There is no denying the fascinating nature of cryptocurrencies. The unique concept transforms the current paradigm of what a currency is. There are no tangible coins or paper notes that these tokens represent, they are merely codes scripted on a long decentralized digital ledger.
So why is cryptocurrency getting all the attention? As a hypothetical illustration, had you invested $100 in its early days in 2010, you would have a staggering $75,558,232 as of today, September 16th, 2021, an annual return of 242%. If that didn’t happen, and most likely it did not, the question is should you buy Bitcoin now? Here are a few things to consider before answering that question:
Some investors buy and “HODL” with the hope that cryptocurrency eventually replaces all government fiat currencies. Other investors are more speculative, buying for price appreciation, then converting back to government issued currency. No matter the motive, investors need to be prepared for the possibility of the investment dropping to zero. In the past five years Ethereum and Bitcoin have seen an estimated 95% and 88% drawdown respectively, while the S&P 500 saw a 34% drawdown. Are these the kind of drops that you would be able to handle?
When you buy a stock, you own a piece of the company, when you buy a bond, a company or government is in your debt, and you have a claim on its assets. If you buy cryptocurrency, you own a list of numbers stored in your digital wallet, and there’s nothing tangible or intrinsic in its nature. Are you comfortable with ephemeral nature of this type of investment?
If you determine that you are comfortable with the risk, and nature of the investment, adding a small position to your overall portfolio could be seen as reasonable. As with all speculative purchases, however, you should limit the holding size to a value you can afford to lose.
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