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At the start of this year, I had saved about $ 8,000. I was fortunate to continue working during the pandemic. And the anxiety about what might happen, combined with the pandemic restrictions that cut a lot of my normal spending, helped me save a good chunk of the money.
If I had used that $ 8,000 to buy Ethereum (ETH), it would be worth $ 38,205 today, or a profit of over $ 30,000. But I don’t regret my decision to wait at all. Here’s why.
1. I strengthened my emergency savings
One of the reasons I saved hard in 2020 was that COVID showed us that anything can happen. I sleep better at night knowing I have money to cover a job loss or an unexpected home repair. Indeed, when the roof started to leak a few months ago, my emergency fund meant I could easily cover repairs. If all my money had been tied up in Ethereum, maybe I should have sold it at a loss to pay the builders.
Having the money to cover more than six months of living expenses also allowed me to take risks with crypto later on. I know I have a safety net and I know I am only investing money that I can afford to lose.
2. I increased my other investments and pension contributions
The older I get, the more aware I am of the power to compound interest, which means you can earn interest on your interest. I want to be financially independent in at least twenty years – and the sooner I put money aside, the harder it can work to get me there. With this goal in mind, I put an additional $ 5,000 into my stock Exchange investments and retirement funds before spending money on crypto.
On average, the stock market has historically paid an annual return of 10%. It varies, but even if we take a potential return of 7%, the compound interest means that $ 5,000 would be worth almost $ 20,000 in 20 years.
Now you might be thinking that I would have made this money (and more) in less than a year with Ethereum, which is true. But you can’t invest in hindsight. The surge in cryptocurrency prices this year may not have happened – they might as well have fallen in value. You can also lose money on the stock market, but it’s not as untested and unregulated as the cryptocurrency industry.
Many financial experts advise that crypto investments should not represent more than 5% (maybe even 10%) of your overall portfolio. This way, the higher risks associated with crypto are offset by safer investments, like stocks or real estate. In turn, crypto protects against stock market failures or hyperinflation. The trick is to build a diversified portfolio that reflects your tolerance for risk and your stage in life.
3. I was not ready to lose that $ 8,000
One of the golden rules of crypto investing is to only invest the money that you can afford to lose. That way, if the worst happens and the market collapses, you can still put food on the table and pay your rent or mortgage. It would be extremely disappointing, but not devastating.
It was only by first preserving my short- and long-term future that I felt able to dive into cryptocurrency. This meant that I could invest without panicking whenever the market went down. It also gave me time to research and plan my crypto investments, rather than rushing because I was afraid of missing something.
I calculated how much of my monthly income I could comfortably invest in crypto while still meeting my other savings and investment goals. Some cryptocurrency exchanges allow you to set up automatic monthly contributions to make this even easier.
Cryptocurrency investments are risky: we don’t know what will happen with the regulations or if the bottom will fall out of the market. And we don’t know if the technology will be replaced by something more advanced.
I believe that blockchain technology has the potential to transform the world we live in. And – although I know that many cryptocurrencies will fail – there could also be significant long-term potential in several of the currencies on the market today, particularly Ethereum. As such, while it would be nice to have an extra $ 30,000 right now, the cryptocurrency wallet I’m building could be worth a lot more in 10 years. The important thing is that even if I don’t, I will still be able to live and retire as planned.
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Emma Newbery owns Ethereum. The Motley Fool owns shares and recommends Bitcoin.
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