Should I Buy Crypto?

Dear Kristin,

Is cryptocurrency a good investment?

Sincerely,

R.B.

Dear R.B.,

Great question! Investing in cryptocurrency (or crypto as many call it) remains such a hot button issue and the short answer is... it depends. What do you define as a good investment? Is it one that gives you 100x in returns? 50x? Is it one that helps you lower your risk? Once you define what a good investment is for you, and your risk tolerance, then you can better determine if cryptocurrency should be a part of your portfolio.              

For example, as a millennial with a lot more time in the market, I’m not terribly worried about the risk I’m taking in my portfolio. So for me, a good investment is one that performs at least as well as (if not better than) the historical return of the stock market: roughly 10%. But maybe you’re older and you don’t want to take on the risks necessary to yield higher returns. Perhaps you want your money to grow just enough to keep up with inflation.

I’m going to assume a very broad definition here and say that a good investment is one that earns money annually, and doesn’t lose money over a considerable period of time. Are there some cryptos that fit that definition? Yes. Are there ones that don’t? Also yes.

There are thousands of cryptocurrencies that you can buy, and as I type this, I’m sure a few hundred more have been created. That’s a staggering number of cryptocurrencies and as you can imagine, it’s practically impossible to know about them all. So let’s take a look at the “OG” cryptos available: bitcoin and ethereum. 

If you bought either of these coins just three years ago, you would be up over 100% for BTC and over 600% for ETH. So that sounds like a great investment right? I can hardly argue with a return like that.

But here’s the problem. Cryptos aren’t for the faint of heart, and unlike a stock, which is tied to a company’s performance, there isn’t much a crypto can hang its hat on. So if you do buy crypto, you need to prepare yourself for what is surely going to be a volatile, and bumpy ride—at least for the foreseeable future.         

For example, while buying either of those cryptos three years ago would have yielded great returns, you wouldn’t have had the same luck if you bought them one year ago. That’s because your losses would be greater than 40%—worse than the stock market—which is only down 5.1% since this time last year. 

So let’s circle back to your original question. Are cryptocurrencies a good investment? The answer isn’t “yes”. But it’s not a “no” either. If you can stomach the roller coaster ride and are willing to stick it out, you might be able to see some amazing returns. Just know that it’s also very likely you might not. 

-Kristin

If you have questions about money, Kristin is here to help. Submit an anonymous question and she may answer it in a future column.

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