Shiba Inu (CRYPTO:SHIB) is the latest cryptocurrency to get a lot of buzz on social media. It's actually a meme-based coin, created as a joke with the goal of its becoming more valuable than Dogecoin -- which also started as a joke but took on a life of its own and is now well known and widely traded. 

If you're thinking of jumping on the Shiba Inu bandwagon while interest is high, there are four questions you should ask yourself first. 

Investor looking at stock charts and computer.

Image source: Getty Images.

1. How does it work?

You should never invest in something you don't understand, and that includes Shiba Inu and any other cryptocurrencies. So before you buy, ask yourself:

  • Who created it and why?
  • What is the technology behind it?
  • What determines the crypto's underlying value?
  • What real-world or practical applications does it have?
  • How are coins created, what is the current circulating supply, and what is the maximum supply? 
  • What are the potential benefits and risks of the investment?

If you don't understand the fundamentals, then it's best to steer clear. 

2. How does it compare to other cryptocurrencies?

Shiba Inu is one of many different cryptocurrencies out there, including better-established coins such as Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH).

Some have more promise than others, and some have already seen much more growth than others. Before you put money into any cryptocurrency, it's a good idea to understand how it fits into the broader world of virtual coins.

By comparing the features, benefits, and risks of each, you can get more clarity as to whether Shiba Inu has a solid competitive advantage that's likely to help it stand the test of time or whether other coins are a better bet. 

3. How does it fit into your portfolio?

Building a diversified portfolio is essential to increasing your chances of earning the maximum potential returns while limiting the amount of risk you're taking on.

By spreading your money around to a broad mix of different assets, you can reduce the chances of losing a lot since at least some of your investments will likely perform well even if others don't. 

Because Shiba Inu is a riskier investment, it's generally best to make sure you have a good chunk of your available money in safer assets before you buy any of the virtual coins. This can include exchange-traded funds, mutual funds, stocks, bonds, and even other cryptocurrencies.

If you already have exposure to many safer investments and want to buy Shiba Inu as a more speculative asset with the potential for a higher return, you may be in a good position to accept the downside risk it presents. But if you have no money in more traditional investments yet, that may be a better place to start.

4. Can you afford to lose your investment?

Because Shiba Inu's price has largely become divorced from its underlying value as it has captured a lot of social media buzz, there is a very real risk you could lose most or all of what you put into the coins. If you can't afford to lose the money you're investing, you shouldn't be putting it in jeopardy with such a volatile investment. 

By considering the answers to all four of these questions, you can decide if buying Shiba Inu is the right choice for you now or if you should be doing something else with your hard-earned money. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.