Bitcoin (BTC 1.52%) has been surging in recent weeks, shattering its previous records. The cryptocurrency recently reached a new high of more than $68,000 per token, up more than 53% since the beginning of October. Some experts believe this is only the beginning for Bitcoin, predicting its price will hit six figures in the relatively near future.
To be clear, nobody knows for certain whether Bitcoin's price will continue climbing. After all, cryptocurrency is still speculative at this point, and it's anyone's guess where it will be in five or 10 years.
However, considering Bitcoin's monumental gains over the past year, it can be tempting to start investing in the cryptocurrency. But is it really time to buy? Here are three things to consider.
1. Consider your tolerance for risk
When you're deciding whether to invest in Bitcoin (or any cryptocurrency), the most important factor to consider is your risk tolerance.
Despite having been around for over a decade, Bitcoin is still relatively new. While it's gaining more acceptance among merchants and the general public as a form of payment, it still has a long way to go before it's considered mainstream. It will likely face regulatory hurdles, as well, as the U.S. government has already started cracking down on the crypto industry.
In addition, Bitcoin can be incredibly volatile. Over the past year alone, it's experienced a roller coaster of ups and downs. For some risk-averse investors, these highs and lows can be tough to stomach.
This doesn't necessarily mean that Bitcoin is a bad investment. Despite its short-term volatility, it could earn positive returns over the long run.
But investing in cryptocurrency is not the same as investing in stocks, and there's a different set of risks involved. Before you buy, make sure you fully understand what you're getting into.
2. Think about how much you can afford to invest
As a general rule of thumb, it's best to avoid investing any money you may need in the next several years. When you're investing in cryptocurrency, this guideline is especially important.
Because Bitcoin is higher risk than many other types of investments, it's wise to only invest money you can afford to lose. While there are stories about investors who have made millions with cryptocurrency, these instances are rare. Rather than sinking your life savings into Bitcoin, think carefully about how much you'd be comfortable losing, and don't invest beyond that limit.
Reviewing your overall financial situation can also help determine whether now is the right time to invest in Bitcoin. Before you invest, make sure all your bills are paid and you have a solid emergency fund with at least three to six months' worth of savings. If your finances are less than ideal, it may be wise to focus your efforts there before you invest in cryptocurrency.
3. Double-check the rest of your portfolio
Finally, if you choose to invest in Bitcoin, make sure you're not putting all your eggs in one basket, so to speak. A well-diversified portfolio is key to helping your savings survive volatility, and it's especially important if you're investing in Bitcoin.
A diversified portfolio includes at least two dozen stocks from multiple industries. The more variety you have within your portfolio, the less risk you face. This way, if Bitcoin ends up taking a turn for the worse, one failed investment won't sink your entire portfolio.
Bitcoin may be smashing records, but that doesn't mean you should rush out to buy. It could be a rewarding investment and a smart addition to your portfolio. But Bitcoin isn't right for everyone, and by considering these factors, you can determine whether it's a smart option for you.