Keep Your Money. You Aren’t Cut Out for Cryptocurrencies.

Crypto is not for the faint of heart. If that wasn’t a blatant fact already, yesterday solidified that statement.

Over the last week, crypto’s market capitalization declined by roughly $1 trillion. Half of that loss took place yesterday when the crypto market plummeted by $460 billion. At one point, Bitcoin’s price was 54% less than its April high of $64,829.

Can you imagine watching your portfolio lose half of its value in a month?

Gains can erase just as quickly as they accumulate. Emotions spur people to sell, sometimes at huge losses. While I’m sure stop-loss orders accounted for a portion of sales (and, hopefully, secured investors a positive return), I’d bet that most crypto-holders panicked and sold their investments out of fear.

I’m not here to argue the legitimacy of cryptocurrencies — you can make that decision for yourself. But I am here to stress a key financial principle: you have no business buying crypto if you can’t handle the risk.

If there’s one thing you absolutely must know about yourself before investing in Bitcoin, Ethereum, or even Dogecoin, it’s your risk tolerance.

There’s a reason that risk tolerance exists as a concept. It’s something a financial advisor will discuss with you on day one. It’s an integral feature behind robo-advisory algorithms. There are questionnaires designed to pinpoint your risk preferences — whether you’re ultra-aggressive, ultra-conservative, or somewhere in between.

In a post from this morning, Tom Kuegler mentioned a friend of his cashed out of Bitcoin during yesterday’s dip. Upon hearing this news, Tom wished his friend had sold those Bitcoins to him.

This perfectly captures the dichotomy between investor types and risk tolerance. The friend is more averse to risk than Tom. It’s not bad to be pro-risk or risk-averse, but one is more likely to stomach crypto’s volatility than the other. Cryptos are some of the most volatile assets out there.

If you want to reap the returns of cryptocurrencies, you better be prepared to potentially lose your entire investment. This is the risk-return tradeoff. As your risk increases, so does your potential return.

There’s a popular question on investing questionnaires about the risk-return principle. Here’s an example:

The following chart compares the best one-year gain and worst one-year loss for three different investments of $10,000. Based on the potential gain or loss, which would you prefer to invest in?

Investment A: gain of $598; loss of -$161

Investment B: gain $1,896; loss of -$1,055

Investment C: gain $4,257; loss of -$3,599

In this hypothetical scenario, cryptocurrencies come closest to mirroring option C, which could be a 43% gain — or a 36% loss.

New traders, regardless of what they’re buying, tend to ignore the “risk” side of this exchange. They think markets rise indefinitely. When days like yesterday occur, they panic. It’s one thing to imagine losing half of your portfolio value in a day, it’s another to actually experience it.

That’s why many people aren’t cut out for crypto.

Just like any asset, cryptos are susceptible to broader market movements and external factors — like bearish news from China or a single tweet from one of the world’s richest people. However, unlike other assets (such as stocks, real estate, and bonds), cryptos don’t have fundamentals to evaluate. There’s a general lack of clarity and understanding.

Speculative demand is the only factor driving crypto prices. It’s one person’s willingness to pay more for a coin than what you purchased it for. While it’s a simple concept, it’s impossible to predict.

So, you shouldn’t be investing in crypto if:

1. You’re risk-averse. (Here’s a quick six-question assessment to give you a baseline.)
2. You don’t understand the coin’s underlying purpose and functionality.
3. You’re investing more than 5–10% of your portfolio in crypto.
4. You need these funds at some point in the next year.
5. You aren’t willing to create an investment plan.

Far too many people treat crypto as a fad or get-rich-quick scheme. If you’re just now investing in crypto for the first time in 2021, you’re not an early adopter. So, make sure you know what you’re getting into before you make a decision with long-lasting financial repercussions.

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Source: https://medium.com/bacon-bits/keep-your-money-you-arent-cut-out-for-cryptocurrencies-a22150851696?source=rss——-8—————–cryptocurrency