesn’t really have a straight forward answer. It depends on a few factors. Risk tolerance, at what stage are you at in your life, how much capital you have to invest, do you really need the money you’re able to invest in crypto?
The younger you are and the fewer obligations you the more risk you can take. This is standard portfolio theory 1on1, as you get older your risk aversion should increase. But what makes cryptocurrencies different from the stock market is that they are a lot more volatile than stocks. So whatever amount you think you’re comfortable investing you should probably split that amount in half. As a general rule I would say somewhere between 5-50%(with obvious exceptions as I just said) is a good range.
Ask yourself honestly, if you were to lose your whole investment would that significantly bother you?
And really try to answer this question as honestly as possible. The reason is, if you’re investing an amount that you’re not comfortable with and you suddenly lose half your investment, that greatly impact your financial behaviour and you will start making really bad decisions. You will likely end up selling when it drops because you’re too afraid that you will lose your remaining money and you won’t feel comfortable investing again until the prices starts rallying again and now you’re paying far more per coin than you should be. Significant drops happen fairly regularly in the cryptomarket and there is no way you are going to avoid the eventual -30%, -50% drops if you’re investing long enough.
The other issue that comes up a lot is that cryptocurrencies can suddenly spike and now you’re sitting at a way bigger share of your net worth in crypto than you initially started with. At this point it is important to shave off your investment so you’re back to a level you’re comfortable with it. For example if you initially invested 10% of your net worth but now the cryptos went up a lot in price and now make up 80% of your net worth. It might be a good idea to take some profit off the table. I don’t suggest going a black or white strategy here, if you believe in a coin that’s fine but there is always a chance you’re wrong so do atleast some profit taking so if it would implode in the future atleast you made back your investment or even profited. And… If it goes to the moon you will still be happy about it. I personally sell off about 25% of my holding when a coin goes up more than 150% and I continute to shave off when it goes up so I limit my risk and same time I don’t miss out if it does go to the moon.
So to sum it up:
What is your risk tolerance?
How old are you?
How much capital do you have?(Small amount that you can save up again quickly?)
Do you need the money?(are you going to buy a house in the near future and need a down payment? then don’t use
If there is a lot going against you – then bet 5%, if the crypto is the next big thing you will anyway profit a decent amount. If you lose your entire investment you will live to see another day. If your circumstances support it then go ahead and put 50% or maybe even 100% then go ahead.