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Is Crypto Your Portfolio's New Best Friend?

By Maurie Backman - Updated Jun 8, 2021 at 10:33AM

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Should you embrace crypto with open arms, or keep your distance? Here's how to know.

It's hard to think about investing these days without at least talking about cryptocurrency. In fact, more than 50 million Americans say they're likely to buy cryptocurrency over the next year, according to recent research conducted by The Ascent, a Motley Fool service.

But is cryptocurrency an ideal addition to your portfolio? Or are you better off staying loyal to more traditional investments, like stocks?

Bitcoin logo on graphic screen

Image source: Getty Images.

The case for buying cryptocurrency

Just as stocks have the potential to increase in value over time, so too can cryptocurrency values skyrocket, so if you invest there, you could make a small fortune. Furthermore, while cryptocurrency isn't yet a widely accepted currency, a growing number of merchants are starting to take it as payment. That means that in time, cryptocurrency could become a much more liquid investment than stocks when you consider that it has the potential to become as commonplace as regular currency.

The case against cryptocurrency

Every investment you make comes with a degree of risk. Stocks, for example, can be extremely volatile, and sometimes, all it takes is a single quarter of missed earnings for a company's share price to plummet. But as volatile as stocks are, cryptocurrency values can swing even more wildly, so if you're the type of investor who's fairly opposed to risk, then cryptocurrency may not be the best choice for you.

Let's also remember that while there are plenty of stocks within the S&P 500 index that have been around for 100 years or longer, cryptocurrency hasn't been around nearly as long. As such, it's hard to predict whether it has the same staying power as stocks.

Finally, let's talk growth potential. There are plenty of companies out there who stand to make more and more money over time as they invest in research, development, and technology. That, in turn, could easily cause their share prices to rise.

For cryptocurrency to really grow in value, it needs to become an increasingly accepted form of payment. And it's too soon to know whether that will or won't happen. If you're not OK with that guessing game, then perhaps you shouldn't put money into cryptocurrency.

Your new best friend, or a casual acquaintance?

There's lots of money to be made by investing in cryptocurrency, and you may be eager to load up on it in your portfolio. But if you're new to cryptocurrency, you may want to take a more laid-back approach. Rather than make it your portfolio's new best friend, you may want to treat it more like a light acquaintance -- something you introduce slowly and test the waters on before diving in fully.

Adding cryptocurrency to your portfolio is a good way to diversify. If you start by investing a small amount of money in cryptocurrency, you can then add to those positions as you grow increasingly comfortable with the idea, just as you might start out a new friendship with a quick coffee date before moving on to a three-course dinner.

There's lots of money to be made with cryptocurrency, but there are risks that can't be ignored. You'll need to balance both of those factors carefully when making your investment decision.

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