Tesla CEO Elon Musk recently made headlines after announcing that his company bought $1.5 billion worth of Bitcoin (CRYPTO:BTC).
The cryptocurrency has been around for years, but it has surged more than 370% over the past 12 months. Even before Tesla's investment in Bitcoin, Musk himself has been credited with increasing the price of cryptocurrencies by voicing his support online.
Because of its soaring price, Bitcoin may seem like an attractive investment. But is it the right time to buy?
Weighing risk and reward
When you're considering any investment, it's crucial to look past the dollar signs and consider the risk involved.
Bitcoin is an incredibly volatile investment, so it's not for the faint of heart. While it has seen an impressive upward trend over the past several months, nobody knows how long that will last. The cryptocurrency has experienced wild price fluctuations in the past, sometimes losing up to 80% of its value.
Between 2017 and 2019, for instance, Bitcoin jumped from around $1,000 to more than $17,000, before it plummeted back to around $3,000.
While all investments are subject to short-term volatility, Bitcoin has experienced extreme levels of turbulence.
In addition, it's unclear whether Bitcoin really is as game changing as its proponents claim. Some supporters believe the cryptocurrency will become the future of global transactions. Right now, however, only around 2,300 U.S. businesses accept Bitcoin as a form of payment, according to research from Fundera. Without widespread adoption, it will be tough for Bitcoin to survive.
Bitcoin's murky future makes it an even riskier investment. Although it could end up changing the world, it could just as easily crash and burn.
How to invest safely
Bitcoin is an incredibly risky investment that may or may not pay off, so it's probably not the best fit for most people. But if you're eager to invest in the cryptocurrency, it's important to do so safely.
First, make sure you have a well-diversified portfolio. The last thing you want to do is invest all your money in Bitcoin, because if it drops in value (and there is a good chance it will at some point), you could experience devastating losses.
Aim to invest in at least 10 to 15 different companies from multiple industries, or opt for index funds or mutual funds to further limit your risk. Because Bitcoin is so volatile, it's crucial to make sure the rest of your investments are as stable as possible.
Next, only invest money you can afford to lose. This is a good rule of thumb to remember with all investments, but especially the riskier ones. You may not lose money investing in Bitcoin, but it's a good idea to be prepared for the worst just in case.
Bitcoin may be gaining popularity right now, but that alone doesn't make it a smart investment. Before you invest any money, think about your tolerance for risk. If you have money to burn and are willing to risk it, it may be worth the gamble. But for most investors, it's best to steer clear of Bitcoin for right now.
This article represents the opinion of the writer(s), who may disagree with the "official" recommendation position of a Motley Fool premium advisory service. We're motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.