One of the most common questions that I get when I first meet new people, is about my opinion on cryptocurrency. This is a tricky question to answer because I don’t have strong opinions on cryptocurrency or any investment, per se. However, I do have very strong opinions about purpose, process and suitability, and my opinion on cryptocurrency flows from those views.
At the moment, cryptocurrency is a speculative asset. When considering a speculative investment, you should begin by determining what role, if any, such an investment should play in your overall portfolio.
The first and foremost question should be:
“What is the purpose and objective of my portfolio?”
Followed shortly by:
“Do speculative investments serve that purpose, and meet that objective?”
The purpose and objective of the portfolio is partially how your portfolio manager determines your allocation. Additionally, being crystal clear on your purpose – the “why” of the investment, is a key factor in the success of any plan.
Next, investors should consider:
“What is my capacity for speculative risk, and what percentage of my assets can be reasonably allocated for speculation?”
If the answers to questions one and two suggest that indeed, some portion of your portfolio could potentially be served by a speculative investment, the next thing you need to look at is capacity. What I mean by capacity is – what is your current financial situation, and how much financial risk can you take at the moment? The answer to that question will also inform your asset allocation, and the amount (if any) that can be prudently allocated to speculative investments. Ultimately, the right asset-mix for you, should be determined by your portfolio manager.
A somewhat related question to consider is:
“What is my risk tolerance and volatility composure?”
How did you react during the last major correction? Have you ever had real money invested during a bear market? What kind of asset allocation process have you followed in the past, and what was your recommended asset mix?
Finally, after all other questions have been answered, and if there is a solid purpose, capacity, and appropriate risk tolerance and allocation, then I think the final question should be:
“Is my interest in cryptocurrency being driven by a fear of missing out (FOMO)?”
Fear and investing don’t mix. If you find yourself thinking some version of, “I better get in now, before it’s too late and I miss my chance,” you could be suffering from FOMO.
For the most part, you should derive your excitement from your clear purpose.
Your investments are merely tools that you use in achieving your higher goals. When you find yourself excited by a specific investment you have often entered perilous territory, and it is time to revisit question one all over again.
As with all things pertaining to financial planning, my position on cryptocurrency is: “It really depends.”