Cryptocurrency can be worth owning, but be careful how much you buy.
Cryptocurrency has always been most popular with younger investors, which is understandable. Younger generations are more likely to adopt new technology, and they can afford a higher risk tolerance, since retirement is still a way off.
However, some young investors take on too much risk with their crypto holdings. The World Economic Forum's 2024 Global Retail Investor Outlook reported that 35% of Gen Z and 26% of millennial crypto investors had allocated over half of their portfolios to cryptocurrency.
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It can be tempting to build a crypto-heavy portfolio, especially when you're starting out and don't have much to invest yet, because cryptocurrencies can deliver spectacular returns. For example, even after the recent downturn, Bitcoin (BTC 1.35%) is still up more than 16,000% over the last 10 years, at the time of this writing (March 26). And if you spend much time on crypto forums, you'll probably read about people who went all in on cryptocurrencies and made a fortune.
But this is a textbook example of survivorship bias. You hear about the lucky few who gambled big and won — not the ones who invested in cryptocurrencies that failed, or who bought high and sold low during a bear market.
The volatility of cryptocurrencies goes both ways. You can do very well, or you can see your holdings lose 80% to 90% of their value, as has happened with many top cryptocurrencies, including Bitcoin.
The safest approach when investing in cryptocurrency is to keep it to no more than 1% to 5% of your portfolio. There's still the possibility of outsize returns, while also being protected from drawdowns. And particularly as a young investor, you can also get fantastic returns by investing in quality stocks and letting them compound over time.
Lyle Daly has positions in Bitcoin. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
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