Is It Too Late to Invest in Cryptocurrency?
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The cryptocurrency hype seemed nearly unstoppable — until now.
Bitcoin’s price nosedived after the Chinese government said on Tuesday that the country's financial institutions and payment companies won’t be allowed to provide services related to cryptocurrency transactions. The crypto’s price, which hit an all-time high above $63,000 per coin in April, plummeted as low as $30,000 this week and now sits around $40,000 on Thursday. The sell-off extended to altcoins: Ethereum and Dogecoin’s prices tanked more than 30%. This follows a price slide last week, when Tesla reversed its decision to accept Bitcoin as payment.
But those with long memories know that cryptocurrency is no stranger to volatility. In 2017, Bitcoin hit an all time high before falling 50% just a month later. Still, investors can’t get enough. In a recent online survey, 33% of Americans said they owned cryptocurrencies, according to research firm Piplsay (while a self-selecting group that answered an online survey may not be representative of the population at large, the results still indicate a high level of interest). And investors can easily trade cryptocurrency via platforms like Coinbase, some brokerages and Venmo. Even robo-advisors, which had long touted themselves as a way for young people to invest responsibly for the long term, are jumping on the bandwagon.
Is this dip a buying opportunity, or has the crypto ship already sailed?
The believers versus the skeptics
Nick Maggiulli, chief operating officer at Ritholtz Wealth Management, said in a Tweet that there are two types of Bitcoin owners: speculators (who trade) and believers (who hold). Knowing which camp you fall into may help you determine if it’s too late for you to buy up cryptocurrency.
Some investors see Bitcoin as the ultimate form of money — the gold 2.0 — believing that it’s durable, will retain its purchasing power and can be easily sent and stored, says Chris Kuiper, vice president of equity research at CFRA Research in Rockville, Maryland. They’re the believers. Richard Smith, CEO of the Foundation for the Study of Cycles, for instance, says that cryptocurrency is going to be the basis for a new version of the internet. There’s a lot more to come, so it’s definitely not too late to get in on cryptocurrency, and this pull back may be a good buying opportunity, he adds.
But there are plenty of reasons to be skeptical, like the potential for regulation. On top of the news that China is cracking down on crypto, India’s government may also set up a panel of experts to study potential regulation of the digital coins, The Economic Times reported. In the U.S., the Chairman of the Securities and Exchange Commission and the Treasury Secretary have both expressed concerns about investors’ best interests when it comes to cryptocurrency.
Another reason to be skeptical is that cryptos are not actually currencies in the strict sense of the word, says UBS Global Wealth Management’s Chief Investment Officer Mark Haefele and his colleagues in a note to clients this week. A basic function of modern currency is to store value. But cryptos' high volatility makes them an unstable asset and the lack of barriers to entry (there are thousands of cryptocurrencies) takes away their long-term potential to actually store value, the analysts wrote. Currency’s other function is to be a medium of exchange, and few companies will actually take cryptocurrency as a form of payment.
Holding versus trading cryptocurrency
True believers would say to make an initial investment in the cryptocurrency, then continue by dollar-cost averaging (investing a set amount of money over time), Kuiper says. That’s because they believe Bitcoin has a strong future, and the exact timing of when you buy may not matter.
If you are more skeptical about crypto — maybe even as far as to say it’s a bubble — yet you still want a piece of the action, then your plan is probably to buy and sell before the price plummets. But that’s really hard for anyone to do, says Vicki Bogan, a behavioral finance expert at Cornell University.
“Nobody really knows how much time is left before a bubble bursts, and you don’t want to be left holding the bag,” Bogan adds.
And if you’re watching prices daily, you may trade based on emotional responses, she says. Emotions and trading don’t mix well, so if you can’t stomach crypto’s volatility, you may want to stay away.
How to start investing in cryptocurrency now
If you still want to try to squeeze some money out of the cryptocurrency hype, just make sure you make a disciplined investment plan and stick with it, says Jared Snider, partner and senior wealth advisor with Exencial Wealth Advisors based in Oklahoma City.
And when markets go up, try not to think about how you’re “missing out” just because you haven’t devoted more money to those popular, buzzy up areas of the market.
“Sometimes the market can stay irrational for a while but then it doesn’t take a long time for the script to flip,” Snider says. “That can work against you even more quickly than it can work for you.”
The amount of money you can put into risky investments depends on your specific financial situation, but Snider recommends making it no more than 3% to 5% of the stock component of your portfolio. (Other experts are even more conservative, recommending no more than 5% of your overall portfolio.)
“Don’t put at risk what you can’t afford to lose,” Snider says.
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