Disclaimer: Trading and investment in digital assets involves a substantial risk of loss. You should not invest more than you can afford to lose. This content does not constitute investment advice and does not make recommendations on the suitability of a particular asset class, strategy, or course of action. You should consider seeking professional advice.
No question investing is risky. If it weren’t risky, it wouldn’t work, and it wouldn’t be so appealing! The real question is how to reduce or balance risk in an investment portfolio. Digital assets could be one way to reduce the risk of a portfolio.
Does Investing Have to Be Risky?
In investing, a higher risk can come with a higher reward. But with risk can also come loss. Leaving money in a checking account isn’t likely to achieve the level of growth a long-term investor is looking for. Most banks don’t need to offer customers anything to keep money in a checking account because people need this type of account to access that money regularly.
Then there are savings accounts. Banks give their customers a little interest for keeping their money with them, but the interest isn’t enough to feel like your money is working for you. . Many people are willing to put their money into a savings account because the risk of loss is virtually non-existent thanks to insurances and general stability of the banks. It’s only riskier investments, where investors might not get their initial capital back. Investment opportunities need to provide higher returns to attract investors and new capital.
Another thing potential investors should think about when choosing where to invest is how they’re sharing in the risk and reward. The Federal Deposit Insurance Corporation (FDIC) might protect people from losing their bank deposits, but the banks use their customers’ money for their own profits. While you might be lucky to get a penny a month, the banks are lending out customers’ money at much higher rates – this is one way they generate revenue. They’re also making much riskier investments, and sometimes these risks don’t pay off – possibly the worst examples of this were the investments that caused the 2008 financial crash, costing many people decades worth of retirement savings.
How Can Investors Reduce Risk in Their Portfolio?
For those who choose to take on risks to invest, one key way to reduce risk is portfolio diversification.
Most investors know not to put all their money into a single stock. If investors picked Apple, they might have come out ahead, but if they picked one of the hundreds of companies that tried to be Apple and failed, like Nokia, Commodore Corp, or Palm, then they might have lost everything. Even if you did manage to pick a company that was destined for greatness, the bankruptcy of General Motors is a good example of how investors may not have sold at the right time. By buying stock with many different companies, investors are hoping that the winners outweigh the losers.
The same principles apply to buying different asset classes. There have been many times that the stock market has dropped, just like it did at the start of the COVID-19 pandemic, the Great Recession, the Dot Com Bubble, and the Great Depression. Traditionally, bonds were the safe asset class that stayed stable or even went up when stocks went down. That left investors with money to spend or gave them something to sell to buy stocks while they were low.
How Does Digital Currency Improve Diversification?
Digital currency is not a stock or a bond. It’s also not real estate, gold, silver, or other assets investors might add to diversify their portfolio. Its price moves independently of those assets, just as those assets all go up and down at different times.
In early 2020 as the COVID-19 crisis became more serious, stocks began to fall. Bond prices also became unstable as investors worried about corporations maintaining their cash flows and governments printing too much money to help with the recovery. As investors looked for a new place to invest their money, cryptocurrency prices took off.
The question investors need to answer isn’t what strategy worked yesterday but what strategy will work tomorrow. When you’re trying to reduce risk in your portfolio, you want diversified assets that aren’t closely correlated.
Glen Broomfield, General Manager of Fabriik Weave
Another major risk for investors is inflation. This is more difficult to diversify away from when using traditional assets priced in the inflating currency. In addition, since bonds are generally more susceptible to inflation, investors trying to be more conservative by opting for bonds often take on the greatest inflation risk.
Some institutional investors are turning to cryptocurrency as an alternative asset class as a potentially high-risk, high-return investment. The logic is that it’s more immune to governmental monetary policies that can set off inflation, and it can function similarly to holding multiple traditional currencies. With more companies beginning to accept cryptocurrencies, like Bitcoin, as payment, digital currency is in some ways functioning more like a cash equivalent.
How To Add Digital Assets to Your Portfolio
Many investors stick with stocks and bonds because this is what they feel more comfortable with (despite the potential risks) or because that’s what their brokers offer. Digital currency has been historically difficult to trade both in terms of execution and get funds to and from banks or traditional investment accounts. New exchanges are opening to help solve those problems and help individuals in particular who are new to investing in digital currency. Considerations for people wanting to enter the digital market:
- Do you research to determine what type of exchange is right for you.
- Talk to friends and colleagues for their opinions, the same as you would for any other purchase or life move. You possibly already know someone who is investing in digital assets.
- Many exchanges have low minimum investments, so investors can give it a go to see how it works without breaking the bank.
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