Everyone has asked themselves this question at some point on their crypto journey, but it doesn’t only apply to first-time investors.
It’s clear that the answer is subjective and here’s a simple concept to show why: The younger you are, the more risk you can take because your financial commitments are often less than those of someone who is married with kids, for example. On the other hand, as you get older you may want to take less risks in order to secure a retirement nest egg or simply because you place more value on financial stability.
However, instead of focusing on the multitude of lifestyle choices, ages and personalities, we’re going to focus on financial decision making and highlight some key considerations which you should be able apply to your own personal circumstances.
When investing in assets, we can categorise into 3 main risk levels.
The weightage of assets in each of these baskets will vary depending on your timeline, financial situation, risk appetite and knowledge.
Before taking up any form of investment, measuring your financial situation will provide a clear picture as to the type of investment that you’re able to make. This includes calculating income, expenses, current investment and savings.
Once you have a better understanding of your personal situation, putting your money into another investment becomes less stressful. It means that you can set your financial goals with confidence and focus on achieving your investment objectives, without the worry factor.
Low Risk investments are built to constantly generate stable cashflow for investors. They come at a slower pace but provide a stable return over a long period of time.
By doing so, it enables investors to build a retirement fund without worrying too much. Most investors reduce risk by putting their capital gains into low-risk investments in order to preserve wealth.
Ideally, low risk investments should generate enough passive income or cash flow to enable investors to only spend the interest. This allows the capital to continuously grow and in turn, provides income for years ahead.
“Never spend the principal, only the interest” – Kevin O’Leary
Some types of low-risk investments include bonds, index funds, high yield savings accounts and treasury bonds. These give a yield of roughly 4-5% per year and most investors hold on to them for a long period of time, usually 10-15 years.
Medium-risk investments give a higher rate of return either in dividends or interest, and sometimes in capital gains as well.
Imagine holding an asset for 3-5 years and being able to flip them for a growth of 30-50% in capital gains or getting a dividend or interest of 10-15% a year. This greatly increases the yield but also comes with higher risk because of the higher volatility it has compared to low-risk investments.
Often, investors will purchase these assets at a low price and look to sell them in the next 3-5 years, making a profit over a shorter period of time.
Medium Risk investments include dividend stocks, crowdfunding and corporate bonds.
High risk investments hold the highest risk due to the volatility that they bring, but they also enable investors to achieve gains of 100% -10,000%.
Cryptocurrencies, for example, are considered high risk to some investors based on the knowledge and experience that they have.
Someone lacking knowledge and experience in the crypto space may decide to stay away from any related investment due to the volatility and risks involved.
In contrast, an investor with in-depth knowledge and awareness of the market may see it as an opportunity. They see it as ‘the future of money’, which holds great potential.
Take DogeCoin (DOGE) for example which has made many into millionaires due the price growth of the token. On the flipside, it has also left many ‘bag holders’ out of pocket, meaning investors held their position and watched as the coin rapidly decreased in value.
From April 2021 to May 2021, it grew from US$0.07 to US$0.70 giving their investors a 10x growth in a period of a couple of weeks.
But in the short span of a month, it went down to $0.18 which was a 75% drop.
The Right Allocation
For investors interested in cryptocurrency, calculating your net worth will give a clear picture of how much allocation one should have in cryptocurrencies.
Having a 3-5% allocation of cryptocurrency in your portfolio will help your portfolio to withstand crashes that can happen in the crypto space, like in May-July 2021 when Bitcoin lost 50% of its value in just 2 months.
However, allocating too much cryptocurrency in a portfolio can be detrimental. It can affect future investment decisions on whether one should sell them or continue to HODL (hold on for dear life!)
If you are looking to gain exposure to cryptocurrency, you can try out high-yield savings accounts like Huobi Earn. This enables users to deposit USDT, which is a tokenised USD, and earn up to 6% in interest.
Huobi Earn functions like a bank, by leveraging on DeFi, it allows users to get higher returns on their cryptocurrency or stable coins. The interest is paid out daily and re-compounded into your account allowing a stream of passive income to grow via the use of cryptocurrency.
Whichever way you choose to invest, take your time, consider what’s best for your personal circumstances and check out the rest of our Huobi Learn website to fully explore your investment options.