Investing

A Year After Its Peak, Bitcoin’s Plunge Offers Important Investing Lessons

Stacy Rapacon

Earlier this year, we likened cryptocurrencies to the Kardashians: infamous yet mysterious, and a hot topic of discussion in a variety of circles. That metaphor still holds. Like many pop-culture stars—and other popular investments, too—crypto has proven that it can burn out just as spectacularly as it can burn bright.

In the last 12 months, the values of computer-generated currencies have swung sharply between brilliant and dull.

What are cryptocurrencies, again?

They’re digital currencies with no physical form that are hidden using cryptography, which is like a system of secret messages. There are many different kinds of crypto, with new options periodically being introduced through initial coin offerings (like initial public offerings but specifically for crypto and with far less regulation).

Bitcoin is still the big kahuna, though not quite as big as it once was. At the end of last year, its value peaked near $20,000—but by mid-December 2018, it had dropped all the way to $3,300, according to crypto research firm CoinDesk. That’s a stunning 83 percent loss for the year. Altcoins—as cryptocurrencies other than bitcoin, including Ethereum, Ripple’s XRP and Bitcoin Cash, are dubbed—have also slid throughout 2018.

Is the crypto craze over?

It’s not looking good. But just because the exuberance has flattened doesn’t necessarily mean it’s dead. Indeed, one recent speed bump has been increased regulation with the U.S. Securities and Exchange Commission and the Justice Department separately investigating cryptocurrencies and penalizing bad actors.

Yes, that’s a big red flag about the legitimacy of crypto, but it could also be a step forward in the development of a real, sustainable market for this kind of currency and, perhaps more importantly, its underlying technology, specifically blockchain. (A blockchain is the automatically and constantly updated public ledger of all crypto transactions, and many people think this kind of security system is where the real value is.)

Another encouraging sign for Bitcoin? You can pay your taxes with it…in Ohio.

So there may be some future for crypto, but what it might be exactly is anybody’s guess.

So, what are we supposed to learn from the last year?

Whether you’re a true crypto believer or not, you can appreciate the main lesson from Bitcoin and its brethren: Speculative investments offer risks as high as their rewards, and they should be reserved for only a small portion of your portfolio, regardless of your confidence levels.

Such popular assets can be tempting, and with so many people piling in, you might wind up with a serious case of FOMO. But the truth is that once an investment has been hyped up as much as Bitcoin was last December, it’s likely too late for regular investors to benefit from ever-bigger returns.

But if you ever do dive in with the crowd, make sure you understand exactly what you’re investing in and that it fits into your overall strategy.

After all, no matter what hot investments seem to be burning brightest at the moment, only a well-diversified portfolio—one that has a solid balance of less-risky and riskier investments—is likely to stay lit for the long term and help you achieve your financial goals.

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