Keeping your money in the bank and investing in cryptocurrency are polar opposites when it comes to risk and reward. Whereas bank savings accounts are FDIC-insured and stable in value, cryptocurrency investments have no guarantees and no intrinsic value backing them.
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Even the stock market, which is often considered volatile, consists of companies that are required to report their actual earnings in black and white every quarter. Cryptocurrencies, on the other hand, are fueled by hope, speculation and rumor.
Yet, this isn’t to say that investing with savings or crypto is “bad” or “good.” Rather, you should be aware of what you are getting – or aren’t getting – when you choose to invest in either of these asset classes.
Read more about whether you should keep your money in the bank or invest in crypto.
What Is Your Risk Tolerance?
Your risk tolerance could tell you right off the bat whether you should invest in a bank savings account or cryptocurrency. If you can handle owning an investment that could drop by 50%, 75% or even more over a relatively short time period, then cryptocurrency may be an acceptable risk for you.
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If, on the other hand, you can not sleep at night when your investments drop by even 5%, you’re a candidate to keep your money in a savings account instead.
With a savings account, you know exactly what you’re getting: a secure, insured bank investment that won’t change in value. The flip side of that is that you will earn only a minimal amount of interest – about 0.60% if you pick a high-yield online savings account or as little as 0.04% if you earn the national average rate.
Cryptocurrency, on the other hand, is truly the Wild West of the investment world. To potentially earn the astronomical returns of a token such as Shiba Inu – which was up a staggering 49 million percent at one point in 2021 – you have to be prepared to lose your entire investment. Cryptocurrency does not pay dividends or have any intrinsic value, so you’ll have to rely on the broader acceptance of the crypto you buy – along with a good dose of speculative investment support – to earn big returns.
What Are Your Investment Objectives?
Savings accounts and cryptocurrency are so completely different that choosing between them can simply come down to what you are looking for out of your investments.
If you’re looking to preserve your principal, which may be appropriate if you’re an older investor, are saving for a short-term goal or are simply very risk averse, then keeping your money in the bank is likely your best option. FDIC-insured savings accounts don’t pay much, but you won’t have to worry about losing what you’ve saved. And if the Fed raises interest rates in 2022, as is widely anticipated, then savings yields will go higher as well.
However, if you’re a speculative investor willing to lose your entire principal in exchange for potentially fantastic gains, then cryptocurrency may be more up your alley. Bear in mind that any price projections for cryptocurrencies are by their very nature speculative guesses. Unlike the stock market, where analysts project stock prices based on factors such as price / earnings ratios, growth rates and management skill, cryptocurrencies have no intrinsic valuation.
Certain cryptos may have better stories behind them about their potential future uses, but whether those stories come to fruition is still up to debate. And while everyone dreams of huge returns in their portfolio, gains in crypto – while potentially large – are far from a certainty.
Do You Have a Diversified Portfolio?
It’s one thing to allocate a speculative portion of your portfolio to crypto, but if you intend to put all of your money there, you’re courting disaster. Every investor should start with safe bank investments, such as a high-yield savings account to hold an emergency fund, before adding more aggressive options to their portfolio.
If you do have a well-diversified portfolio, filled with many non-correlated assets, adding a 5% weighting in cryptocurrency might be an opportunity to juice your returns. But you should build a base of safe investments before you start reaching out further on the risk / reward spectrum.
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This article originally appeared on GOBankingRates.com: Should You Keep Your Money in the Bank or Invest in Crypto?
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.