Many people have incurred a considerable loss by investing in cryptocurrencies at their peak. The problem is that most of the people do not follow basic investment rules when it comes to saving in cryptocurrencies. Would you have listened to someone stating at the peak of the Crypto mania that you shouldn’t invest more than 1% of your entire portfolio in a particular cryptocurrency? You would have probably laughed off at the suggestion. The truth is that, if you are investing at those levels or the current levels, you should not put more than 1% of your total portfolio net worth in a single cryptocurrency. We will help you understand why.
Why should you limit investment in each crypto to 1% of pf?
When you’re building a cryptocurrency portfolio, chances are you will pick at least 6 to 7 cryptocurrencies to invest. That is the basic diversification principle. Ideally, you should not have invest than 5% in a single cryptocurrency. However, it is difficult to find 20 cryptocurrencies for the average investor. That is why, for his investments, you should search for 5 to 7 cryptocurrencies worth investing. It is good to invest only 1% of your entire portfolio in these cryptocurrencies.
On the other hand, if you have only invested 7% of your portfolio in 7 different cryptocurrencies and even if the entire cryptocurrency market moves down by 90%, you would have lost 6.3%. 6.3% losses are recoverable. Most likely, if you have chosen your other investments wisely, it would be recovered within one year. Owing to this very reason, you should never invest more than 1% in a single cryptocurrency are not more than 5% to 7% in the entire cryptocurrency class.
Alternative Asset class:
In spite of the huge run-up, cryptocurrencies still form an alternative asset class. The alternative asset class often faces various problems like lack of liquidity or upheaval in rules and regulations. That is why it is not right to invest a significant amount of your money in any single cryptocurrency. It does not matter whether you’re investing in the best cryptocurrency or the market pioneer or some lesser-known cryptocurrency. You have to always limited to 1% in a single cryptocurrency.
Many of the cryptocurrency projects are just 3 to 4 years old. For a start-up, this is the nascent stage. That is why in the management metal of these cryptocurrency start-ups has not been tested. You never know when the management might abandon the project. That is why you must limit your investment to limit the scope of losses.
While the exponential returns in cryptocurrencies lure many people but you should never invest more than 5% to 7% of your portfolio in cryptocurrencies. Subsequently, you should limit the investment in each cryptocurrency to just 1% of your net worth. That way, even if you get it wrong, your losses will be recovered in a single year.