Thinking of Investing in Crypto This Year? Take These 4 Steps First

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KEY POINTS

  • Cryptocurrency is a volatile asset that presents risks that some other asset classes don't.
  • Before investing in cryptocurrency, make sure you have a solid emergency fund and retirement account.
  • Do your research and develop a crypto investment strategy before jumping in.

Don't end up rushing into a crypto investment you'll regret.

Investing in cryptocurrency is becoming increasingly popular among Americans. Many cryptocurrencies have caught the public's attention this year, with some coins even turning investors into millionaires.

But if you're considering jumping on the bandwagon and adding cryptocurrencies to your portfolio, there are four key steps you should take first. Here's what they are.

1. Make sure you have an emergency fund

Crypto investments are volatile; the price can move up and down quickly and dramatically. As a result, it's especially crucial you have an emergency fund in place to cover unexpected costs before you invest in crypto assets.

Saving money for emergencies before buying any type of investment where there's the potential to suffer losses is a good idea. This is true even for stocks or exchange-traded funds (ETFs). Without emergency savings, you could be forced to sell your assets at a time when they're temporarily down if surprise expenses happen and you don't want to borrow for them or can't get approved for credit.

Since crypto prices tend to fluctuate more dramatically and more frequently than the prices of most assets, having emergency savings is even more important. It will help ensure you don't have to sell at a bad time and lock your losses in that you could've recovered from if you'd been able to wait it out.

2. Max out your retirement investment accounts first

Preparing for retirement is crucial because you need money to support yourself. Retirement accounts also come with tax advantages that make it easier for you to make hefty contributions. And your employer may match your contributions for at least part of the money you invest if you have a workplace 401(k).

It's more important to get money into these retirement accounts -- due to both the benefits they provide and the crucial role they'll play in supporting you late in life -- than it is to make a speculative investment in cryptocurrency with the hopes of getting rich. Responsible retirement investing helps make sure you have enough money to support yourself late in life, while it's far from certain any crypto investment will pay off.

3. Evaluate how crypto will fit into your overall portfolio

Cryptocurrency can play a role in a diversified portfolio, but you'll want to understand how it fits in with your other investments. Having the right asset allocation that exposes you to an appropriate level of risk can help you avoid outsized losses.

If you don't have many other risky investments, crypto may be a good addition to your portfolio because you can take more of a chance with some of your money in exchange for potentially higher returns. But if you have a lot of high-risk investments already, it may be worth putting some of your money into safer bets.

You not only need to make sure you have a good mix of low- and high-risk investments, but you also want to make sure you aren't over-exposed to any one particular industry or asset class. If you already have a lot of crypto investments but no stocks, bonds, or real estate, investing in these other types of assets may make more sense than buying more crypto in 2022.

4. Develop a sound strategy for cryptocurrency investing

Finally, you want to make sure you understand how to evaluate cryptocurrency investments and pick one based on its fundamentals, rather than just investing in the latest coins being discussed on social media or endorsed by a celebrity. You'll also want to commit to making long-term investments.

If you do your research, invest in a crypto with solid potential, and don't plan to try to get rich quickly, then investing in crypto in 2022 can make sense as long as you've checked other key financial tasks off your to-do list first.

Our Research Expert

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