Fi Life's motto is "buy term and invest the rest" and it's good to have diversification when it comes to investments. Recently, Bitcoin reached an all-time high which excited many in the market. Hence, we would like to look whether we should also include cryptocurrencies in our portfolio.
Cryptocurrency remains a controversial investment asset. To explain briefly, it is a decentralised (i.e. not controlled by any central bank) digital currency based on blockchain technology.There are many types of cryptocurrencies, such as Bitcoin, Ethereum, Ripple, Litecoin etc. Here are some of our considerations when it comes to crytocurrencies.
1. How much risk can you tolerate?
Cryptocurrencies are an extremely volatile asset. You could make a great fortune: Bitcoin rocketed to almost US$65,000 in April 2021 from below US$8,000 the year before. Or you could lose it too: Ask the Bitcoin investors who bought it over US$19,000 in December 2017 only to see it crash to $3,100 a year later.
Every investor has a different risk appetite and investment goal. If you are not ready for extreme volatility where you run the risk of losing the value of a big chunk of your funds, you should not join the wild, bumpy ride of cryptocurrencies. But if you are not averse to risk and have extra money you can afford to lose, then by all means, put a bit of spare change in them.
2. Value of cryptocurrencies are simply based on demand and supply
The biggest criticism towards cryptocurrencies is how their values derive from pure demand and supply. Unlike stocks or bonds, cryptocurrencies have no underlying income. They are just a store of value like gold. Because they have no underlying income, legendary investors like Warren Buffett will never be an investor. But the lack of income for gold has never deterred gold investors, so there is no reason why the lack of underlying income for cryptocurrencies should deter cryptocurrency investors.
3. There is no discerning pattern behind the price of cryptocurrencies
An asset like gold is sometimes added to an asset allocation portfolio to guard against a depreciating US dollar, or treated as a safe asset during times of uncertainty, financial distress or economic downturn, when the price of gold usually goes up. In contrast, the value of cryptocurrencies does not seem to correlate to anything, other than the daily mood of cryptocurrency traders. Given that there’s no pattern as to what drives their price, it should not form the bedrock of your portfolio. Far from it, they should be in that speculative high-risk, high reward section that you can afford to lose.
4. Despite the risks, you want to invest. But how much?
Here’s a big fat hint from Morgan Stanley, a major US bank. It limits its accredited (read experienced) investors to invest no more than 2.5% of their net worth in bitcoin funds.
Investors must also have at least US$2 million in assets with the firm and “an aggressive risk tolerance”. That’s the bar for Morgan Stanley for experienced investors, what more for us everyday investors?
5. You want in. How to go about it?
You should trade on a regulated platform that has implemented safeguards that protect investors as prescribed by regulators. In Malaysia, this means crypto exchanges regulated by the Securities Commission of Malaysia. Luno is one of 3 digital asset exchanges recognised by the Securities Commission, so that is a good place to begin.
Here’s an offer to get you started. From now until the 16th of May, you will receive RM25 in bitcoin when you invest RM100 on Luno. Just use the promo code “LUNOFI”.
Disclaimer: This is not financial or investment advice. Please consult a licensed financial planner before making any investment decisions.