Digital Assets
May 29, 2024

The Benefits of Incorporating Digital Assets in Your Portfolio

The Benefits of Incorporating Digital Assets in Your Portfolio

There’s no question that trading is risky. If it weren’t risky, it wouldn’t work, and it wouldn’t be so appealing! The real question is how to reduce or balance risk in your portfolio. Digital assets could be one way to reduce the risk of a portfolio. 

Does Trading Have to Be Risky? 

In trading, a higher risk can come with a higher reward. But with risk can also come loss. Leaving money in a checking account isn’t likely to achieve the level of growth a long-term trader is looking for. Most banks don’t need to offer customers anything to keep money in a checking account because people need this type of account to access that money regularly. 

Then there are savings accounts. Banks give their customers a little interest in exchange for keeping their money, but the interest isn’t enough to feel like your money is working for you. Many people are willing to put their money into a savings account because the risk of loss is virtually non-existent thanks to insurances and general stability of the banks. It’s only riskier exchanges, where traders might not get their initial capital back. Opportunities need to provide higher returns to attract traders and new capital. 

Another thing potential traders should think about when choosing where to buy is how they’re sharing in the risk and reward. The Federal Deposit Insurance Corporation (FDIC) might protect people from losing their bank deposits, but the banks use their customers’ money for their own profits. While you might be lucky to get a penny a month, the banks are lending out customers’ money at much higher rates – this is one way they generate revenue. They’re also making much riskier decisions, and sometimes these risks don’t pay off – possibly the worst examples of this were the actions that caused the 2008 financial crash, costing many people decades worth of retirement savings.  

How Can People Reduce Risk in Their Portfolio? 

For those who choose to take on risky opportunities, one key way to reduce risk is portfolio diversification.  

Most traders know not to put all their money into a single stock. If they had picked Apple, they might have come out ahead, but if they picked one of the hundreds of companies that tried to be Apple and failed, like Nokia, Commodore Corp, or Palm, then they might have lost everything. Even if you did manage to pick a company that was destined for greatness, the bankruptcy of General Motors is a good example of how shareholders may not have sold at the right time. By buying stock with many different companies, traders are hoping that the winners outweigh the losers. 

The same principles apply to buying different asset classes. There have been many times that the stock market has dropped, just like it did at the start of the COVID-19 pandemic, the Great Recession, the Dot Com Bubble, and the Great Depression. Traditionally, bonds were the safe asset class that stayed stable or even went up when stocks went down. That left traders with money to spend or gave them something to sell to buy stocks while they were low. 

How Does Digital Currency Improve Diversification? 

Digital currency is not a stock or a bond. It’s also not real estate, gold, silver, or other assets traders might add to diversify their portfolio. Its price moves independently of those traditional assets, just as those assets all go up and down at different times. 

In early 2020 as the COVID-19 crisis became more serious, stocks began to fall. Bond prices also became unstable as traders worried about corporations maintaining their cash flows and governments printing too much money to help with the recovery. As traders looked for a new opportunities to potentially grow their money, cryptocurrency prices took off. 

Another major risk is inflation. This is more difficult to diversify away from when using traditional assets priced in the inflating currency. In addition, since bonds are generally more susceptible to inflation, traders trying to be more conservative by opting for bonds often take on the greatest inflation risk. 

Some institutional fund managers are turning to cryptocurrency as an alternative asset class as a potentially high-risk, high-return option. The logic is that it’s more immune to governmental monetary policies that can set off inflation, and it can function similarly to holding multiple traditional currencies. With more companies beginning to accept cryptocurrencies, like Bitcoin, as payment, digital currency is in some ways functioning more like a cash equivalent. 

How To Add Digital Assets to Your Portfolio 

Many people stick with stocks and bonds because this is what they feel more comfortable with (despite the potential risks) or because that’s what their brokers offer. Digital currency has been historically difficult to trade both in terms of execution and getting funds to and from banks or traditional fund accounts. New platforms are opening to help solve those problems and help individuals in particular who are new to trading in digital currency. Considerations for people wanting to enter the digital market: 

Do your research to determine what type of crypto wallet or exchange is right for you. Talk to friends and colleagues for their opinions, the same as you would for any other purchase or life move. You possibly already know someone who holds digital assets. 

Many exchanges and crypto wallets have low minimum entry levels, so people can give it a go-to to see how it works without breaking the bank.

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