Bitcoin was born in 2009. However, it wasn't until 2017 when mainstream media and investors started taking it seriously. Bitcoin's ambitious goal to become the Internet's protocol for value transfer has fueled the creation of an active community of software developers, entrepreneurs, investors, and enthusiasts. It was only a matter of time before some members of the community wondered how to use Bitcoin's blockchain technology for applications other than money. That's how Ethereum, Steem, and other projects set off to explore new promising territories.
Today there are thousands of blockchain-related projects. Using initial coin offerings or ICOs, many of these projects get funded by investors. And as a result, by buying those crypto coins (or crypto tokens*) investors have an unprecedented opportunity to be part of the development of new technologies that have the potential to change the way we live and to profit from it.
Should you invest in crypto assets?
Investing in crypto coins or crypto assets (or just "crypto" for brevity) is a risky business. It's akin to investing in early-stage high-growth startups, a game of high-risk high-reward. This type of investment is common among angel investors, individuals with extra cash, usually with experience in the technology industry. If you have never made an angel investment before, crypto investing might be out of your comfort zone.
If you do decide to invest in crypto, consider the following:
The bottom line is if you have more debts than assets and your financial situation is not good, DON'T INVEST in crypto assets. On the other hand, if you are making money through crypto economies like Steem, use some od the earnings to diversify investing in other crypto assets.
Allocation
Once you decide to invest, the next question is what portion of your portfolio you should allocate to crypto. I propose different answers depending on your familiarity with blockchain technologies, as follows:
Don't know much about blockchain technologies: 1-5%
Enthusiast of blockchain technologies: 5-10%
Work full time in the blockchain space: >10%
If you enjoy a healthy financial situation, investing 1% of your assets won't put you at risk, but it does give you the opportunity to profit from technologies that might change industries moving forward. Remember to see crypto investments as part of your long-term investment plan. Then the more you understand about blockchain technologies, the more you should allow your self to invest.
Diversification
Just as it's a good idea to diversify in the stock market, it's a good idea to diversify in crypto. Remember that blockchain projects are early stage startups, so many of them will fail.
Diversification will protect you from losing your investment due to project failures. At the same time diversification will give the opportunity to have better returns by participating in more projects.
Based on BitWealth's HODL10-2017-CRYPTO index, if in January 1st, 2017 you invested equally in each of the top ten coins by market cap, your return in December 31st, 2017 would have been 67X (or 6690%). Compare that with Bitcoin's 13X (or 1,267%) for the same period, and you will see the benefit of diversification.
HODL-2017 = 67X or +6690%
BTC-2017 = 13X or +1267%
Options to diversify
To achieve diversification in crypto investors have a few options.
Assuming you want to buy the top10 coins by market cap, let's explore these options one by one.
Do it yourself
Cost: 0.5% to 4% per transaction
Invest in a crypto Hedge Fund
Cost: usually 2% management + 20% to 40% performance fee
Use a passive-investing service like BitWealth
Cost: 3% per year of your account balance charged monthly
Conclusion
If you are financially healthy, allocating a small portion of your net assets in crypto assets provides further diversification to your entire financial plan. When investing in crypto is a good idea to diversify, and investors have different ways to do it. At BitWealth we offer a cost-efficient solution that gives investors options based on their preferences. If you are in interested in using BitWealth, please reach out to us here to learn more and start investing.
We just explored allocation and diversification. In a future article, I will go over the different strategies you can use to invest in crypto assets
Do you use different criteria to allocate your investments? Let me know in the comments
This story was published originally on BitWealth's blog
This article does not constitute financial advice. It only represents the author's opinion.
*crypto stands for cryptography, the techniques used to achieve secure communication in the presence of third parties called adversaries.