It's impossibly difficult to have an interest in finance without learning what the crypto fuss is all about. You've likely heard stories of people becoming overnight millionaires on the heels of Dogecoin (DOGE -1.33%) price moves, and you've also heard of people losing most of their money during one of Bitcoin's (BTC -0.40%) volatile periods. The big question: Is crypto investing right for you?
Here, we'll look at 3 reasons to invest in crypto, and 3 reasons to stay away.
3 reasons to invest
1. You'll treat it like a lottery ticket, and you can afford to lose
Some people believe that cryptocurrency in 2021 is much like the internet in 2000: You can live without it now, but you won't be able to in 10 years (or maybe even sooner). The price calls for Bitcoin have been seen reaching into the millions, so there is definitely a meaningful part of the financial community that does believe this will be the case. Assuming you have the extra money to invest, a small allocation to the tune of 5% or less might be a worthwhile speculative play.
2. It offers some level of diversification to an already diversified portfolio
A 2018 study by Yale University researchers concluded that, based on the risk and return profile of certain cryptocurrencies, a 6% allocation in crypto can help reduce portfolio volatility. The study also showed that the Sharpe ratio (a measure of risk-adjusted return) for cryptocurrencies was actually higher than those of stocks and bonds over similar time periods. And the researchers found that the factors driving crypto performance were entirely different than those of other asset classes as well as those driving other fiat currencies.
3. It's interesting and worth learning about
Regardless of your specific opinion on the future of crypto, it's pretty difficult to argue that it's not an amazing phenomenon. The concepts surrounding it, including blockchain and decentralized finance, are emerging ideas that are likely to be core to the way we do business in the future (price projections aside). While it's probably not a good idea to go all-in on crypto for reasons of diversification, having some skin in the game might lead to more interesting learning on the subject.
3 reasons not to invest
1. There are big questions about its underlying value
When you buy Bitcoin, you're in effect buying a series of 1s and 0s that can be moved seamlessly throughout the internet. There's no underlying business, no dividend to be paid, and no price-to-earnings ratio. Can most people even say they truly understand cryptocurrency? Given the wild price swings, lack of day-to-day stability, and its uncertain future, there are very valid reasons to stay away, especially if you're nearing retirement.
2. You see no value in holding another currency
You're probably not holding other currencies, like the Japanese yen, Chinese yuan, or Russian ruble, so why hold Bitcoin? There is an argument to be made that Bitcoin is in fact a legitimate currency, given its durability, storability, and divisibility. But if you're not investing in other currencies, why would Bitcoin be any different? The option of sticking to basic buy-and-hold index funds will likely yield some benefit to you even if crypto takes off, so you don't necessarily need to own crypto directly to profit from its potential rise.
3. You're not confident about maintaining a crypto wallet
There are horror stories across the internet of people losing crypto wallet passwords and losing out on millions (or even billions) of dollars worth of Bitcoin. Hearing these stories can make you a bit queasy, so if you're not confident that you'll be able to safely manage and hold on to your crypto wallet passwords and/or API keys, you might want to stay away. There are online brokerages (Robinhood among them) that will allow you to hold Bitcoin without the need for more-complicated storage.
There are many good arguments on both sides
Like anything worth debating, there are many good reasons to invest in Bitcoin and many reasons to run from it like the plague. Some people cite a failure to invest as a failure of the imagination, while some people believe investing too much can be one of the biggest financial mistakes you'll ever make.
Regardless of your ultimate decision, it's a really good idea to simply learn about Bitcoin and its underlings first, and then make a call based on your relative tolerance for risk. As long as you're prudent about the decision (especially by not investing too much), you're likely to come out in a good place.