Eric Sachetta
2022 was a year of hard lessons for a lot of investors. If you started the year feeling optimistic about your new cryptocurrency investment, you might be one of them. The crypto crash was the worst-case scenario for millions of optimistic investors. After hitting peak prices in late 2021, Bitcoin had lost half its value by the next summer. Other virtual currencies saw their values plummet too. By the time the FTX exchange imploded in November, causing the loss of more than $200 billion in assets, cryptocurrency’s reputation was officially tarnished. The buzziest Next Big Thing in investing had turned into a high-profile disaster.
If there’s a silver lining to the crypto crash, it’s those lessons that investors can take from watching the collapse happen in real time. It doesn’t matter if you’ve never done any crypto investing before and don’t plan to start now. Some of the key lessons illustrated by the crypto crash are relevant to anyone who’s trying to grow their net worth through investing.
Three Lessons From the Crypto Crash
A caveat: your financial advisors are always the best source of guidance when you’re making portfolio decisions or assessing the outcomes of your past investment choices. What’s true for many investors won’t necessarily be true for you. That said, these three crypto crash takeaways might resonate with you.
- Don’t Invest What You Can’t Afford to Lose. This is a common refrain in the investment world, but the crypto crash highlights why it always bears repeating. Investing in digital currency has been a high-risk venture from its inception. Individuals who got into crypto investing did so knowing that it was a gamble. A new industry with an unpredictable future is always going to be a volatile place to invest compared to more tested investment products like bonds and mutual funds. Of course, a lot of investors were still willing to take the leap in exchange for the possibility of huge returns.
Ultimately your investment decisions are yours to make, shaped by your own financial philosophies and guidance from your advisors. If you’re willing to take big risks, great—as long as you’re prepared to potentially lose big too. But it’s important to remember that less volatile investments aren’t guaranteed to pay off either. “Don’t invest what you can’t afford to lose” is a sound philosophy whether you’re allocating $100 or $100,000.
How do you know what you can “afford” to lose? Only your financial advisors can help you answer that. Determining how much money you can really afford to gamble with is a complex calculation that depends on factors including your age, income, expenses, retirement savings and personal risk tolerance. You also need to look at what kind of returns you could earn from putting any “extra” cash into savings or more stable investments when considering high-risk portfolio allocations.
- Diversify, Diversify, Diversify. The crypto crash tanked values for virtual currencies industry-wide but not all investors experienced the same kinds of losses. More than 20,000 unique cryptocurrencies exist, and they didn’t all see as dramatic price drops as high-profile coins like Bitcoin and Terra did. Someone who invested in cryptocurrency in 2021 by buying Bitcoin and nothing else probably lost most of that money. Investors who took a diversified approach to creating a crypto portfolio may have weathered the market volatility with less significant losses than those who put all their virtual eggs in Bitcoin’s basket.
On a broader scale, the crypto crash has been a harsh reminder about the risks of an unbalanced investment portfolio. Investing too heavily in any one product or sector exposes you to the kind of sudden, dramatic losses that have shaken so many crypto investors. The risks are especially great for investors who are nearing retirement age or who are already in retirement and may not have the time to earn back the money they lose.
Working with your advisors to refine your diversification strategy creates a kind of safety net under your portfolio. Even if some of your investments fail because of a complex mix of economic factors, theoretically you’ll also own other investments that are less affected by those factors.
- Remain Open to New Investment Possibilities. There’s no doubt that some people had their worst investment fears confirmed by watching the crypto crash happen in real time. The possibility of striking it rich by getting in early on a promising new technology is practically the American dream. So far crypto hasn’t turned out to be the next Apple or Microsoft, but that doesn’t mean investors need to entirely retreat to familiar ground and stop taking chances on new opportunities. The next new investment trend that piques your interest could be a great fit for your risk tolerance and financial goals. Don’t let the crypto crash scare you away from investing in emerging technologies and other new industries if those are avenues you’d like to explore.
Need More Guidance on Building Your Investment Portfolio?
Sachetta’s team of advisors are here to give our clients the context and guidance they need to make investment decisions they feel good about. Don’t let buzzy news events like the crypto crash drive your investment decisions—call your advisors for help creating a portfolio that’s aligned with your specific financial goals. Contact us today.
Eric Sachetta, ChFC®, CFP® is a Certified Financial Planner™ practitioner and focuses on financial planning and client relationship management. Eric believes that estate planning provides an opportunity to “look at all things that you value, see how they fit together, and make choices to balance everything and to maximize the things you want to do.”