I have to admit that a year ago, cryptocurrency was not on my radar, even though I spend a lot of time working on my investment portfolio. But these days, the cryptocurrency market is booming, and more people are jumping on that bandwagon.
If you're interested in investing in crypto, it's important to think things through before diving in. Here are four essential moves to make in that regard.
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1. Make sure you're set for emergencies
Though cryptocurrency is more mainstream now than it was years ago, it's still considered a pretty speculative investment, similar to other fairly risky prospects like penny stocks. As such, if you're going to buy cryptocurrency, you have to go in with the assumption that you may eventually lose all of your money.
You also have to assume that the value of your cryptocurrency will fluctuate wildly from day to day, since the crypto market can be very volatile -- much more so than stocks. And that's why having cash reserves is essential.
If you don't have money in the bank for emergencies, you may land in a situation where you need to sell some cryptocurrency to generate cash. And if that cryptocurrency is down at the time, you'll permanently lock in a loss.
2. Research different coins
Though some cryptocurrencies are more popular and more talked-about than others, there are technically thousands of digital coins on the market that you could potentially own. Rather than just say "it's time to buy crypto," spend some time researching different currencies to land on the right one.
3. Understand the risks
When you buy stocks, there's always the risk that your shares will lose value over time and never be worth what you paid for them initially. Heck, even bonds, which are considered a relatively safe investment, come with risk. Companies with high credit ratings can see their finances take a turn for the worse, at which point they could start to default on their bond interest payments, even though that's a less-than-common thing to have happen.
But cryptocurrency carries its own unique blend of risk. When you buy cryptocurrency, there's always the risk that it'll be worth less in time. But your coins could also plunge in value overnight, because again, the digital currency market is far more volatile than the stock market. Make sure you recognize just how risky cryptocurrency can be before putting money into it.
4. Decide how it fits into your overall strategy
My general investing strategy involves assembling a portfolio of quality investments that I expect will retain and gain value in the long run. And while I'm finally thinking of buying cryptocurrency, I don't expect it to fall into the same category.
Rather, I look at cryptocurrency as more of a short-term investment -- one I may hold for a few months or maybe even a few years. I don't expect to buy cryptocurrency now and hang onto it during retirement, though that could, of course, change over time.
The point, however, is that if you're going to buy cryptocurrency, it's a good idea to decide how it'll fit into your investing strategy. Maybe you'll use it as a means of diversification. And maybe you feel differently than I do about cryptocurrency and think you will, in fact, keep it in your portfolio for many years. The key is to give that some thought so it guides and grounds your decision.
Cryptocurrency is becoming a more popular investment choice, and it may be a smart one for you. Just be sure to check these items off your list before loading up on it yourself.
