Bitcoin resting on United States dollar banknotes.Nicolas Economou | NurPhoto | Getty Images
Bitcoin's trademark volatility is again rearing its head, showing investors the risk they're signing up for when they put money into the cryptocurrency.
The digital coin cratered as much as 10% on Monday, amid a global market decline. Bitcoin was last down nearly 8%, hovering around a price of $43,800 per coin, according to data from Coin Metrics. The rest of the cryptocurrency market was also in a slump, with ether falling more than 9% to about $3,046 per coin.
The extreme swings up and down are relatively common for cryptocurrencies, and investors can expect them to continue in the future.
“The only thing I can expect for sure is volatility,” said David Yermack, a professor of finance at New York University Stern School of Business. “From day one, this has been a risky investment for people.”
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Bitcoin has seen both astronomical growth over the last decade and major sell-offs at various points in between. Although many bulls point to its past performance as a sign that the cryptocurrency will continue to surge in the future, that might not happen, according to Yermack.
“It's a purely speculative asset,” he said, adding that while bitcoin has grown in popularity, it's still not considered a mainstream investment, meaning that many have little information about the asset.
“You should never invest in anything that you don't understand,” said Yermack.
Only invest what you're willing to lose
Still, investing in cryptocurrencies has become increasingly popular, especially because of how easy it is to buy into them. Even some financial advisors are beginning to see the digital assets as tools for building personal wealth.
Because cryptocurrencies are risky assets, however, financial experts generally advise that people looking to invest in bitcoin allocate a small amount of their portfolio that they'd be OK with losing entirely to the asset.
“People should only invest really what they're willing to lose,” said Daniel Polotsky, CEO of CoinFlip, one of the largest bitcoin ATM companies in the U.S.
He added that people near retirement, those who will need the money they're investing near term or people who are looking to trade frequently to make a profit may want to reconsider bitcoin as an asset for those goals.
“Maybe there are more opportunities to make money because it's so volatile, but it can get very addicting very quickly to start trading back and forth,” he said. “And, most of the people that do that lose money.”
People should only invest really what they're willing to loseDaniel PolotskyCEO, CoinFlip
Buy for the long term
If you are going to assign part of your portfolio to a speculative asset like bitcoin, take a disciplined approach and impose rules for buying and selling, said David Sacco, an economics professor at the University of New Haven.
“You can get experience and not blow yourself up in the process,” he said.
One way to protect yourself from selling at a loss is to commit to holding the asset long term, similar to other stocks and bonds in your investment portfolio.
“Throw some money into it and kind of let it stay in there and season for a while,” said Anjali Jariwala, a certified financial planner and CPA and founder of Fit Advisors in Torrance, California. “Just so you're not making decisions every time there's a fluctuation in price, which at this point happens every few days.”
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