To say that Bitcoin (BTC 2.86%) has experienced an incredible run-up over the last few weeks would be an understatement.
The cryptocurrency is nearing $50,000 at the time of this writing, and despite some volatility, it's been reaching record highs so far this year. In addition, Tesla made headlines when CEO Elon Musk announced that the company would be buying $1.5 billion worth of Bitcoin, fueling the cryptocurrency's skyrocketing price.
Bitcoin has proved to be divisive, with many investors advocating for it and many staying as far away from it as possible. If you've been considering investing in Bitcoin, here are three signs you're ready to take the plunge.
Image source: Getty Images.
1. You're willing to take on higher levels of risk
Despite its price surge and popularity among many investors, Bitcoin is still an incredibly volatile investment. It's experienced wild price fluctuations over the years, at times losing roughly 80% of its value.
Even over the last two months, it has seen two steep falls. If you're going to invest now, be sure you can tolerate these intense price swings.
Bitcoin price data by YCharts.
Not everyone has the stomach for this type of volatility, so consider your risk tolerance before you invest.
If you invest in Bitcoin today and it drops by 20% tomorrow, will you still be able to sleep at night? What if it falls by 50%? What about 80%? Knowing your limits can help you decide whether Bitcoin is the right investment for you.
2. You have a diversified portfolio
Regardless of your investing strategy, it's always wise to have a properly diversified portfolio. But with an investment as volatile as Bitcoin, it's even more crucial.
There's no telling how Bitcoin will perform. That means you'll need other investments to fall back on if it takes a turn for the worse. There are several ways to create a diversified portfolio, each of which can reduce your overall risk:
- Invest in index funds: Having a core portfolio of index funds can substantially lower your risk. When the majority of your savings are spread across hundreds or thousands of different stocks, you won't lose everything if Bitcoin falters.
- Invest in a variety of industries: If you opt to invest in individual stocks, try to invest in companies across multiple industries. Even if you're investing in a dozen or so stocks, if they're all from the same industry, you risk putting too many eggs in one basket. If you're investing in Bitcoin, you want your core portfolio to be as stable as possible.
- Stick to well-established companies: Having a portfolio full of stocks that are very likely to perform well can reduce your overall risk. This doesn't mean you can only invest in organizations that are household names, but you may want to avoid investing most of your money in start-ups.
There's no hard-and-fast rule as to how diversified your portfolio should be. But if you're investing in a wide variety of solid companies that can stand the test of time, you may be ready to add Bitcoin to your portfolio.
3. You're able to invest for the long term
One of the best ways to make a lot of money in the stock market is to buy solid investments and hold them for as long as you can. The same holds true for Bitcoin, so think about how many years you're willing to wait to see significant returns.
If money is tight and you expect you may need to sell your investments within the next few years, it may not be the right time to invest. But if you're able to keep your money invested for at least five to seven years (or more), you may be ready.
- "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes." -- Warren Buffett
Bitcoin isn't the right investment for everyone, so make sure you're making this decision carefully. If you already have a healthy portfolio and are willing to take calculated risks, investing in Bitcoin may be a wise choice. Otherwise, you may want to steer clear of it for now.
