Cryptocurrency is a highly risky and unpredictable investment. Investing in existing companies’ stocks is usually safer than investing in cryptocurrencies including Bitcoin. We will discuss Should You Buy Cryptocurrencies or not.
Investors who are concerned about the stock market could seek out alternative investments such as Bitcoin. When considering cryptocurrencies, however, you should remember your overall portfolio targets as well as your risk tolerance. Learn how to invest in Bitcoin rather than stocks in order to determine whether or not adding the cryptocurrency to your portfolio is the correct step for you.
Risks of Bitcoin vs. Stocks
It is important to know about risks before knowing Should You Buy Cryptocurrencies or not. Investing entails some risk. For a variety of reasons, the stock market could crash. Corporations can go bankrupt. In a more optimistic light, a stock could rise in value over time. When deciding whether or not to add new assets to your portfolio, risk must be considered.
Kirk Chisholm, a wealth manager and alternative investment specialist at Innovative Advisory Group, told The Balance on the phone, “With an individual stock, there are risks.” “There’s a chance it won’t rise, dividends could be cut, and many people equate results to the S&P 500, so you could end up trying to keep up with the Joneses.”
However, he pointed out that these are threats that many investors face. Stocks are unique in that there is some guidance that can be used to predict where a price will go.
Bitcoin, according to David Stein, a former chief investment strategist and portfolio manager for an investment fund, lacks the predictors that stocks do.
“Cryptocurrency is entirely speculative, dependent on supply and demand,” Stein said. “All currencies are, to some extent, dependent on what people are willing to pay, but a crypto like Bitcoin is different. It’s a far smaller market in terms of total size than other currencies like the dollar or gold, so it’s more susceptible to large swings.”
Bitcoin, according to both Chisholm and Stein, is a relatively recent development that hasn’t yet gained widespread acceptance. This introduces a new layer of risk since it may be replaced by more effective digital currencies or controlled out of existence.
History of Bitcoin vs. History of Stocks
While you can’t predict future results based on past performance, it’s useful to look at how different investments have performed over time.
The price of Bitcoin fluctuated between $200 and $500 per coin in 2015. However, the price unexpectedly soared in 2017, hitting a high of $19,891 in December before plummeting to below $3,500 in December 2018.
Since 2015, stock growth has been less dramatic, but it has also been more consistent. In early 2015, the S&P 500 index was hovering about $2,000 per share. Though there have been ups and downs since then, the S&P 500 is currently trading at about $3,100 in July 2020.
In early 2015, the Dow Jones Industrial Average (DJIA) was trading between $17,000 and $18,000. When Bitcoin reached nearly $20,000 in December 2017, the DJIA was around $24,000. The DJIA is expected to be around $25,000 in July 2020.
Bitcoin has been volatile since its inception since there was no natural way to value it, according to Chisholm. “It went up to $20,000 because everyone had heard the news and no one wanted to be left out. Then it fell to $3,000, and it’s nearly up to $10,000.”
Stocks have more long-term and historical support, despite having ups and downs and some uncertainty in the short term.
Chisholm said, “There is an assumption that the stock market will be propped up.” “Bitcoin does not have the hope. Stocks have traditionally been funded because they are more developed and expected to perform well.”
Who Is a Good Bitcoin Match?
If you’re looking for a little more variety in your portfolio, Bitcoin could be a good fit. Bitcoin and other cryptocurrencies provide an alternative to more traditional assets. It will help in understanding Should You Buy Cryptocurrencies or not?
“Bitcoin is useful if you want to have any assets that aren’t denominated in your home currency or the dollar,” Stein said. “It’s a way to keep some assets away from the dollar,” says the author.
Even if you think Bitcoin would be a good match for your portfolio, Stein and Chisholm agreed that it shouldn’t be the primary objective of your investment strategy. It all boils down to how much risk you have and can handle, as well as if you’re willing to lose too much money in your portfolio.
“If you like numbers and calculus, think that (Bitcoin) could go to zero or go up twentyfold,” Chisholm said. “So, how much of your portfolio are you prepared to give up? Depending on your risk perception, I recommend limiting it to 1 to 5% of your portfolio.”