At the beginning of 2023, the value of all existing cryptocurrencies in the world hit $804 billion. Nearly half of that value is due to one cryptocurrency: Bitcoin.
Adding crypto to your investment portfolio can turn around some impressive returns, especially in the long term. Yet, Bitcoin and other cryptocurrencies are highly volatile.
To offset the high-risk level, experts recommend investing no more than 5% of your investment funds in this asset class.
Why 5%? And is Bitcoin the only cryptocurrency you should invest in? We are answering these questions and more in this complete guide to making a crypto investment in 2023.
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What Is Cryptocurrency?
Cryptocurrency is the world’s first digital-native currency. These unregulated assets do not rely on financial institutions to issue transactions. Instead, transactions are made peer-to-peer.
There is no such thing as a physical crypto coin or dollar. Instead, these currencies exist exclusively online. Encrypted blockchain ledgers track peer-to-peer transactions made using cryptocurrencies, hence the name.
It is possible to convert cryptocurrencies to US Dollars and other forms of physical currency. You can even convert crypto to cash and withdraw it from an ATM.
What Is Bitcoin?
Bitcoin was the world’s first and most well-known cryptocurrency. It also goes by the acronym BTC. Some people think crypto and Bitcoin are synonymous with one another, but there are other cryptocurrencies besides BTC.
If you have a crypto wallet, you can buy Bitcoin directly from another BTC owner. Cryptocurrency exchanges also allow investors to purchase, trade, and hold Bitcoin on their accounts.
Of course, BTC is not the only cryptocurrency out there. The second-most commonly traded crypto asset is Ether/Ethereum (ETH). Binance Coin (BNB), XRP, and Cardano (ADA) round out the list of the top five cryptocurrencies.
How Does Crypto Work?
To understand cryptocurrencies, you must first learn about the underlying technology that enables their creation and use: blockchain. Blockchain features interconnected “blocks” of information.
Just like a real ledger book, the blocks of information on the blockchain store transaction data. The information in each block is immutable, meaning no one can alter it, and encrypted, meaning it’s secure from hacks and breaches.
How does this information get on the blockchain in the first place? Every time a crypto transaction occurs, a network of computers gets access to it. Each computer in the network must verify the information to create a block.
When a new block gets created, the computers that verified it creates new cryptocurrencies. The cryptocurrency created depends on the blockchain in question. Each cryptocurrency, including BTC, has its own blockchain.
Interestingly, blockchain technology does not just apply to crypto transactions. Many well-known companies are using blockchain to make real-life payment transactions more secure, faster, and more transparent.
Is Crypto a Good Investment in 2023?
The cryptocurrency market crashed in May 2022. So, is it still a good investment to add to your portfolio in 2023? According to institutional investors, the answer is yes, as long as you diversify.
According to Coin Telegraph, 62% of institutional investors increased their cryptocurrency positions in 2022. And the majority of the same investors agree that crypto is a good investment, especially in the long term.
However, institutional investors do not allocate big portions of their portfolios to crypto. Instead, most investors keep their crypto investors to less than 5% of their allocations. Many keep allocations to crypto under 1%.
What Percent of Your Investment Portfolio Should Be Crypto?
How much you should allocate to any asset class depends on a few factors. One of these factors is how much risk you have in your portfolio already.
Low-risk investors tend to allocate 15–40% of their funds to equities (AKA stocks). Medium-risk investors allocate 40–60% of their portfolio to equities. And high-risk investors allocate 70%+ to equities.
The remainder of the investor’s portfolio will go toward lower-risk investment options. Low-risk assets include bonds, high-yield savings accounts, mutual funds, and ETFs (exchange-traded funds).
Crypto is a high-risk asset class. As such, you should lump it with stocks in your portfolio. When determining exactly how much of your high-risk funds to put into crypto, you need to compare the two.
The amount of your portfolio you allocate to crypto depends on how risky you see this asset class as compared to stocks. For example, do you think crypto returns will outperform stocks annually? If so, by how much?
People with high confidence in crypto against the stock market should invest no more than 5% of their funds in this asset class. People with low confidence should consider allocating 5% or much less of their portfolio to crypto.
Another factor to consider is how long you have to profit. If you are a long-term investor (you have 30+ years to profit), you can afford higher risk in your portfolio.
Moderate-term investors and conservative investors should consider allocating even less to crypto. If crypto fails, these investors may not have time to recover losses. If crypto thrives, it won’t be long enough to see good returns.
When it comes to crypto investing, diversification is key.
What Is Diversification and Why Is It Important for Crypto Investors?
You may think all cryptocurrencies are alike. But this is not exactly true. Aside from originating from different blockchains, cryptos also fall under different categories of coins.
Three of the most important crypto categories are transactional, security, and utility tokens. It is important to hold one or more coins in each category. Here’s why.
Transactional cryptocurrencies are the most similar to “real” money. You can use them to make retail transactions. For example, Bitcoin is a type of transactional crypto.
But BTC also falls under another category: securities. Security cryptos are similar to stocks in that you can buy and sell them for profit.
Utility cryptocurrencies include ETH. Certain blockchains require utility cryptos to function. For example, you have to pay in ETH to build projects on the Ethereum blockchain.
Each of these tokens presents its own risk level. For example, transactional coins are highly risky. That is because we do not commonly use them in retail transactions.
The least risky category is utility cryptos. As long as people continue using the blockchain, these tokens will continue to be important. Learn more about portfolio diversification strategies at this link.
What About Crypto ETFs?
Exchange-traded funds are a great way to diversify your crypto holdings. Financial institutions offer crypto ETFs as a way to invest in multiple cryptos at once. Some of them also include other high-performing asset classes.
You can learn more about crypto ETFs and find the right one for your investment strategy in this guide from US News.
Why Is Crypto So Risky?
One main reason cryptocurrencies are such risky investments is their history. The first crypto (BTC) came out in 2009. That means there is only about a decade of BTC trading history to show.
Smart investors base their portfolios on historical data. In other words, the way the stock market has performed in the past can help you predict how it will perform in the future. You can’t do that with crypto.
Further, the historical data we do have points to the high volatility of cryptocurrencies. Volatility refers to an asset’s tendency to change in value rapidly and unpredictably. Often, these changes are to crypto’s detriment.
Crypto’s volatility means you could make a lot of money very fast. But the reverse is also true. If the market drops suddenly, your entire crypto investment could be at risk.
Another reason for crypto’s risk is its uncertain future. Cryptocurrencies like Bitcoin have a lot of supporters. But the government hasn’t always been one of those supporters.
Governments in countries like India want to ban crypto altogether. In the US, regulatory restrictions could make crypto investing safer. Yet investors worry these same regulatory measures could cripple the crypto market.
Finally, crypto is risky because it’s complicated. Not a lot of people understand how it works. And even fewer people can comprehend how crypto market trends work.
For all of these reasons and more, it is important to measure the risk of this investment class against any possible gains. Researching the industry can also help mitigate risk.
Need Help Researching the Crypto Market?
Adding cryptocurrencies like Bitcoin to your investment portfolio can provide some impressive returns. But crypto investing presents significant risks. That’s why experts recommend allocating 5% or less of your portfolio to crypto.
Are you looking for more educational resources to help you research cryptocurrencies? We have hundreds more articles like this one. Type “crypto” in the search bar to find the information you need to make a smart investment.