- It's important to ensure high-risk assets like crypto only represent a small percentage of your portfolio.
- There's a lot of uncertainty about regulation and the economy that could cause crypto prices to fall even further.
- Crypto investors shouldn't ignore the darker side of the industry.
I'm not selling, but I need to focus on other financial goals.
I'm passionate about cryptocurrency and optimistic about the way Bitcoin (BTC) and blockchain technology could eventually transform whole industries. I have continued to buy crypto during the ongoing market slump. But more recently, I've paused my crypto purchases, at least for a little while.
To be clear, I'm not selling any of my existing investments. I plan to hold for at least 10 years, and probably more, and I'm earning decent rates of interest on many of my crypto assets. However, for me, it's a good time to take a step back. Here are four reasons why.
1. My portfolio is out of balance
Many experts recommend that crypto make up only a small percentage of your portfolio. And they are right -- this is a high-risk asset class that may collapse completely. However, I spend most of my days reading and writing about cryptocurrencies, and I sometimes get a little too enthusiastic. Especially recently when prices have been low, it's tempting to pick up a little more crypto each time they slump further.
Crypto currently represents about 20% of my portfolio, but I don't want to sell any of my crypto. Instead, I'm going to stop buying digital assets while I focus on building up other parts of my portfolio, particularly equities. I also had to dip into my emergency fund recently, so topping that up is a priority. I'm comfortable with my crypto investments, but now I want to focus on other things.
2. I want to see what regulation will bring
Crypto regulation is a divisive topic. Some believe it goes against the decentralized ethos of cryptocurrency, while others think it is essential if the industry is to mature and flourish. I fall into the latter category. But there are a lot of caveats, primarily that we simply don't know how harsh the impending regulatory framework will be.
We're in a regulatory waiting game. Many countries recognize the need for more crypto rules, but have yet to decide what shape they might take. Clear and well-thought out regulation may build investor confidence and shore up the industry's foundations in the long term. Unfortunately, in the short term, there's a good chance any increased regulation will hit prices hard. Added to which, there are no guarantees the eventual frameworks adopted by individual countries will be crypto-friendly. With such a big cloud hanging over the industry, I don't want to buy more cryptocurrency until it passes.
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3. The market may well fall further
Regulation isn't the only cloud hanging over the industry. Inflation rates are high, the Federal Reserve is pulling back on its pandemic-related economic stimulus, and the Russia-Ukraine crisis shows no signs of stopping. Many economists warn that a recession is very likely, and we don't know how that will impact the crypto industry.
The conditions that drove the extraordinary growth in the crypto market in the past two years are well and truly over. If prices continue to stagnate or fall further, there's a chance many popular cryptocurrencies could fail. I understand the logic behind the advice to "buy when there's blood in the streets." But I've done that over the past few months. If there's worse to come, now I'd prefer to wait and see what the future holds.
4. I'm increasingly uncomfortable with the shadier side of crypto
I am extremely conscious about the way I spend and invest my money. I opt for fair trade products and prioritize socially responsible investments. In crypto, I'm a big fan of Cardano (ADA), which has a mission to use blockchain to make the world a better place. But there are still too many elephants in the room to think that crypto is an ethical investment.
Here are a few:
- Money laundering: According to a report into crypto crime by Chainalysis, criminals laundered $8.6 billion worth of cryptocurrency in 2021. This only includes money generated by crypto crimes, not cash from traditional crimes.
- Ransomware: Ransomware attacks -- where criminals lock up a computer system or data via malware and demand a ransom to unlock it -- grew dramatically in 2020 and 2021.
- Lack of transparency: The idea that crypto could be self-regulating hasn't proved realistic. Anyone can create a cryptocurrency token, and there are few rules in place to guarantee that what you read on a website is true and accurate.
- An overreliance on stablecoins: Tether (USDT) has been fined before for lying about its reserves. It's the third-biggest crypto in the world, and we don't know whether it has enough money to support itself or what it's doing with people's money. For all Tether's assurances, I worry that the industry is too reliant on a token that could collapse.
It isn't all bad, though. Chainalysis also showed that illicit activities now make up a smaller percentage of overall crypto activity than ever. As crypto adoption grows, legitimate use cases push out the illegitimate ones. Plus, law enforcement is getting better at tracking crypto and seizing funds from ransomware attacks and other criminal activities. However, money laundering, fraud, and ransomware are all issues that crypto investors can't ignore.
Cryptocurrency remains an exciting and fascinating industry with huge amounts of potential. However, it also carries a lot of risk, and sadly, criminals will always find ways to take advantage of new technologies. Most of all, crypto investing is as much about your personal financial situation as it is about your belief in particular projects. For me, it's time to practice what I preach and focus on other financial goals, at least for a few months.
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