One of the most common questions in crypto is how much to invest. While the answer is different for everyone, here's a good framework to guide your thinking.

What's your financial health?

I'm a big believer in cryptocurrency as an asset class, but I recommend having your financial situation in good order before buying-in. The reason why is because I want you to be able to weather downturns and emergencies without having to sell too early.

Here are five check-ups for your financial health:

  • Do you have high-interest debt, like a credit card balance? If so, pay that off first.
  • Do you have to borrow money to buy crypto? If so, don't.
  • Do you have cash saved for a rainy day? If not, build a cash reserve of 3-6 months.
  • Are you maxing out your tax-advantaged retirement accounts (Roth IRA, 401K match)? If not, do that.
  • Are you making more than you spend? If not, increase your income and decrease your costs.

Another benefit of being in good financial health is that you can take advantage of large dips. If all your money is tied up in crypto and crypto falls 80%, you miss out on a great buying opportunity.

The 5% rule

How much of your portfolio should be in crypto? I've asked this question to many different crypto-positive financial advisors over the years, and the consensus figure is around 5%.

5% makes sense to me because it's not enough to matter if it goes to 0, but it's large enough to double your portfolio after a 20x. 5% is also interesting because many advisors used to recommend 5% go into gold, which crypto competes with to some degree. What it looks like is if you have $50,000 in cash/stocks/bonds, then $2,500 is a savvy starting point!

Everyone's situation is different. If you’re young and risk-seeking, consider going up to 10%-20% and if you’re retired, scale it down to 2.5% or even 1%. It also depends on how much time you want to spend researching cryptocurrency; is it something you want to set and forget or something you want to become an expert in? Your time has value, so if you're going to be spending hundreds of hours researching what to buy, then it makes sense to put in more money!

Don't just buy once

The most successful investors don’t just buy once. They set-up a recurring purchase and buy a little every month, forever. That means they’re always accumulating and can take advantage of market downturns. That also means they save time because they don’t have to stress over when to buy and when to sell...and that extra time can be used to earn money to buy more crypto with!

Here’s a challenge: cut $100 from your expenses every month and earn an extra $100 using one of your skills. Put that $200 a month into crypto. Most of my portfolio today comes from small side hustle work I did years ago where I bought crypto with the proceeds, so I know how powerful this method is. If you do this for a few years, and your portfolio hits a 20x, you could end up with over a hundred thousand dollars. And if it doesn't, well this is money you were spending poorly anyway! (You'd be shocked how much the average American spends on lottery tickets, a far riskier prospect than crypto.)

A final consideration: you can stake or lend out some of your crypto for interest, which is like buying more on auto-pilot every month.

Minimizing regret

Crypto is full of people who wish they bought more and people who wish they bought less. Balance the two by asking yourself how you'd feel to lose 90% of what you put in and how you'd feel to get a 20x. If you'd lose sleep over a 90% loss or not notice a 20x gain, you've invested poorly. Also remember that a 20x will come with a large tax bill, so it might not be as much as what you hoped for.

Have milestone goals

Rather than focusing on the price of what you're buying, focus on achieving key holding thresholds. For example, owning a full Bitcoin, owning 32 ETH, or being a "whale" in a smaller project is a goal every crypto investor should have. There's no practical advantage to owning whole numbers in crypto, but there is a psychological advantage: it sustains you through the tough times and gives you goals to reach for. No matter what happens, 1 Bitcoin is always 1 Bitcoin!

Enjoyed this article? Please share it, follow us on Twitter, and subscribe to our free Friday newsletter! It helps us out and keeps your investing mind sharp. Win-win!