Whenever Bitcoin’s price goes on a massive growth spurt, it’s pretty predictable that people are going to talk about it — and wonder if they should invest in cryptocurrencies, whether that’s Bitcoin, Ethereum or other options.
(And if you live in my house, it’s likely that you’re going to hear many, many jokes about how “we can retire now” on the fragment of a bitcoin your partner mined years ago.)
As with anything in the world of personal finance, there’s no one-size-fits-all answer to whether investing in Bitcoin is right for you. However, there is a process you can walk through to figure out for yourself if this (very) high-risk, potentially high-reward option is right for some of your money.
To figure out if you should invest in cryptocurrencies, ask yourself these four key questions.
- Do you have a diversified portfolio already?
- How much money are you comfortable putting into riskier investments?
- Are there other big bets you want to make?
- Are you comfortable if the value goes to zero?
And if those seem like really intangible or confusing questions, don’t worry — that’s what the rest of this post is for. Let’s tackle each one to help you figure it out and explain why it’s a question that needs answering before you go wild and put your life savings into cryptocurrency.
Spoiler alert: Please don’t put your life savings into cryptocurrency.
Hey, full disclosure: Some of the links in this article are sponsored. But we only recommend products and services we trust and that we think you’ll love.
1. Do you have a diversified portfolio already?
Unless you have a golden-egg, iron-clad, definitely-going-to-be-there-in-50-years pension, you need to take care of your retirement savings yourself. The best way to do that is to invest regularly in a portfolio of low-cost, diversified investments that will grow alongside the market over time, like with a standard robo-advisor portfolio.
Think of something like your traditional Wealthsimple Invest TFSA or RRSP account: It’s got exposure to multiple countries, multiple industries and multiple different types of investments, built right in for a low annual cost. And as an added bonus, you’ll get $50 when you open your first account and deposit at least $500.
Sure, it’s not going to quadruple in the next month, but you’re also not going to lose 85% of the value if a single stock (or, ahem, cryptocurrency) tanks tomorrow.
This is where the bulk of your investments should be, and that applies to anyone — but it doesn’t mean there’s no room for other options.
So let’s talk about how to add stuff like cryptocurrency into the mix in a way that makes sense.
2. How much money are you comfortable putting into riskier investments?
Cryptocurrency is one of the best examples of a risky investment. There are no real “market fundamentals” in the same way there might be underpinning, say, a dividend-paying bank stock.
Is a concept like “underlying market fundamentals” debatable with any hot investment? Sure, but at least for stocks you can check on some common ratios or read a financial report if you’re feeling really ready to party.
So before you decide to buy cryptocurrency, you should figure out how much money you’re comfortable putting into something that is, by definition, riskier than average. One of the easiest ways I’ve found to manage this for my own investments is to think about it in terms of percentages. I’m comfortable putting about 10% of my money into investments that are outside my regular, balanced, diversified portfolio. So if I had $10,000 to invest today, I’d be comfortable sending $9,000 to my Wealthsimple Invest account for the long-term, and giving myself $1,000 in Wealthsimple Trade to invest in whatever I wanted, including cryptocurrencies.
3. Are there other big bets you want to make?
Here’s something you’ve probably never heard before in your life: There’s only so much money.
It’s deeply obvious, but also deeply important, to remember this when you’re thinking about investing in Bitcoin or any other cryptocurrency, because the money you invest in crypto is money you’re not investing in something else.
Are there any other big swings you want to take when it comes to your investments? Maybe an IPO you’ve heard is coming up, or a company you’ve done a lot of research on that you really believe has a bright future. If you’ve got $1,000 to spend on your big investment bets, maybe you only want to put $500 of it into Bitcoin and $500 into something else.
It’s not diversifying in the classic sense, but think of it like shopping for a treat for yourself. Do you want the $1,000 pair of kicks or a $500 sweater and a $500 bag?
And, yes, that level of luxury purchase is how I think about any risky investments: It’s fine to do if you’re financially stable and otherwise set for retirement, but only after that’s the case!
4. Are you comfortable if the value goes to zero?
The last big thing to ask yourself when it comes to investing in any cryptocurrency is this: How will you feel if the value goes down?
Bitcoin is a great example because I’ve heard about prices ranging from $40 US (yes, I should have bought in then) to $20,000, back down to $10,000, and recently I’m pretty sure it went up to over $40,000. It’s not uncommon to have feelings when your investments fluctuate, especially when it’s by that much.
Sidebar: When Bitcoin was at $40, buying it seemed like a technical feat. I could never have figured out how to actually buy one, and chances are good that even if I had, I’d be one of those people whose single bitcoin was lost to the sands of time. That’s why it’s amazing that these days, options like Wealthsimple Trade make it downright simple to put your money into popular cryptocurrencies.
But risky investments are just that: risky. There’s no guarantee that any single investment, whether it’s a stock or a cryptocurrency, is going to maintain any level of value over time. That’s why my most basic litmus test for my own investments is this: would I be comfortable, and more importantly fine financially, if the total value of these investments disappeared?
If the answer is yes, you’ll be more prepared to weather the inevitable swings in value. If or when the answer becomes no, that’s when you know it’s time to sell or rebalance some of your investments — a.k.a. take money off the table.
Like if I had figured out how to put $1,000 into Bitcoin at $40 way back when and never sold a single dollar of it, I’d have over a million dollars by now (weeps gently in hindsight). That’s far too much money for me to be comfortable if it disappeared tomorrow, so it’d be well past time for me to sell some of that investment and put the proceeds into something more stable, like my Wealthsimple Invest account.
And, hey, if I’m a millionaire, maybe my threshold is that I’m still comfortable holding $100K in bitcoin—that’s fine! Everyone’s tolerance for risk is different, and your overall financial picture makes a big difference.
That’s why there really is no one-size-fits-all answer to “should I invest in cryptocurrency?” But hopefully you now have the tools to answer it for yourself, so you can pop open your Wealthsimple Trade account with no guilt whatsoever.