Op-ed: Cryptocurrency investors need to understand and manage their risk tolerance

Commemorative Doge Coins issued May 14, 2021 in Yichang, China.

Barcroft Media | Barcroft Media | Getty Images

When my customers ask about Dogecoin, many say they are intrigued by the potential investment because of the news and the excitement that comes with it.

As the conversation about investing in cryptocurrency gets more serious, I ask why they want to do this. I then ask what value, in their opinion, they could have for your portfolio. There is always room for productive conversation, and so I tell a client that they should never invest in cryptocurrency if it interferes with the original financial goals they set for themselves.

I also ask how long do you think you can stick with this investment if or when the volatility hits. Once the tough questions are answered, I can determine how much cryptocurrency investment makes sense for each client’s portfolio.

(If the answer to my first question is that “it’s hot right now” or a friend told you to buy it, I am explaining that you probably want to invest in cryptocurrency for the wrong reasons.)

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The answer to whether someone should invest in Dogecoin – which is all the rage right now – is of course different for every investor. As with any type of investment, the investor must exercise caution as there is always some risk associated with every investment opportunity.

I explain to clients that they need to determine what risk they can handle, especially when it comes to cryptocurrency. And since everyone is different, the conversation focuses on that person’s goals before deciding how much risk to take.

If a customer is risk averse, crypto is not the investment for them.

Of course, investors are watching the news and are aware that Dogecoin rose sharply last week following a tweet from supporter Elon Musk, CEO of Tesla and SpaceX. In addition, the cryptocurrency exchange platform Coinbase has announced that it will list the meme-inspired cryptocurrency. Meanwhile, Mark Cuban, owner of the Dallas Mavericks, has made several social media posts in support of Dogecoin.

A little background: Dogecoin was originally created in 2013 as a joke or funny variant of Bitcoin by Jackson Palmer, an Adobe software developer, and Billy Markus, an IBM software developer. Despite its prankish beginnings, the technology and algorithm behind dogecoin are very serious.

Dogecoin is considered an alternative cryptocurrency coin, comparable to Litecoin – another big player. Cryptocurrencies like Bitcoin, Dogecoin and Litecoin are real online tokens that can be used to pay for, trade and invest in goods and services. The value of an asset ultimately depends on what someone is willing to pay for that asset at any given time.

Because of this, as an asset manager, I urge clients – and all investors as well – to do the proper research and be cautious in trying to “time” the markets with a cryptocurrency investment.

It is always wise to proceed with caution and stay true to your “why” for investing.

So is Dogecoin a smart investment? Let’s look at some pros and cons.

Advantages:

  • Diversification
  • Low price / not expensive
  • High growth potential
  • Aligned to futurized investment trends
  • Not supported / regulated by any government or financial institution
  • On the right side of the investment trend

Disadvantage:

  • Very high risk
  • Lots of volatility / lack of stability
  • Not much research, history, and basic analysis is available
  • May be subject to capital gains tax
  • Not supported / regulated by any government or financial institution
  • The intrinsic value is missing.

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