Investing in cryptocurrencies might be enticing -- especially when you hear stories of people being catapulted into millionaire status almost overnight. But these types of investments are complicated, and achieving that kind of success is not only rare but also not nearly as straightforward as it may seem.
Before investing your first dollar in this intriguing asset class, prepare yourself by doing these three things.
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1. Expect a roller coaster ride
When you invest, what you buy helps dictate how much volatility your accounts experience every day. Holdings like U.S. investment-grade bonds will trade pretty steadily, while stocks will fluctuate more. But even for the latter, stock market crashes -- short-term drops of 10% or more in value -- are rare.
When you buy crypto, you're signing up for daily ups and downs, include steep short-term changes. It should not come as a surprise if you see your accounts double in value or fall by half in a very short period of time.
The table below shows how much the value of bitcoin changed in a recent two-week span:
| Date | Closing Price | % Change |
|---|---|---|
| 06/08/21 | $32,996.47 | N/A |
| 06/15/21 | $40,023.75 | 21.3% |
| 06/22/21 | $33,849.68 | (15.4%) |
Data source: Coindesk. Table by author.
While this type of gain in only a week may sound great, losing almost that much in the same time frame can be quite the shock as well. Making sure that you can endure these ups and downs will involve learning more about what to expect. And while you probably can't avoid it altogether, you can better prepare yourself for it.
2. Start off with small amounts
You can dip your toe into cryptocurrency by starting with small sums. Dogecoin might trade for as little as $0.20, while Ether costs $2,000. And if the latter is too much, you can buy fractional shares.
But putting too much money into crypto could derail your progress toward a big milestone like retiring if you suffer a major loss, so sticking with smaller positions means the rest of your assets won't fluctuate excessively. And more importantly, it will let you test how you feel about this volatility with real money on the line.
If you're not stressed out by the ups and downs, you can potentially add more to your crypto balances. On the other hand, if you find the volatility too nerve-racking, you can keep a small investment for fun or sell it and go back to your normal investing strategy.
3. Regularly track how it's performing
You don't have to be glued to your computer screen 24/7 tracking the performance of your crypto holdings, but it's probably not the type of investment that you can set and forget. If you own something like an index fund or ETF, your performance or allocations shouldn't skew too far from the index it tracks, so you can hold them with very little management.
The more complicated your investing strategy becomes, though, the more you should review it. Adding different asset classes or sectors to your portfolio could mean that at a minimum, you rebalance your holdings when one investment -- because of growth or attrition -- makes up a different percentage of your accounts than you initially designated.
And you should review your stock holdings regularly in case the prospects for a particular company or industry have changed enough that it doesn't align with your objectives anymore. But for the most part, you'll be making minor adjustments, and anything that you own will be held for many years.
Cryptocurrency is completely different: When you buy, it's not necessarily a long-term investment. Instead, you may end up trying to trade more frequently to benefit from the volatility. And because these digital currencies can fluctuate so much, it can be tempting buy and sell often, even daily.
But timing the market is incredibly time-consuming and hard to do. If you want exposure to cryptocurrency without the volatility and need to track your portfolio constantly, a solid alternative is to seek out crypto-related stocks or ETFs.
Investing in cryptocurrencies can be lucrative, but that type of reward usually comes with a matching level of risk. Successfully navigating through it requires awareness of the pros and cons so you truly understand what your investing journey might look like.
