Yahoo Finance 5 Key Signs You’re Too Heavily Invested In Crypto
Asset allocation is a crucial but often overlooked part of any good investment strategy. Smart asset allocation will ensure you’re diversified enough to minimize your overall portfolio risk as much as possible. A big part of that is making sure you aren’t over-invested in any one security or asset class, especially riskier ones.
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Cryptocurrency, despite its popularity, remains volatile and risky. It has certainly offered some outsized returns — Bitcoin alone minted a host of new millionaires — but it’s important to be certain it isn’t taking up too much space in your portfolio. GOBankingRates spoke to Kadan Stadelmann, CTO of the blockchain platform Komodo, to find out five key signs that you’re too heavily invested in crypto.
Obsessive Monitoring
“You find yourself constantly checking cryptocurrency prices, even multiple times an hour, and it significantly affects your daily routine and productivity,” Stadelmann said. If this sounds like you, take it as a warning sign. Checking on prices too often tends to give you an overstated sense of how important a change in price is, which can lead to bad decision making.
The truth is, any publicly traded asset is going to experience some price volatility. That’s perfectly normal and even healthy. Crypto is particularly volatile — the price of Bitcoin has ranged from around $24K to over $70K just over the last 52 weeks — which amplifies the negative effects of over-monitoring
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Emotional Overreaction
“Your mood fluctuates significantly based on the movement of cryptocurrency prices. A drop in prices might cause anxiety or panic, while a rise might lead to euphoria,” Stadelmann said. This is a dangerous sign because an excess of emotion dramatically increases your chance of making a mistake that could result in a serious loss of your savings. Fear can make you sell when prices drop quickly, locking in a loss that you might have avoided by simply holding through the downturn. Conversely, the rush of high prices might lead you to allocate even more of your savings to crypto, thereby unbalancing your portfolio.
Borrowing To Invest
“You’ve taken on debt or borrowed money to invest in cryptocurrency, exposing yourself to even greater financial risk,” Stadelmann said. The practice of using borrowed money to invest is called leverage, but it’s also referred to as buying on margin when stocks are involved. The reason investors use leverage is to increase the return on an investment (ROI).
Here’s an example. Let’s say you invest $100 in a stock. It goes up over the next few months and you sell when it hits $125. Your ROI is the return divided by the original amount invested, in this case 25%. Now let’s say instead you have $50 and borrow another $50 from a friend to invest in that stock, selling at $125. You pay your friend back and you’re left with $75. In this scenario, your return on investment is now 50%. You got the same amount of return on half of the original investment.
The flip side of this is that leverage can also increase the loss if your investment goes south, which is always a possibility. In fact, because you are essentially counting on the return on investment to pay back the debt, it’s possible that you could lose more money than you originally invested.
You Have a Gambling Mindset
“You’re drawn to high-risk cryptocurrency ventures such as buying highly speculative altcoins without fully understanding the risks involved,” Stadelmann said. Finding yourself on the right side of a trade can be quite a rush. Just like hitting a jackpot on a slot machine, you might start to feel as though you can do no wrong and start exercising poor judgment or take on too much risk.
The legendary investor George Soros once said, “If investing is entertaining, if you’re having fun, you’re probably not making any money. Good investing is boring.” Gambling is exciting, but it’s not a very reliable way to get a return on your money. Stay boring and stick to your strategy and your ideal asset allocation.
You Think It’s a Sure Thing
“You’re convinced that cryptocurrency investments will always yield high returns and fail to acknowledge the inherent volatility and uncertainty in the market,” Stadelmann said. It doesn’t matter how smart or savvy you think you are, no one can predict the future, and any investable asset could lose value, whether it’s a stock, bond, real estate or crypto. If you don’t acknowledge this you might stick to a losing investment that’s going to zero, when you should have been taking the loss and moving on.
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This article originally appeared on GOBankingRates.com: 5 Key Signs You’re Too Heavily Invested In Crypto
