The 4 Biggest Mistakes You Can Make When Buying Bitcoin

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Don't make these mistakes when you buy cryptocurrency.

People have made a lot of money from Bitcoin. If you'd invested $100 when the coin first launched in 2009, your Bitcoin could be worth millions of dollars today. But let's not forget -- many people have also lost millions of dollars on Bitcoin.

Whether it's from buying high and selling low, getting hacked, falling victim to scams, or losing your keys, this high-risk investment can lose you money. Here are four big mistakes to avoid when buying Bitcoin.

1. Not prioritizing security

There are a few reasons good security is crucial when you're buying Bitcoin. Fundamentally, if you lose your Bitcoin, you're unlikely to get it back.

Bitcoin cuts out the middleman in financial transactions using something called blockchain technology. The details are complicated, but in essence, that technology lets you buy things without going through a bank or other financial institution.

You access your Bitcoin through public and private keys, and one way you can lose money is to lose those keys. Since there's no bank, you can't just call someone up and have them reset your password. If someone else gets your keys, they control your Bitcoin.

Here are some Bitcoin security essentials:

  • Use a reputable exchange. One of the attractions of Bitcoin is that the currency network itself is hard to hack. The same can't be said for the exchanges where you buy Bitcoin. One common scam is to steal money by creating a fake exchange, so avoid any that are new or have bad reputations. Check out our list of the best cryptocurrency exchanges and look at each one's security credentials.
  • Get a wallet, and preferably a cold one. A wallet safeguards your crypto keys. Rather than leaving your money on an exchange, move it to a wallet you control. You can get cold wallets and hot wallets. Think of a hot wallet like a regular wallet you'd carry around. They are less secure, as they're connected to the internet. But they're good for small amounts of money you might want to spend or trade. Cold wallets are physical devices that remain offline. They cost $50 to $150, and are widely regarded as the safest way to store your Bitcoin. One word of caution: Don't lose your passwords. There's currently about $140 billion worth of Bitcoin stuck in wallets people can no longer access.
  • Protect your computer and cell phone. Any device you use to buy, sell, or trade crypto needs to be secure -- that means using two-factor authentication, encryption, unique and unguessable passwords, and protection against malware and viruses.

2. Not understanding your investment

You'd likely be reluctant to buy a car without taking it for a test drive first. And you probably don't buy a pair of shoes without trying them on. Similarly, before you buy Bitcoin, make sure you understand what it is and how it works.

Plenty of people, especially on social media, say Bitcoin is an excellent investment. But it's not a great idea to invest in something just because everybody else is doing it. A bit of research will help you avoid scams, formulate an investment strategy, and make your own decisions about when to buy and sell.

3. Only investing in Bitcoin

A diversified portfolio is a good way to protect yourself against volatility. Not only do you need to invest in other non-crypto assets, you might want to diversify your crypto investments, too. That way, if Bitcoin fails, you won't have all your eggs in one basket.

A common rule of thumb is not to put more than 5% to 10% of your portfolio in cryptocurrencies. Look at established -- and potentially safer -- investments such as stocks, shares, mutual funds, and real estate for the other 90% to 95%.

If you want to mix things up within your crypto portfolio, there are a lot of coins to choose from. But just as with Bitcoin itself, research before you buy. Look for well-established coins with reputable names behind them. Each coin has a white paper you can read to understand what the coin will do and who's involved. And fake coins are another way fraudsters trick investors out of their money.

4. Investing more than you can afford

There's a lot of potential upside to buying Bitcoin. There's also a lot of uncertainty. It is a new asset class, and there's very little regulation and protection. A U.K. watchdog, the Financial Conduct Authority, recently warned that consumers who invest in crypto assets "should be prepared to lose all their money."

That's why it makes sense to only invest money you can afford to lose. If you don't yet have an emergency fund to cushion you against job loss or sudden illness, make that your priority. Don't borrow money to invest in crypto. And if you have credit card debt, try to pay it down before you buy Bitcoin.

It's natural to see the value of Bitcoin increasing and want to get involved. But Bitcoin has seen dramatic increases and decreases for the past decade. Imagine losing your job the same week your Bitcoin investments take a dive -- you'll be glad you stocked up your emergency fund and paid down debt before investing.

There's plenty to gain in getting on the crypto bandwagon, and avoiding these mistakes will help you minimize some of the risks.

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