5 Questions to Consider Before You Buy Crypto in 2023

Thinking about buying crypto next year? Read this first.

Cryptocurrency investments soared in 2020 and 2021, and many top cryptocurrencies hit all-time highs. The granddaddy of them all, Bitcoin (BTC) climbed from around $7,000 in Jan. 2020 to over $68,000 in Nov. 2021. However, 2022 has been a different story.

Prices began to fall after the Fed introduced economic tightening measures and investors pulled away from riskier assets. The market then suffered a series of shocks, and prices plummeted further after each one. One notable example was the collapse of the Terra (LUNA) network, which sent ripples through the market for several months to come.

As we approach a new year, some investors hope the worst might be over and wonder if 2023 might be the time to buy crypto. Here are a few questions to ask yourself before you do.

1. Do you have an emergency fund?

Whether you're buying crypto or investing in stocks, make sure you have a fully stocked emergency fund before you jump in. If you have three to six months' worth of living expenses stashed away in a savings account, it will cushion you against unexpected crises such as a job loss or medical issue.

Crypto prices dropped dramatically in 2022. Many investors hope that prices will recover eventually. But if you're forced to sell an asset when it's worth 80% less than you paid for it, you won't be able to benefit from any recovery. By building an emergency fund, the idea is that you'll be able to tap your fund rather than resorting to selling your investments or taking on debt.

2. Are you in it for the long term?

There are no guarantees when it comes to investing, particularly with cryptocurrencies. However, if you invest with a 10 to 20 year window, you'll be able to wait out even dramatic short-term dips such as the one we've seen this year. To do that, you need to believe in the long-term potential of blockchain technology and the individual projects you buy.

Investing for the long term means doing a lot of research and identifying the projects that are most likely to succeed. You might decide to stick to Bitcoin and Ethereum (ETH), which are the two biggest cryptos by market cap. If you get more experienced, you might branch out into projects you think have utility and a good chance of performing well in the coming decades.

3. Will your cryptocurrency be part of a diversified portfolio?

I am a big fan of cryptocurrencies and I hope the technology will transform the way we use money and manage our identities online. But right now, it is a risky and relatively unregulated industry that has some major hurdles to overcome. It may not be able to do so, and if it doesn't, investors could lose everything.

Don't go all in on crypto. Many experts recommend crypto make up no more than 5% of your investments, which is a sensible place to start. That way, you'll be able to profit if the industry does succeed. But at the same time, if things go south, it won't derail your finances.

4. Do you have a plan?

Be honest with yourself about why you're buying crypto and what you hope to achieve. Many crypto investors who bought during the crypto frenzy of 2021 did so because they were scared of missing out or they wanted to make short-term profits. Unfortunately, that meant people bought close to the highs without fully understanding what they were buying.

Your plan should include the amount of money you're willing to invest, the types of cryptocurrency you plan to buy, and how long you plan to hold them. It's also crucial you know why you are investing -- what is it that makes you believe blockchain technology could succeed? What triggers might cause you to change your hypothesis? That knowledge can help combat both panic selling and panic buying as it gives you a solid decision-making base.

5. Do you understand the risks?

Cryptocurrency investing is extremely risky. Those risks come with the potential for higher returns, but you need to understand what you're getting yourself into. If you're someone who might lose sleep over a 20% drop in a day, crypto investing may not be for you.

Here are some uncomfortable truths about crypto investing:

• Cryptocurrency prices are extremely volatile. Prices could fall dramatically in a matter of weeks, and may not return to their former highs.
• Individual cryptocurrencies could fail. If a crypto you own collapses or turns out to be a scam, you could lose everything.
• Crypto exchanges and platforms can fail. If the crypto exchange you use declares bankruptcy, you may not be able to get your money back, as there are few consumer protections in place.

There are ways to mitigate the risks, such as using a crypto wallet instead of leaving your assets on a crypto exchange. But you need to be willing to put the time into understanding how wallets work and learning how to keep yours secure, which not every investor will want to do.

Buying crypto in 2023

We don't know what will happen to cryptocurrency prices in 2023. Increased regulation is on the horizon, which will likely cause near term volatility even if it strengthens crypto's foundations for the longer term. The current crypto winter shows no sign of thawing, and prices could stay low for some time to come.

If you decide to buy, don't do it because you're hoping to profit from a similar rally to the one we saw in 2021. Do it because you understand blockchain and what it might be able to do in the future. And even then, follow the golden rule of crypto investing and only invest money you can afford to lose.