If you're thinking of buying cryptocurrency in the new year, you're probably in good company. A lot of investors have enjoyed success with cryptocurrency over the past year, and it's natural to want a piece of that action.
But if you're going to buy cryptocurrency, you'll need to proceed with caution. And that means avoiding one key mistake.
Don't go all in
There's absolutely nothing wrong with putting a portion of your money into cryptocurrency. But if your goal is put all or the bulk of your money into digital currencies, then you're taking a really big risk.
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First, the cryptocurrency market can be very volatile -- more so than the stock market, which certainly sees its share of wild swings. If you go all in on cryptocurrency and the value of your investments plummets, you could be in for serious losses if you're forced to cash out.
Furthermore, cryptocurrency is still a relatively speculative investment, and getting a handle on its actual value is tough. When it comes to buying stocks, there are ways to gauge whether shares are trading at what's considered a good price. With cryptocurrency, that's harder to determine.
Also, it's still unclear as to whether cryptocurrency is a viable long-term investment or not. If it doesn't become a widely accepted form of currency, then its value could sink over time -- to the point where it even fizzles out.
Furthermore, regulatory changes could come down the pike that make cryptocurrency a less-appealing investment from a tax standpoint. And the last thing you want is for the bulk of your portfolio to contain an investment that's now causing you a tax nightmare.
That's why it's important to take it slow when it comes to buying cryptocurrency. Invest a small portion of your money in it, and see how well you fare. If you choose to increase your crypto holdings over time, that's OK, too. But don't, for example, take your entire 2021 bonus and put all of it into cryptocurrency. Instead, spread it around.
If you put too much money into cryptocurrency, you might miss out on the chance to scoop up quality stocks -- those that have the potential to enjoy a lot of growth over time. We don't know if cryptocurrency will even be a thing in 10, 20, or 30 years, but given that many of today's stocks are companies that have been around for over 100 years, it's fair to assume they'll stick around for the next few decades. So you don't want to miss out on the chance to buy them.
Finally, if you're going to invest in cryptocurrency, do your research. There are thousands of different digital coins in circulation, and it may be that a lesser-known crypto is a good fit for you. There's no need to rush out and buy the cryptos that are most likely to land in the news -- just as there's no need to rush out and overload your portfolio with cryptocurrency at the expense of other investment opportunities.
