Thinking of jumping on the Bitcoin bandwagon? Read this first.
Earlier in the year, internet-fueled "meme stocks" blew up, and now, cryptocurrencies seem to be the next big thing. While there are many digital currencies you can invest in, you may have your eye on Bitcoin, since it's arguably the most well-known.
A lot of investors have had success investing in Bitcoin, so you may be eager to follow in their footsteps. Here's why you need to be especially cautious when considering Bitcoin.
1. It's very volatile
If you have a brokerage account and invest in stocks, you may be no stranger to market volatility. But as wildly as stock prices can swing, Bitcoin can swing even more.
Earlier this month, Bitcoin fell to a three-month low after Tesla CEO Elon Musk announced that the company was hitting pause on accepting the currency. If you're going to buy Bitcoin, gear up for what could be a very intense ride.
2. It's still pretty speculative
When you invest in stocks, you can put your money into companies that have been around for decades. In fact, many stocks within the S&P 500 (a market index that consists of the 500 largest publicly-traded companies) have been around for upward of 100 years.
Bitcoin, on the other hand, has only been around since 2009. It doesn't have the long history -- or performance -- that stocks have. It's also unclear whether Bitcoin's value will really increase long term. Much of that will hinge on whether it becomes a widely accepted form of currency, and it's too soon to know that. So if you're comparing Bitcoin to stocks, there's really no comparison -- they're totally different beasts, and the long-term performance of stocks can't in any way predict how Bitcoin will fare in time.
3. Your account could get hacked
Security breaches happen on the internet all the time, but that could put your Bitcoin (or any cryptocurrency) investment at risk. A number of digital currency exchanges have been subject to hacking incidents, and you could suffer serious losses if you choose an exchange with lackluster security.
The good news is that most large crypto exchanges have strong security measures in place. But if you're going to buy Bitcoin, find one that offers insurance, so you get some amount of protection.
Weighing your options
You may decide Bitcoin is right for you based on your investing strategy and tolerance for risk. And that's not necessarily a bad call. Investing in Bitcoin isn't always a bad idea -- for some people, it's a great idea. The key is to understand some of the key risks before you make that decision.
Furthermore, if you're new to cryptocurrencies, you may want to look at different currency options before settling on Bitcoin. You may find that there's another that's a more suitable fit for you.
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Maurie Backman has no position in any cryptocurrencies mentioned.
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