- Cryptocurrencies are high-risk investments, and investors need to be prepared for volatility.
- It's important to research the cryptos you want to buy, and to only invest money you can afford to lose.
A lot depends on your attitude to risk and individual financial situation.
The cryptocurrency market had a rocky start to the year. Tighter economic policies caused investors to pull out of riskier assets, and the total crypto market cap is down over 40% from its November high of almost $3 trillion.
Some view this drop as an opportunity to buy popular cryptocurrencies while prices are at six-month lows. Others are nervous that this is the beginning of a longer period of low prices. A lot depends on your long-term crypto perspective -- some think crypto could transform the way we handle money, while others see it as a bubble that's about to burst.
If you're considering buying your first crypto this year, here are some questions to ask yourself first.
1. How much do you know about the cryptocurrencies you want to buy?
Research is a crucial part of any investment, especially cryptocurrency. Before you spend a dime, you need to know what the crypto in question does and how likely it is to perform well in the long term.
Here are some points to understand:
- What problem the crypto solves and how it will achieve its goals
- How big the potential user base is
- How it fits into its competitive landscape
- Who's in charge and what experience they have
- What its market cap is and what factors might cause it to increase or decrease
- How it will issue new coins or tokens, what the maximum number will be, and how they will be distributed
Also, you don't have to be an expert in blockchain technology, but you do need a basic understanding of what it is and how it could work. That understanding can help you avoid being scammed -- and help you make better investment decisions.
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2. Are you ready for the risk and volatility?
Cryptocurrency investing is a high-risk proposition. You may see huge returns, but you could also lose all your investment. This is a relatively new and untested industry, and there are many unknowns. For example, other countries could follow China's lead and ban cryptocurrency altogether. The crypto you buy could experience an unexpected technical problem or security breach -- or it could be overtaken by a newer coin that uses different technology.
In terms of volatility, cryptocurrency prices can gain or lose 20% or more of their value in a matter of days. That can be quite traumatic for a new investor, and you need to be ready for what can be a rollercoaster ride. If the volatility is likely to cause you sleepless nights, it's better to stick to safer investments.
3. Are you investing money you can afford to lose?
It's easy to get seduced by headlines of extraordinary gains from crypto investing and want to put all your available cash into Bitcoin (BTC). But the best way to protect yourself against the risk is to only invest money you can afford to lose. That way, if the worst does happen and the bottom completely falls out of the market, you won't face financial ruin. Moreover, if there's a prolonged drop in prices, you'll be able to wait out the dip. You don't want to have to sell your crypto investments at a loss to cover your next mortgage or rent payment.
4. Are you on top of your other financial goals?
Before you start buying crypto, first make sure your emergency fund is topped up. Ideally, you should have enough to cover three to six months of living expenses. That way, if you lose your job or face another financial crisis, you'll have a cushion to tide you over. If you don't yet have a solid emergency fund, now's not the time to get into crypto investing. Instead, start putting a small amount aside each month until you've built up that fund.
The same goes for your retirement savings. Crypto investing should not interfere with building the long-term wealth that will see you right in your old age. So map out how much you want to put into your retirement account each month. If your employer matches your 401(k) contributions, make sure you put in at least as much as your employer will match. Crypto can be part of your retirement planning, but it should only ever represent a small part of your overall investment portfolio. What matters is to have a plan and be clear about how your crypto investments fit in.
Buying crypto for the first time
If the questions above helped you decide to invest in crypto this year, the next step is to work out how much you want to spend and which cryptos you want to buy. It's probably best to stick to more established cryptos at first, such as Bitcoin, Ethereum (ETH), and Cardano (ADA). You may not see the same eye-watering returns, but there's also less risk involved, making these bigger coins a good place to start.
Check out our list of top cryptocurrency exchanges to find the right one for you. Have a look at things like the security measures they take; what the deposit, withdrawal, and trading fees are; and what educational resources they provide. It's also important to track all your crypto purchases for tax purposes, which some exchanges can help with.
If you decided crypto isn't right for you, that's OK. Cryptocurrencies are high-risk investments and they won't suit every investor. And if you decided to first focus on other financial goals, that's a solid move, too. If cryptocurrency is worth investing in, it will still be here when you're financially ready.
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Our Research Expert
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.
Emma Newbery owns Bitcoin, Ethereum, and Cardano.
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