Cryptocurrency has been making waves in the investing world, and many investors may be wondering whether it's time to jump on the crypto bandwagon.
While it's true that some cryptocurrencies, such as Bitcoin (BTC 8.14%), have experienced phenomenal returns over the past few months, that doesn't necessarily mean they're a safe investment.
Cryptocurrency is highly speculative at this point, and nobody knows what kind of staying power it has. Although it could change the world, it could just as easily crash and burn. Right now, it's too soon to tell what the future has in store for cryptocurrency.
In addition, crypto is famous for its volatility. Bitcoin lost roughly 80% of its value at one point, and since the beginning of the year, it has experienced a roller coaster of ups and downs. Not all investors have the stomach for that type of turbulence.
However, if you're eager to invest in cryptocurrency but want to limit your risk, there's another option: crypto stocks.
Cryptocurrency vs. crypto stocks
When most people think of investing in cryptocurrency, they think of investing directly in the currency itself. But it's possible to invest in crypto without actually investing in crypto.
A crypto stock is a company that is involved in cryptocurrency in some way. That could mean the company offers crypto as a form of payment, it may have invested in crypto, or maybe it builds the technology behind digital currencies.
Take Tesla, for example. The company announced this year that it made a $1.5 billion investment in Bitcoin, and it also accepts Bitcoin as a form of payment.
NVIDIA is another example of a crypto stock. The tech company designs and builds graphics processing units (GPUs), which are often used in the creation of cryptocurrency.
If you were to invest in Tesla or NVIDIA, you wouldn't be investing in cryptocurrency directly. However, if crypto does become mainstream and is adopted as a standard form of currency, these companies could benefit from it. As a result, your investments could thrive.
Crypto stocks are generally safer than investing in cryptocurrency directly. This is because crypto is only a portion of these companies' businesses. If digital currencies fail to see long-term success, the companies themselves likely won't crash along with them.
Should you invest in crypto stocks?
Although crypto stocks may be less risky than investing in cryptocurrency itself, there are still a couple of things to consider before investing.
First, look at the company as a whole to decide whether it's a solid investment. In other words, don't invest in a stock only because of the cryptocurrency factor. The best investments are the companies that have solid fundamentals and are likely to remain strong over the long term. If they happen to be invested in crypto as well, that's an added bonus.
Also, make sure you have a well-diversified portfolio if you decide to invest in crypto stocks. Building a diversified portfolio is a smart move regardless of where you choose to invest, but it can help limit your risk even further if your crypto stocks don't perform well.
Investing in crypto stocks can be a smart way to diversify into cryptocurrency while limiting your risk. Just be sure you're choosing your investments wisely and opting for stocks that have strong underlying fundamentals. By investing for the long term, you're more likely to see success with crypto stocks.