Cryptocurrency: Is It Worth The Risk?

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Matt Soladay

Matt Soladay

Cryptocurrency has become a social phenomenon.  You can’t get through a news feed or a scroll through social media without seeing a headline on the topic. The biggest reason Cryptocurrency has gained so much traction in our minds and many people’s portfolios is that a small number of people have experienced huge rates of return from their investments; they far surpass the 8-10% that we expect from the stock market over the course of an entire year. Like most things, when we see a story of someone who ‘got rich quick,’ we want to know their secrets. But the secret is that most of the people who have made a lot of money were either early adopters or were just plain lucky. Crypto remains highly speculative and volatile, leading many investors to make arbitrary decisions based on the fear of missing out. 

What is Cryptocurrency

It is a digital “currency” based on blockchain technology.  This technology involves a decentralized and transparent approach to transactions across many computers all over the world.  This redundancy in backups and checks promotes the security of data as well as resistance to manipulation.  Think of it as a computer that has backed itself up thousands of times, so if one of the computers gets hacked, the others will recognize it, thus preventing a problem. 

Contrast this to specific paper money such as US Dollars, otherwise known as fiat currency; this is susceptible to the actions of the US government and the economy.  The government can continue printing money as they see fit, so crypto advocates point out that some cryptos have a finite amount of ‘coins’ available.  The decentralized approach to Cryptocurrency is thought to be more equitable across all people regardless of their location or government regulation.

Is Cryptocurrency a “Currency?”

If I go up to a toddler with a cookie and ask for one of their toys in exchange, they are probably are to say yes. Unless, of course, I ask for the kids Iron Man figure, that’s probably worth at least several cookies.  This transaction does NOT mean cookies are a universally accepted currency.  Essentially, this is Cryptocurrency. Few businesses currently accept crypto transactions, and at present state, the greatest value it has is when it is sold for a real currency such as US Dollars.

Advocates for Crypto hope that it will serve as a widely accepted currency, but it is not a currency as it is not generally accepted as such.  After all, who would want a currency that can lose the majority of its value overnight?  The value of a particular crypto swings drastically based on investor interest and trading activity. 

If we all thought of crypto-currency as crypto-assets instead, then this all would be more straightforward.

In fact, it’s much more straightforward to acknowledge that Cryptocurrency is actually an Asset Class because it can be sold for money. Crypto can have a place in some people’s portfolios as long as the portion dedicated for more risky and alternative asset classes is kept very small (<5%). 

Don’t Risk Your Financial Future

The majority of your portfolio should consist of proven and established Asset Classes with long track records like Stocks, Bonds and Real Estate.  The advantage of these asset classes over Cryptocurrency is that they have decades of historical data to base decisions on past performance and to make assumptions on future behavior.  In addition, they are based on real value, such as a company and its products and workforce, a country or government and its economy, or a home and the land it is on.

Cryptocurrency, however, is primarily based on perceived value and lacks stability, and it is not widely accepted in exchange for goods or services.  In short, Crypto is a gamble and is often referred to as such.  We can’t predict what will happen in the future to Crypto, but we can give ourselves a greater chance of financial success by investing in low-cost index funds and ensuring we have a savings rate compatible with our goals. Don’t let the hype surrounding Crypto distract you from a sound and well-balanced financial plan.

My Thoughts On Crypto

I would only invest an amount of money that I wouldn’t mind losing and would never jeopardize my cash savings, emergency fund, taxable accounts, or retirement accounts.  If you want to have some crypto in your portfolio, make sure it is a very small amount of your invested Net Worth, this way, you protect yourself from compromising your long-term financial future.  Also, if you have credit card debt or are trying to pay off your school loans quickly, you shouldn’t be putting money towards alternative/high-risk asset classes anyway.  That available money should be put towards eliminating those debts.  Risks are reasonable for those who can afford them, not those who hope the risks will pay off and get them out of a challenging financial circumstance.

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Marjorie
Marjorie
1 year ago

Amazing article!! Thanks so much for such a clear and thorough explanation, you really are brilliant!

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