To put it very simply, diversifying is putting your funds in multiple buckets in order to minimize your own risk. By allocating your money across different stocks, for example, you spread the risk around in several buckets, so that if one stock’s price goes down, you won’t lose all your money at once, because only that one bucket was impacted. You are also able to diversify across industries. If you only invest in oil companies and the price of oil drops dramatically, chances are good your portfolio is going to take a hit. But if your money is spread across multiple industries, you’re in a much safer position.
This is where cryptocurrency comes in. Crypto is unlike any asset type because it’s fully in its own class. Many investors are turning to digital currency, mainly Bitcoin, as a new and exciting frontier. Here’s what you need to consider before jumping in.
Security. Despite the apprehensiveness that you may feel about any digital currency, transactions using the blockchain are highly secure. Although, it’s important to note that its novelty means the potential for exploitable loopholes hasn’t been completely ruled out, in theory, the blockchain system is permanent and unalterable, and by all accounts is unhackable. Fraud and hacking aren’t threats that compromise the investment’s potential value.
Potential. Centralization and regulation have been problematic institutions for the money chain for decades. Cryptocurrency is decentralized, meaning it’s not directly regulated by governments and banks. It also has significant long-term potential, possibly even more so than the current global system of cash. That means almost any cryptocurrency, especially the major players, has a huge potential upside–especially over the course of the next few decades.
Volatility. Even if the price isn’t in a bubble, you should know that the newness and excitement around cryptocurrencies make them a highly volatile investment. It’s almost certain that the price will fluctuate up and down, sometimes wildly, before it stabilizes. For low-risk investors, this should be a red flag.
Uncertainty. Cryptocurrencies are still very new, and even lawmakers aren’t sure what to do with them yet. The SEC is starting to crack down on initial coin offerings (ICOs) and other digital currency regulations, and their actions may seriously change the game. There’s too much uncertainty to make any definitive guess about their future.
Understanding cryptocurrency and its impact on your portfolio is crucial for your own success. Is it a suitable asset type for you to invest in? As with all assets, it depends on your current portfolio, your risk tolerance, and where else your money lies.