Not all investments perform exactly the same under certain market conditions. For example, an increase in inflation can cause the price of gold to rise, but the price of other investments to fall. That doesn’t necessarily mean all gold companies will benefit equally. Those that are heavily in debt could be punished by rising interest rates, and fuel and other increased costs of production may not be offset by the higher gold price. A recession can devastate stock market values across the board, unless the company is in the business of consumer staples, bargain goods, alcohol, or other things in high demand when times are tough.
To reduce risk, smart investors make sure their holdings are spread across different sectors, industries, companies, countries, and even risk levels. They diversify their investments to reduce the risk of a single holding being the cause of a significant financial loss. One of the easiest ways to diversify when you are just starting to invest or don’t have very much money, is through products such as mutual funds, index funds, and ETFs.
Cryptocurencies like Bitcoin and the explosion of Initial Coin Offerings (ICO), have added perhaps another layer to investment diversification. Cryptocurrencies don’t yet fit accurately into financials, but can act as a payment method. They are unique in the revolutionary blockchain technology that backs them (a technology that is making inroads into all industries), but it is their high risk of fraud and failure that puts them into risk category all on their own. The risk of failure is very high in startups of any kind, but doesn’t come close to the current rate of failure of ICOs (almost half of the ICOs launched in 2017 have disappeared). Industry experts are predicting an overall failure rate of 90%.
ICOs and new cryptocurrencies take the top spot on the pyramid in the extreme risk category. A basket of well researched cryptocurrencies and blockchain projects should make up no more than 5% of a portfolio, with only a small portion of that (if any at all) being allocated to new projects. The overall portfolio allocated to cryptocurrency could reasonably be increased up to 10% if you are very knowledgeable on the subject and can tolerate the risk of loss. The investors that take the time to educate themselves on cryptocurrency value, markets, exchanges, and identifying red flags will have the greatest chance of success.
Cryptocurrency should never be your only investment.
Risk Reduction Strategies in Cryptocurrency Investing: Part 1 – Education
Risk Reduction Strategies in Cryptocurrency: Part 2 – Research
Risk Reduction Strategies in Cryptocurrency: Part 3 – Diversification
Risk Reduction Strategies in Cryptocurrency: Part 4 – Dollar Cost Averaging
Risk Reduction Strategies in Cryptocurrency: Part 5 – Security Precautions
The DNotesEDU platform provide
- For beginners that are having trouble understanding what cryptocurrency is – If Cryptocurrency Confuses You… Start Here
- Learn how to reduce some of the risks of investing in cryptocurrency – Cryptocurrency & ICO Screening Guide for Investors
- Learn more about investment risk – Investment Allocation by Risk Level