Investors nervous about the stock market might be looking for alternative investments like Bitcoin. When considering cryptocurrencies, though, it’s important to assess your overall portfolio goals and risk tolerance.
Learn about investing in Bitcoin over stocks in a way that may help you decide whether adding the cryptocurrency to your portfolio is the right move for your situation.
Bitcoin Risk vs. Stock Risk
Investments carry risk. The market could crash for various reasons. Companies could go bankrupt. Or, in a positive sense, a stock could soar over time. Weighing risk is important when you decide to add different assets to your portfolio.
“With an individual stock, there are risks,” Kirk Chisholm, a wealth manager and alternative investment specialist at Innovative Advisory Group, told The Balance via phone. “There’s a risk that it won’t grow, dividends might be cut and many people compare performance to the S&P 500, which means you run the risk of trying to keep up with the Joneses.”
However, he pointed out, these are risks common with many investments. Stocks are different because there is some guidance you can use to get an understanding of where a price might go.
David Stein, a former chief investment strategist and portfolio manager for an investment fund, also told The Balance via phone that Bitcoin lacks the predictors that stocks do.
“Cryptocurrency is speculative, completely based on supply and demand,” Stein said. “All currencies are, to some degree, based on what people are willing to pay, but it’s different with a crypto like Bitcoin. Unlike other currencies like the dollar or gold, it’s a much smaller market with regard to its overall size, so it’s more subject to big swings.”
Both Chisholm and Stein agreed that Bitcoin is a relatively new development and isn’t yet widely adopted. That adds a different layer of risk because it could be replaced by other more efficient digital currencies, or it could be regulated out of existence.
Who Is a Good Fit for Bitcoin?
Bitcoin may make sense if you’re looking for a little extra diversity in your portfolio. Cryptocurrencies like Bitcoin provide alternatives to more common assets.
“Bitcoin is helpful if you want to have some assets that aren’t denominated in the dollar or other home currency,” Stein said. “It’s a way to hold some assets away from the dollar.”
In general, even if you feel like Bitcoin is a good fit for your portfolio, Stein and Chisholm agreed that it probably shouldn’t be the main focus of your investment strategy. It’s mostly about how much risk you have and can tolerate, and whether you’re comfortable with losing that amount in your portfolio.
“If you like the numbers and the calculus behind (Bitcoin), then consider that it could go to $0 or up twentyfold,” Chisholm said. “So what percentage of your portfolio are you willing to lose? I think you limit it to 1 to 5% of your portfolio, depending on your risk tolerance.”
Who Is a Good Fit for Stocks?
For most people, stocks are likely to be appropriate for the bulk of any portfolio.
“Stocks should be the main focus of a portfolio for most people,” Stein said. “You can come up with a value based on profits and it’s a more stable investment due to its underlying characteristics.”
Plus, Stein said it’s reasonable to suppose that, even with some short-term volatility, most companies will likely exist in the future and, therefore, provide stability. By investing in a broad-based index fund or exchange-traded fund (ETF) made up of stocks, there’s a good chance that you’ll be fine in the long run.