Disclaimer: I’m not an expert—not even close. None of this article should be taken as financial advice. The information offered here is simply insights from a novice to provoke your thinking about Crypto.
Let’s get real about Crypto. If you have dipped your toe in Crypto, or if you have a sizable portion of your savings in Crypto, you already know that the Crypto space is subject to a great deal of volatility – much more so than traditional financial markets. This volatility can cause significant angst and/or provide an investment opportunity. Your outlook depends on the size of your investment and your mindset.
First, a Reality Check
Although Crypto has minted millionaires, it has also left exponentially more people in financial ruin, so you should have guardrails in place. Crypto should not be considered, in any way, shape, or form, a “savings account”. Investing in Crypto is as risky as it gets. You should not invest hard-earned dollars you cannot afford to lose. Investments in Crypto are more like an amusement park ride than a financial investment.
Today, I will be addressing three questions: How much should you actually put into Crypto? How to know when it’s too much? And how to reduce holdings if that becomes necessary. Spoiler Alert: It’s less about the dollar signs that might be dancing in your mind, and more about being able to get a good night’s sleep no matter what the market is doing.
How Much Should You Invest in Crypto?
If you are just starting, start small. There is no magic number. Your number will depend on your particular situation, such as your age, risk tolerance, and life stage. My overriding limit in the Crypto space is to not invest more than you can afford to lose entirely. Think of it as your investment mad money.
Look at what happened in 2022: Crypto dropped by 70%. Can you afford to lose 70% in an investment? How would that make you feel? Don’t think it can go to zero? Think again. In one sense, Crypto is unregulated, which adds to the extreme volatility. But in another sense, Crypto may one day receive the ultimate death sentence. A government could decide to make it illegal to protect its own fiat currency. The chances of this are not zero. This would be the nightmare situation for Crypto investors.
With all this in mind, let’s look at how some investment professionals allocate their portfolios’ assets in Crypto. BlackRock, the ETF giant, advises most investors to allocate 2% of their portfolios into Crypto. J.P. Morgan echoes by advising on a cap of 1% and Fidelity floats a 2-5% range for its clients. At the other extreme, even some of the most bullish Crypto evangelists say you should limit your investment to between 5% and 10% of your portfolio. These numbers also provide a good yardstick for measuring the veracity of so-called Crypto influencers. If someone is advocating double-digit percentages in Crypto portfolios, they are in Lulu Land. Their advice should be taken as such.
My take on this issue is that your age and life stage should be the primary considerations. If you are under 30, with a steady income, 5% feels right—aggressive but diversified. If you are in the latter stages of life, 1-2% max. Also, one good strategy to even out the bumps and take advantage of the dips is dollar-cost averaging. Buy $100 weekly instead of dumping a lump sum. And diversify with BTC (50-60%), ETH (20-30%), and then a bit of SOL (pun intended). Avoid Meme Coins unless you’re a riverboat gambler.
How to Know When You’re Too Deep
Here is my most straightforward advice up-front. I’ll share with you what I learned a long time ago from a well-educated and seasoned investment professional: “If one of your positions is making you lose sleep, you have too much size in that position”.
The dopamine rush of a 10-20% green day can be addictive – be careful you’re not in this for the gambler’s high. But with the highs will come the lows. Here are some more telltale signs you’re overexposed:
- Are dips stressing you out?
- Is your sleep, work, or mood altered by market moves?
- Does a 10% drop have you snapping at your family?
- Are you up at 3 a.m. scrolling screens for validation?
- Are drawdowns affecting your meal or entertainment choices?
These are signs that you have too much money and too much emotional capital invested.
How to Pare Back
If you find you are over-invested in the Crypto space, develop an action plan to reduce your holdings. First, calculate your Crypto holdings as a percentage of your total portfolio. If you’re losing sleep with 10% of your assets in Crypto, consider reducing your holdings to 5% – for example.
If the Crypto space has taken a dip and you are hesitant to dump your holdings, sell a portion immediately, then plan to sell additional tranches on a regular schedule—like daily or weekly increments. Make a plan and stick to it. You’ll sleep better again knowing you are in control again.
Seek Balance
If you are young and just starting out, aim for 1-5% to start. Diversify smartly and watch for those overkill signals. Don’t be afraid to sell winning positions. No one has ever gone broke banking profits. Buy dips without overextending yourself. It’s not about getting rich quick – it’s about stacking odds in your favor. Play the long game. Investing is a marathon, not a sprint. Healthy investing should hum in the background, never scream in the foreground.