Had you bought bitcoin in early April 2017, for example, you could have seen a 3,700% return in just four years.
But there also have been plenty of price plunges along the way. If you’d bought in mid-April of this year, you would have lost more than half your investment in just four months.
So if you’re tempted to invest, here’s what to consider before taking the leap.
It is a highly speculative investment
Generally speaking, there is no intrinsic value underlying most cryptocurrencies.
Unlike a stock, for instance, they don’t track the growth potential of a real-world company selling real-world products and services. Nor do they track the value of a natural resource the way a traditional commodity does.
So by investing in a digital currency today, “your sole source of a return is betting that someone else will be willing to pay more for [it] in the future than you did,” said Minnesota-based certified financial planner Matt Elliott.
That might be a fair bet given growing mainstream interest in crypto, especially with some of the bigger currencies like bitcoin, which has a market cap worth nearly half the total crypto universe, according to Charles Schwab.
But it’s just as fair a bet to assume that many crypto currencies will flame out, much the way so many companies did in the dot-com era, noted New York-based chartered financial analyst Ryan Sterling.
“On the upside, we could see a 10x return in the next five years. That said, we would not be surprised if they were worthless in five years,” he said.
Don’t bet what you can’t afford to lose
While he’s not a huge fan of crypto, Sterling sees it as something that, in very small doses, might help clients get more diversification, since it performs so differently from stocks and bonds.
Sterling advises interested clients to invest no more than 2% of their liquid portfolios in digital currencies. In other words, they should only invest a small percentage of the money they have above and beyond their home equity and their retirement and education savings.
“By investing 2% they feel like they’re participating, but not so much that it creates problems,” Sterling said.
Elliott suggests having no more than 5% of your overall portfolio dedicated to speculative investments of all kinds, including crypto, but only if you have little to no debt and are willing to accept the risk of losing what you put in.
Arizona-based certified financial planner Christine Papelian thinks direct exposure to crypto is too volatile for her clients, who are primarily investing for retirement
Read more:Bitcoin for beginners: Here’s what to know before you invest in crypto
