While cryptocurrency is speculative, using cryptocurrency in your personal finance goals is an essential tool for added diversification and exposure to an upcoming asset class. The recent developments of cryptocurrency have been encouraging (despite the volatility in the underlying value). With that being said, you should only be allocating 5% (or less) of your total assets to cryptocurrency.
Using Cryptocurrency in your Personal Finance Goals
What is cryptocurrency? Before making any decision about adding something to your portfolio you need to ask yourself if you understand it. Everyone one, especially investors, love Warren Buffett, so here’s quote,
“Never invest in a business you cannot understand.”
A straightforward rule to be sure. If you don’t understand the asset you’re investing in then how can you be sure the market is wrong and that an opportunity to make money exists? So let’s dive in and break it down in a simple manner. Cryptocurrency exists online. It’s digital cash, and behaves like a computer program that has defined rules.
What makes it unique and appealing to a lot of people is that it has built in techniques to regulate the creation of new units of currency and to verify exchanges of currency between parties.
This means is there is no physical money here, you can’t touch it or hold or pull some out of your pocket and hand it someone. Cryptocurrency also operates between parties and within the rules that have been created for it.
It’s not controlled by any banking entity. No one can just create more when they want or if for some reason they deem worthy. This provides a built in measure against inflation.
There will be no central banks trying to influence inflation through interest rates or money supply with cryptocurrency.
Why invest in cryptocurrency? Why should you be using cryptocurrency in your personal finance goals?
With bitcoin on a ten thousand percent tear these past few months crypto has been the talk anywhere you look. Hell, just mention the word blockchain and you get venture capitalists throwing money at you. I figure a lot of you are in a similar position. A friend, relative, or some random guy told you about bitcoin in 2011 and you’re kicking yourself now.
They explained the blockchain to you, even though they didn’t really understand it themselves. They told you all about “mining” them. You know what I’m talking about. You were gonna buy a bunch of AMD GPU’s, you had all your costs figured up, even electricity, you even talked to your wife about using the spare closet for the operation. Maybe you even tried to get her to let you build a shed outside for this.
Then for whatever reason you didn’t, and now you’re crying yourself to sleep to REM dreams of the Lambo you could have had. But it’s ok there’s still time to get it. Or is there? Which leads to another question you need to ask. Should you? There is a responsible way of using cryptocurrency in your personal finance goals.
Additionally, you can use cryptos as a form of passive income if you prefer to not invest with your own savings. This form of passive income gives individuals comfort that they are not using savings money and it is more about ‘playing with the houses money.’
We all know diversification is good. A majority of the assets you hold should be diversified. A lot of this is a very personal decision between you and your risk tolerance, or based on your experience.
But are cryptocurrencies an asset? Sure you can park money in them, but you could also buy a bunch of logs. That’s diversified.
Actually you know what, take 5% of your net worth and invest in wood, take another 5% and buy a lot of rubber bands. Be diversified. Don’t really do that. But I think asking yourself if crypto is worthy is valid. If you had asked 5 years ago the answer would be, no.
Crypto has come a long way since then, a lot of new currencies have come out, infrastructure has been built around some of the bigger ones, and millions of people have taken notice. When you’re dealing with currency that’s a big deal. You need awareness.
A lot of the value of the currency will come from how many people use it and how easily you can use. The more people who know about it, the better.
How should you be using cryptocurrency in your personal finance goals?
Now the question becomes how can cryptocurrency help you in your personal finance goals. The answer to that is, you invest one-thousand dollars and hope it goes up another ten thousand percent. Obviously that’s a joke.
That would be like using lottery tickets in your personal finance goals. Cryptocurrency is risky. It’s probably the riskiest most volatile asset you’ll hold in your portfolio. That’s not necessarily a bad thing.
Risk and volatility is where you find mispricings in assets. If you’ve identified an opportunity that the market either hasn’t identified or has discounted then you’ve made money. The best play here is to invest in crypto as an ETF (to the extent available). Diversify your diversification.
Allocate five percent (or less) to cryptocurrency and split that up among the highest quality cryptos. The sole act of having cryptocurrency in your portfolio at the current moment is to hedge against inflation of other currencies such as an investment in gold. Hopefully, cryptocurrency will give you an added element of a non-correlated asset to your portfolio.
I suggest you start small by adding a portfolio of the top 5 cryptocurrency coins (by market cap) to your portfolio with equal weighting for each. Or, create an index of your own based on the top 10 cryptocurrency coins.
Cryptocurrencies and the major technology behind them, the blockchain, are really sparking innovation and ideas in a lot of industries. It’s a risky asset but definitely has some potential and a lot of great attributes behind it.
To include cryptocurrency in your portfolio you really need to ask yourself how much money do you want to make. Joking, joking. Ask yourself three things.
Do you understand what it is and the potential? Do you think you should have this new asset as part of your portfolio? How much are you comfortable having in a highly volatile asset?
Where to invest in cryptocurrencies?
If you’d like to build an investment portfolio with cryptocurrencies, Robinhood just released cryptocurrency trading under the name ‘Robinhood Crypto’.
It is easy to trade crypto with Robinhood as we released the initial Robinhood crypto list. If you haven’t joined Robinhood already, use this link and we will BOTH get a share of FREE STOCK!
We like the idea of complementing a dividend growth portfolio with cryptocurrency. In addition, you can use our 5 Ways to Earn Passive Income with Cryptocurrency to add another element of value to your income streams.
here is much more to cryptocurrency than Bitcoin with a lot of cryptos offering extremely disruptive technology that can be used in a number of different applications.
Pick a coin that you like, we think Golem Network has a strong future.
Are you using cryptocurrency in your personal finance goals? What are you doing to achieve your personal finance goals? Is cryptocurrency too risky for you to get involved? Please let us know in the comments below.
Once you get started with cryptocurrencies and bitcoin, consider a book that will assist you in your endeavors with the blockchain and bitcoin. The book is called The Bitcoin Revolution: By a novice. For a novice. This book is a great example of unraveling the complexities of Bitcoin, blockchain and other cryptocurrencies by simplifying the process. It’s a great read!
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