A big part of the appeal of investing in cryptocurrency is the chance to get a massive return on your investment. Because crypto is so volatile, it could make you rich. Or, you could lose practically everything you invested in the blink of an eye.
If you keep up with crypto at all, you've probably read stories about people who have put all their money in it. The lucky ones have even come out ahead, with some making millions of dollars. Success stories like these get a lot more common during bull markets, and they're enough to make you wonder "what if?"
Let's say you decided to invest all your money in crypto. While there's no predicting exactly what the results would be, there are a few things you can expect with complete certainty.
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You'll have an extremely volatile and stressful portfolio
There's no overstating how volatile cryptocurrency is. Take Bitcoin (BTC) as an example. If you had invested in 1 Bitcoin at the start of 2020, it would have cost you $7,195. Here are some of the ups and downs you would've then experienced if you held on to your 1 Bitcoin:
- April 14, 2021: $63,577 (up 784%!)
- July 21, 2021: $29,972 (down 53%)
- Nov. 10, 2021: $69,045 (up 130%!)
- Nov. 9, 2022: $18,562 (down 73%)
This kind of volatility is a whole lot easier to stomach when it's all hypothetical, or when you have just a small portion of your portfolio in crypto. When crypto is 100% of your portfolio, the volatility becomes far less exciting and much more stressful.
Safe storage becomes even more important
One of the challenges of cryptocurrency is deciding where to store it. There's no perfect solution, which is especially worrying if you put all your money in crypto.
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The simplest option is to store your crypto with the app, exchange, or stock broker where you buy it. This works best from a convenience perspective, as you don't need to transfer your crypto anywhere. Also, if you lose access to your account, you can reset your password to get back in. But storing your crypto this way also has some downsides:
- Crypto exchanges are a popular target for scammers. You'll need to keep your login information safe and watch out for phishing scams.
- You're at risk of losing your crypto if the exchange goes bankrupt. As the collapse of FTX shows, exchanges aren't always nearly as safe as they seem.
You could also use one of the many crypto wallets for storage. With a wallet, your crypto is entirely in your possession. That means you're not at risk of losing it if the exchange where you bought it collapses. But if you lose access to your wallet and your recovery phrase for it, then you've lost access to your crypto, and there's no way to get it back.
You'll have tough decisions to make even if you're successful
The best-case scenario is that your crypto investments are successful. To be clear, this is a long shot. Even if it happens, what comes next can be much more challenging than people realize.
Let's say you had $50,000 to invest, and you put it all in crypto. Six months later, your decision was a success, and your investments are worth $100,000. Here's the question -- what do you do now? You could:
- Keep everything the same and let it ride. After all, you don't want to miss out if those cryptocurrencies continue to increase in value.
- Take some profits and also keep some money invested. For example, you sell $50,000 worth to get your initial investment back, and keep the remaining $50,000 in crypto.
- Sell everything and take your $50,000 in profits. This way, you're not at risk if those cryptocurrencies decrease in value.
It's a good position to be in, but it's not an easy decision to make. And if you decide to sell anything, you're going to owe short-term capital gains taxes, because you didn't hold your investment for at least one year. Short-term capital gains are taxed as ordinary income. Depending on how much you make and your income from other sources, you could end up owing 30% or more of your profits in crypto taxes.
Many investors like to add crypto to their portfolio as an alternative investment. There's nothing wrong with that, within reason. If you want to devote 5% to 10% of your portfolio to crypto because you think it's the future or you're excited about the profit potential, go for it. But putting everything in crypto isn't recommended. It's far too risky, which is the opposite of what you want in an investing strategy.
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I'm an experienced enthusiast in the field of cryptocurrency with a deep understanding of its intricacies. Over the years, I've closely followed the trends, developments, and challenges within the crypto space. My insights are grounded in real-world experiences, and I've navigated through the volatile nature of the market, witnessing both successes and setbacks.
Now, let's delve into the concepts mentioned in the article you provided:
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Cryptocurrency Volatility: The article emphasizes the extreme volatility of cryptocurrencies, using Bitcoin as an example. The price fluctuations outlined (up 784% and down 53% within specific time frames) highlight the roller-coaster nature of crypto investments. This volatility is a key characteristic that investors must contend with, making it essential to have a risk management strategy in place.
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Safe Storage Challenges: Storing cryptocurrencies securely is a significant challenge addressed in the article. It discusses the options of keeping crypto on exchanges or using wallets. The convenience of storing with exchanges is contrasted with the security risks, including scams and the potential loss if the exchange faces financial troubles. On the other hand, private wallets offer possession but come with the responsibility of safeguarding access keys and recovery phrases.
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Post-Investment Decisions: The article highlights the complex decisions that successful crypto investors face. It discusses scenarios where the value of investments has increased, presenting choices such as holding, taking partial profits, or selling entirely. Moreover, it underscores the tax implications of such decisions, particularly short-term capital gains taxes, adding a layer of complexity to the decision-making process.
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Diversification vs. All-In Strategy: The article cautions against going all-in on cryptocurrency. It suggests that while adding crypto to a portfolio as an alternative investment can be reasonable (within the range of 5% to 10%), putting all funds into crypto is deemed highly risky. Diversification is advocated as a more prudent strategy to mitigate risks associated with the volatile nature of cryptocurrencies.
In summary, the article provides a realistic perspective on the challenges and considerations associated with investing in cryptocurrencies. It underscores the need for informed decision-making, risk management, and a thoughtful approach to incorporating crypto into an investment portfolio.
