Cryptocurrencies like Bitcoin (BTC 1.14%), Ethereum (ETH 2.71%), and Dogecoin (DOGE 3.88%) have taken the world by storm over the past year, and some investors are buying into the crypto trend in hopes of getting rich.
While it is possible to achieve lucrative returns with cryptocurrency, it's also a risky investment. The future is uncertain right now because it's so highly speculative. Although it could change the world, it's equally possible that it could become worthless someday.
Still, though, it's hard to ignore the temptation of cryptocurrency. If you're eager to invest but want to limit your risk, there's one safer way to buy without actually buying: investing in crypto stocks.
Image source: Getty Images.
What are crypto stocks?
When most people discuss buying cryptocurrency, they're typically referring to buying the currencies directly -- for example, buying Bitcoin tokens. But you can also gain exposure to the crypto market without having to buy the tokens themselves by investing in crypto stocks.
A crypto stock is a company that is somehow involved in the cryptocurrency movement. Some examples include:
- Tesla (TSLA +2.40%): The company invested $1.5 billion in Bitcoin earlier this year, and CEO Elon Musk has famously supported cryptocurrencies like Bitcoin and Dogecoin.
- Square (SQ 0.48%): The digital payments company has also invested heavily in Bitcoin, and it allows its merchants to accept various types of cryptocurrency as a form of payment.
- Nvidia (NVDA +5.93%): This company creates computer graphics processing units (GPUs) that are widely used for cryptocurrency mining.
None of these companies focus exclusively on cryptocurrency, but it is a factor in their businesses. If cryptocurrency does take off someday and becomes widely accepted as a form of payment, these organizations will benefit from it.
By investing in these types of stocks, you may also benefit from cryptocurrency's success without facing the risks of buying crypto tokens directly.
Should you invest in crypto stocks?
While this type of investment can be a smart way to limit your risk, there are a few things to consider before you buy.
First, it's important to avoid buying a stock solely because it's involved in cryptocurrency. If a company has weak underlying fundamentals and crypto does not succeed over the long run, that stock will have a hard time bouncing back. Strong companies, on the other hand, are more likely to survive regardless of what the crypto market does.
As you're researching stocks, be sure to look at the big picture. Are the company's financials healthy? Does it have a strong leadership team? What about a competitive advantage in its industry? Without these factors, it will be tough for any company to see long-term growth -- and if a company ends up failing, it won't matter whether it was involved in the crypto market.
Also, make sure your portfolio is properly diversified if you choose to invest in crypto stocks. By spreading your money across at least a dozen or so different stocks, you can further limit your risk in case your crypto investments don't perform well.
Cryptocurrency may be the latest trend in the investing world, but it can be risky. If you want to get involved while keeping your money as safe as possible, crypto stocks may be the right option for you.
