Can cryptocurrency be part of a responsible long-term portfolio?

Rochelle Warries Latest, Rochelle Writes

Short answer: Yes.

Long answer: It depends on your risk tolerance and time horizon. Crypto has been dubbed ‘The Wild West’ and it honestly deserves that title. An asset class that can rise over 150% in a matter of months is nothing short of wild.

However, we cannot ignore the cryptocurrency adoption curve. Cryptocurrencies are the fastest-growing technology in human history. It’s growing faster than the internet and that in itself is impressive. For example, the cryptocurrency user base is growing at over 100% a year, while the internet only grew around 67% per year during the late 1990s and early 2000s, (see diagram below).

*Source: revix.com

First things first: Why cryptocurrencies?

Many people are excluded from the traditional finance system. This cohort is also known as the ‘unbanked’. It sadly comprises mostly people of colour, women, and lower-income individuals. In addition, there are a lot of perceived barriers to traditional retail stock investing that have made some of these historically under-represented groups less likely to invest.

The growing accessibility of cryptocurrency is a characteristic that may be especially appealing to this group. If we can get them into the world of investing via cryptocurrencies, we might be able to build on this leap, and convince them that a balanced portfolio, where traditional stocks and bonds are included, is the holy grail.

Common barriers to investing in crypto

Many people are sceptical of cryptocurrencies and rightfully so, as it has been a breeding ground for scammers where many investors have lost money. The world of cryptocurrencies is also greatly misunderstood because of the technical jargon. That’s why education is critical in this space. Whilst you don’t need to be an expert, there are a few terms to understand, like blockchain, smart contracts, DeFi, wallets, seed phrases and the like.

It’s often said that Bitcoin is an inflation hedge because supply is capped and demand is uncapped. Thus, it cannot be inflated as no new coins can be created or printed. Once you learn the basics and are invested in the space (no matter how small), you will be eager to learn more at your own pace.

How to start thinking about crypto

In my cryptocurrencies e-book I ask readers to answer six simple, but important, questions before considering entering this space:

  1. What does the coin/token* do?
  2. What problem does the coin/token solve?
  3. Where does the coin/token fit into the puzzle that is cryptocurrencies?
  4. Does this coin/token have the potential to change the world? (Mass adoption)
  5. How strong is the community behind the coin/token?
  6. How reputable is the development team behind the coin/token?

* A token is a cryptocurrency denomination.

Unlike stocks, researching tokens can prove challenging and many investors are probably safer sticking to the top 10 coins in market capitalisation. But here one also needs to be cautious. LUNA, a once previous top 10 coin, lost nearly 100% of its value in 2022.

A potential solution

First, have a solid financial plan that includes an emergency fund and retirement planning. Next, be honest with yourself: Where does crypto fit into your discretionary investments, and what is your risk tolerance or allocation percentage? Age plays a very important role in your decision. The general consensus for conservative investors is for 2 – 5% of their total wealth to be invested in crypto assets. More aggressive believers, like myself, will stretch it to 10-15%. Gen Z will most likely go much higher.

The most difficult part is building a long-term mindset and not checking prices daily. If you check prices daily, are you really in it for the long-term and the technology?

Dollar-cost averaging is one of the best strategies to incorporate a volatile asset into your portfolio. This means buying with small amounts of money consistently, instead of buying all at one time. This helps reduce some of the price volatility.

Crypto bundles like EasyCrypto EC10 or the Revix Top 10 Bundle offer diversification from inception, just like an ETF. The eToro platform also offers fascinating bundles and it rebalances a few times per year, so you don’t need to do anything. A few examples:

  1. CryptoEqual: The portfolio allocation is equally weighted among the top crypto assets and not by market capitalisation
  2. Scalable-Crypto: Assets that will increase transaction speed in one bundle
  3. DeFi Portfolio: Assets that act like “banks” in the digital world in one bundle

Crypto in South Africa

The South African Reserve Bank (SARB) changed its stance on crypto in July 2022. “Our view has changed, and we now regard it [cryptocurrency] as a financial asset and we hope to regulate it as a financial asset. There has been a lot of money that has flowed in and there is a need to regulate it and bring it into the mainstream.” – Kuben Naidoo, Deputy Governor of the SARB

Conclusion

Investing in cryptocurrencies should be viewed as a path toward financial independence that can help people beat inflation over time. However, this is not the only path. It can supplement a balanced portfolio that aligns with your risk appetite.



Rochelle

Rochelle Warries is a qualified chartered accountant with 16 years of experience and a seasoned stock market investor. Her passion is helping novice investors build healthy investment portfolios through financial education.

She is founder of Soul Financial, a website offering financial education and coaching. You can find her on Twitter: @soulfairy3