5 Questions to Answer Before You Buy Bitcoin
by Lyle Daly | Updated July 21, 2021 - First published on May 29, 2021
By asking yourself the right questions first, buying Bitcoin won't be a decision you regret.
There have been lots of first-time Bitcoin buyers in the last few months, and it's safe to say that there are many more to come. A survey by Gemini estimates that 19 million people may start buying crypto this year. Because Bitcoin is by far the most well-known crypto, a large portion of those new buyers will gravitate toward it.
Whether you're wondering if you should buy Bitcoin or you've already decided, you're more likely to be satisfied with your choice if you ask yourself a few important questions.
1. Why do you want to buy Bitcoin?
Whether it's a good idea to buy Bitcoin depends on why you're doing it. There are several good reasons to buy Bitcoin. Two of the best examples are if you think it's a sound investment or if you want to support the advancement of cryptocurrency.
On the other hand, you should reconsider your decision if you want to get rich quickly or you just have a fear of missing out. Bitcoin is very volatile, and it's impossible to predict its price swings. Those who jump into it to make a quick buck or because everyone else is doing it often end up panic selling at the first downturn in price. If you're going to buy Bitcoin, do it for the long-term potential.
2. Where will you buy it?
It's extremely important that you pick a safe way to buy Bitcoin. Cryptocurrency scams are common, and you can lose your money if you're not careful.
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Although there are many ways to purchase Bitcoin, those who are new to crypto should stick to the best cryptocurrency exchanges. These exchanges are secure and have reasonable fees. They also tend to be user-friendly, which helps when you're getting started.
3. What's your investing strategy for Bitcoin?
Your investing strategy is how you plan to buy and sell Bitcoin, which is an area a lot of people neglect.
To start, figure out how much you plan to put into Bitcoin and how often. Instead of putting in a big chunk of money all at once, consider dollar-cost averaging. This is when you divide the amount you want to invest over a series of purchases. You could decide to buy $1,000 of Bitcoin at the start of each month or $250 every week. Spreading out your investment this way works well because it allows you to buy the dips when Bitcoin's price drops.
It's also good to plan the circumstances when you'll sell. You could pick a timeframe, such as waiting at least three to five years before you consider selling. Another option is a price target, such as selling if Bitcoin hits $100,000.
4. Are you prepared for the price swings?
There's no overstating how volatile cryptocurrency is. The price of Bitcoin went from $50,000 to almost $60,000 and down to $30,000 within a few weeks.
Before you buy Bitcoin, think about how you'd react if the price dropped by 50%, or 80%, or 90%. Would you sell in an attempt to salvage what's left? Or would you stick with it and consider buying more while the price was lower?
Situations like these happen to most crypto investors. That's why you need to believe in Bitcoin as a long-term investment and have an investing strategy you're prepared to follow. Otherwise, you may be tempted to sell at the first sign of trouble.
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5. Can you afford to lose the money?
Because of the volatility, Bitcoin is not the place to put money you're going to need any time soon. My preferred approach with Bitcoin and other high-risk investments is to only put in as much as I'm willing to lose. To be able to afford that, both of the following need to be true:
- You have an emergency fund with enough money to cover three to six months of living expenses. If not, any financial issues could put you in a position where you need to pull out the money you invested in Bitcoin.
- You have a balanced portfolio with no more than 5% to 10% in high-risk investments, including Bitcoin. That way, it's only a minor setback if Bitcoin doesn't work out, and not something that ruins your portfolio.
Those are five questions that every Bitcoin buyer should be able to answer. If you can, then you're in a good position to safely buy Bitcoin and weather its highs and lows.
About the Author
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
Lyle Daly owns Bitcoin. The Motley Fool owns shares of and recommends Bitcoin.