There's a lot of money to be made in cryptocurrency these days. But there's also a lot to be lost.
The same, however, can be said for the stock market. In fact, throughout its history, the stock market has experienced its fair share of crashes, and some experts believe that another downturn is imminent. When we consider the number of stocks that are overvalued right now, that notion holds water.
Of course, without a crystal ball, it's impossible to predict when the next stock market crash will occur, and it may not even happen this year -- but we should assume that we'll face some type of downturn eventually. If you've been toying with the idea of buying cryptocurrency to protect yourself in the face of a stock market crash, here's what you need to know.
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A separate investment, but no less risk
You might think that investing in cryptocurrency is a good way to hedge your bets in case stocks take a beating, and that's not a bad theory. The reality is that cryptocurrencies don't necessarily move with the stock market, so you could run into a situation where your stock portfolio is down but your crypto investments are up.
Similarly, cryptocurrencies, like stocks, can be bought and sold. If your stock investments take a beating and you need money, liquidating some crypto positions could give you access to cash without having to tap your stock portfolio when it's down.
But make no mistake about it -- cryptocurrency is still a very speculative, risky investment, and while it may seem like a good way to protect yourself in the face of stock market volatility, that strategy could easily backfire. After all, what happens when stock values plummet at the same time the cryptocurrency market experiences its own shake-up? At that point, you could be hit with a double whammy.
While it's a good idea to hold investments other than stocks for protection against a market crash, cryptocurrency isn't necessarily your best bet in that regard. A more stable alternative may actually be real estate. The real estate market also tends to operate independently of the stock market, and if you take the money you're thinking of investing in cryptocurrency and use it to buy an income property, for example, you'll secure a steady stream of rental earnings for yourself that can serve as a source of financial security if stock values plummet.
Of course, you may decide to invest a small portion of your assets in cryptocurrency, and that's not necessarily a bad idea. In fact, it could work out quite well for you. But ultimately, you shouldn't buy cryptocurrency for the sole purpose of gaining security during a stock market crash.
Though falling stock values won't necessarily send cryptocurrencies on a nosedive, both markets could decline at the same time. And since cryptocurrencies tend to be even more volatile than stocks, they may not be the best choice to serve as your backup plan.
