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Cryptocurrency as part of a wealth creation plan

PUBLISHED: Fri, 14 May 2021 20:23:11 GMT

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This article is part of an ongoing series of basic financial education brought to you by financial industry professionals curated by PocketFin – The Financial School of Real LifeCNBC Africa provides content from PocketFin as a service to its readers but does not edit the articles it publishes. CNBC Africa is not responsible for the content provided by PocketFin.

Photo by André François McKenzie on Unsplash

Since the dramatic return and spike of the cryptocurrency market and the impressive traction its gained over the past few years, many individuals, and even institutions are eager to know just how this form of “digital money” works and would it be advisable or applicable to attain as part of your wealth creation plan, ultimately forming yet another aspect in your financial plan.

Whilst cryptocurrencies are unregulated and highly volatile, for those that believe there is a future for this digital asset, many are confused by terms such as “block chains” , “tokenomics” and “crypto exchanges and wallets”. As with most complex financial markets it can be a challenge to become educated and make informed

Coming up with an investment plan for a cryptocurrency investment plan isn’t as complicated as you may think or as it has been made out to be.

In reality, the risk factors and investment attitude of a crypto investment plan remains very much the same across traditional asset classes such as stocks, property etc. The universal premise is that you need operating procedures to keep your investments in check and on track, if not you risk falling into the trap of emotion as we have previously mentioned in the CNBC Africa / PocketFin financial education hub. 

So all your friends are telling you about the hottest new cryptocurrency, or how they have made exceptional returns with even the more stable of currencies such as Bitcoin or Ethereum and you want a piece of the pie.

What do you do?

1.Allocate funds

Start by allocating a certain percentage of your investable savings to this asset class. DO NOT PUT ALL OF YOUR MONEY INTO CRYPTO CURRENCIES just as all of your money shouldn’t be in stocks or property as diversification is absolutely essential in any wealth creation plan . 

If you choose to invest 100% of your savings in cryptos, then you need to understand the risk attached to it and its highly inadvisable. Cryptocurrencies are widely regarded as speculative and volatile investments; prices can change dramatically by the minute, which can lead to massive returns or devastating losses. Just this week saw Bitcoin , the largest cryptocurrency tumble by 18% in a matter of hours.

While it depends on who you ask, it’s generally recommended that speculative investments should not exceed between 7.5%-10% of your wealth creation portfolio (depending on your risk preferences and investment goals). 

So, for example, if you had R100 000 to invest, a rule of thumb could be that you allocate R7500 into cryptocurrencies based on the 7.5% percentage.

2.Research

Much like investing in mutual funds, stocks, property and bonds, it is absolutely crucial to take time to research and evaluate various potential coins you may want to invest in. To get a general feel of what’s out there, start by scanning cryptocurrency exchanges like Binance which list the majority of audited cryptocurrencies, which you can organize by price, price changes, market capitalization, and so on.

Cryptocurrencies typically serve a purpose , they function to solve problems. For example the 7th largest cryptocurrency by market cap XRP (Ripple) is primarily focused at financial institutions with their incredibly fast transaction speeds and low fee’s. What this means is that the first aspect of a coin you should understand is the problem(s) it solves. Most coins have websites that detail their purpose and function, so start there. 

Now comes the tricky part. Currencies aren’t like companies , they don’t have underlying assets and operations that you can evaluate. On top of that, cryptocurrencies aren’t regulated like publicly traded companies, so there isn’t a uniform standard for reporting or disclosures, and this has led to a vast amount of “Rugpulls” especially in the more underground cryptocurrencies. A ”Rugpull” is a malicious event in the cryptocurrency and unregulated penny stock industry where a crypto or company developers abandon a project and run away with investors’ funds. 

However, many coin developers share whitepapers to help people understand their coin’s underlying technology. These are usually complicated, long documents which explains the tech behind the specific project. That said, if the team behind the cryptocurrency is proactive, and public facing, this can instill public trust within the project and its solutions. 

Focus on the key aspects of a cryptocurrency that you can research, including:

Leadership: The developers and management team (which isn’t always public information)

Metrics: Supply, market cap, and volume (The total amount of coins in circulation, the market cap being how much is the total supply of coins worth, and the volume, being the amount that is currently being traded (bought and sold)

Support: Community and social media followings (Eg Twitter, Reddit, Telegram groups etc)

3.Set a time frame, a stop loss and a goal:

Ask yourself questions such as the following:

-What’s your goal for these investments? (e.g. fund a trip, build wealth, etc.)

-How long are you willing to hold? (1 year, 3 years, 10 years?)

-When, if ever, do you need these funds? (Immediately? Never?)

-How much do you want to make from your investments? (10%?100%?1000%?)

-How receptive are you to volatility? (For example, if you lost 50% of the value, how would that affect you?)

As the cryptocurrency market is unregulated, there is no legal “financial advice” that can be held responsible. It is therefore of the utmost importance that as you explore the exciting and fascinating world of cryptocurrencies you stay true to yourself and your objectives.

This article is of personal opinion and does not constitute personal financial advice. Do not invest what you cannot afford to lose.


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