As Bitcoin (BTC 0.42%) continues its upward climb, many investors have their eyes on cryptocurrencies. Bitcoin has soared more than 77% since the beginning of the year. Dogecoin, another popular cryptocurrency, has skyrocketed more than 950% so far this year. With incredible run-ups like these, it's becoming hard to ignore cryptocurrencies.
However, they aren't the right investment for everyone. Although they have the potential to make investors a lot of money, they also carry a significant amount of risk. Before you invest in crypto stocks, here's what you need to know.
What are crypto stocks?
First, it's important to understand the difference between crypto stocks and cryptocurrencies themselves. It's possible to invest directly in digital currencies, like Bitcoin or Dogecoin, by buying tokens. Or you can invest in a stock that's heavily invested in cryptocurrency or is building the technology behind it. Some of these stocks include:
- Tesla (TSLA 4.42%): CEO Elon Musk announced that the company would be buying $1.5 billion worth of Bitcoin. Musk also revealed that in the future, Tesla plans to start accepting Bitcoin as a form of payment.
- Square (SQ 4.55%): The fintech company recently announced it was buying $170 million worth of Bitcoin, in addition to its $50 million purchase last year. Square has also accepted Bitcoin as payment since 2014, and CEO Jack Dorsey is a longtime advocate for the cryptocurrency.
- Salesforce (CRM -0.91%): While Salesforce itself is not heavily invested in cryptocurrency, it creates blockchain solutions, which is the infrastructure behind cryptocurrencies. In order for Bitcoin and other digital currencies to succeed, they'll require widespread adoption. If Bitcoin becomes widely accepted, Salesforce could benefit, as well.
Investing in crypto stocks and cryptocurrencies themselves can be risky. So before you invest, it's important to weigh the pros and cons.
Are crypto stocks right for you?
One advantage of investing in these stocks is that they're less risky than investing directly in cryptocurrencies, which are incredibly volatile and carry a lot of risk. For example, despite Bitcoin's skyrocketing price over the last few months, it also lost close to 80% of its value at one point.
Bill Gates has also warned against Bitcoin, recently telling Bloomberg that: "[I]f you have less money than Elon [Musk] you should probably watch out."
Nobody knows what will happen with cryptocurrencies over the long term. Bitcoin could become the world's most popular one, or it could crash and burn. That uncertainty makes it an incredibly risky investment, and not all investors have the stomach for that type of volatility.
Crypto stocks are generally less volatile, because cryptocurrency is only one part of their overall business. There are plenty of reasons to invest in Salesforce, for example, outside of its crypto business. Even if cryptocurrencies don't become mainstream, Salesforce will likely still be a strong company.
What to look for in a crypto stock
If you're considering investing in these types of stocks, the best thing you can do is look at the underlying business fundamentals. In other words, don't invest in a stock simply because the company is heavily invested in cryptocurrency. If the company itself is strong, it will likely be a good investment regardless.
Look at factors like the company's revenue growth and profitability, its competitive advantage in its industry, and its leadership team. If all of these factors are favorable, it's more likely to be a solid investment. The crypto aspect of the business is just an extra advantage.
Finally, if you choose to invest in crypto stocks, make sure they're part of a well-diversified portfolio. Even the strongest ones aren't immune to volatility, so it's important to avoid putting all your eggs in one basket, so to speak.
Aim to invest in at least 10 to 15 different companies from a variety of industries. This way, you can limit your risk in the event that your crypto stocks take a turn for the worse.
Investing in crypto stocks can be a good way to invest in Bitcoin without investing in the cryptocurrency itself. By doing your research and investing in solid long-term investments, you can reap the rewards of the crypto movement without putting your money at risk.