Many of you will have heard about people making fortunes by investing in cryptocurrencies. Take the story about one of the senior managers at Goldman Sachs in London who handed in his notice after making millions of pounds by investing in Dogecoin.
Dogecoin was originally set up in 2013 as a joke, but it now appears that the joke is on us as it has recently risen in value by 6,000%, making lucky investors like the GS manager very rich indeed. It’s like Bitcoin. Back in 2018, you could have bought one Bitcoin for around £3,000. Today, at the time of writing, the same purchase would cost you more than £26,000.
But while it is true that a lot of money has been made on cryptos, there have also been many losses across the years. It is typical of any volatile commodity.
The Importance of Understanding the Volatile Nature of Crypto
According to the Save the Student website, the number of students turning to crypto to make money has tripled from 2% to 6% in 2021. They, of course, are not the only ones. When news of big gains spread out on TV, newspapers, and social media, it tempts investors from all walks of life.
It is a concern that some novice investors get swept away by all of the hype. They go ahead and invest without a proper understanding of either effective strategies or the risks involved in the volatile nature of these types of trades. It highlights the importance of doing your research and being familiar with the market for a commodity before taking the plunge.
If we take a quick look at the history of the value of the best known of all cryptocurrencies, Bitcoin, it’s easy to see how volatile it is. If you buy when the price is high and are forced due to personal circumstances to sell when prices have slumped, you can lose in a big way.
Crypto and the Gender Gap
It is interesting to note that there is a significant gender gap when it comes to investing in crypto. According to an article on the CNBC.com website, women are more than half as likely as men to invest in crypto. The statistics are 16% of men versus 7% of women. It is significantly lower than investing in stocks, ETFs, mutual funds, and property.
Only Invest What you Can Afford to Lose
Regardless of the gender discrepancy, when investing significant sums of money, taking the investment term into account is one of the key factors. Having to sell at low can be a disaster, especially if you rely on the money you have invested for income. One important piece of advice is to only invest what you don’t rely on to get by. This is particularly relevant to students, for example.
The Difference Between Saving and Investing
If you live close to the “breadline,” you are better off saving (if you can) rather than investing. There is a difference. When you save, you put your money into a secure account where it remains until you want to draw some or all of it out. Because you have instant access, the interest is very low, typically under 1%.
When you invest rather than save, you put your money into an account or portfolio and make it work for you. Depending on the products or commodities you invest in, the returns are significantly higher than putting your money into a standard savings account.You always need to make sure that you are taking tax issues into consideration with crypto, and there are various free tax tools online to help you figure out those costs.
According to a 10 year study, the average return on stocks and shares ISAs over the past ten years was 9.64%.
With Investment Comes Risk
But the fact of the matter is that there is a certain amount of risk involved with investing. That risk, however, can be mitigated by two things – investing long-term and having a diverse portfolio. Cryptocurrencies will always be volatile products – at least in the foreseeable future.
The Key to Successful Investing is Diversification
But if crypto forms only a part of your investment portfolio, the risk is considerably lessened. Creating a diversified portfolio to offset any potential losses is the answer.
But don’t be misled into thinking that investing in a cryptocurrency is always bad news. Many experts believe that the best investment portfolios, like ISA shares and stocks, need a blend of higher, medium, and low-risk products.
Diversification Carries its Own Set of Problems
The main problems with diversification are time and money. If you are keen on managing your own investment portfolio, not only should you be familiar with trading stocks and shares, you also need the free time in which to do so.
In itself, time is money, but the associated costs with trading – particularly with multiple holdings and investments can become significant. You have to consider transaction fees plus brokerage charges.
It can also be quite complicated. Many synthetic products have been devised to accommodate an investor’s tolerance towards risk. Such products can be rather complicated and, therefore, may not be suitable for novice investors.
Seeking Advice from Wealth Specialist Advisors
While the idea of losing money is abhorrent, an overriding aversion to risk will drastically lessen the amount of money your savings can make and expose them to the likelihood of being devalued in real terms by inflation – especially over the long term.
If you speak to an FCA-approved wealth specialist company, you will be given sound advice, and can if you wish, place the day-to-day management of your portfolio in professional hands.