Should You Start Investing in Cryptocurrency in 2022?

Is crypto right for you, and should you dive in once the new year kicks off?

If you follow any sort of financial news, you may be aware that a lot of investors have made serious money off cryptocurrency this year. And if you'd like to get in on the action, you may be considering adding cryptocurrency to your portfolio.

Before you do, ask yourself these essential questions to see if that's the right move for you.

1. Have I done my research?

The term "cryptocurrency" encompasses thousands of digital coins. You may be more familiar with some of the popular ones like Bitcoin and Ethereum, but in reality, there are many, many options. Before you invest in cryptocurrency, research your choices carefully, and don't assume that the coins that get the most press are the best ones to put your money into.

2. Do I understand the risks?

There's no such thing as a risk-free investment. But cryptocurrency is notoriously volatile. The value of digital coins tends to swing more wildly than stock values -- and stocks can be volatile in their own right. Make sure you're willing to deal with that before you add digital coins to your portfolio.

3. Am I looking for a short-term or long-term investment?

There are plenty of people who have had great success buying stocks and holding them for 40, 50, or 60 years. But cryptocurrency doesn't have that same track record; it simply hasn't been around long enough. Digital coins have only been circulating for a little over a decade, and that alone makes cryptocurrency a bit speculative as a long-term investment. This isn't to say that you can't treat it as one, but it's a good idea to decide what approach you'll take to crypto before you buy it.

4. Do I have a fully loaded emergency fund?

You can lose money any time you invest. But because cryptocurrency is riskier than a typical investment, it's important to be set financially before putting money into it. Take a look at your savings account balance to make sure you have at least three months' worth of living expenses set aside. If you don't, build up your emergency fund before you buy crypto -- or even stocks, for that matter.

Is crypto right for you?

Though cryptocurrency seems to be 2021's hottest investment, that doesn't automatically make it right for you. Don't succumb to peer pressure; instead, take your time. Figure out if there are more suitable ways to invest your money in the coming year.

Remember, too, that if you're going to dabble in cryptocurrency, you may want to start slow. That could mean putting around 5% of your portfolio into cryptocurrency and keeping the rest of your brokerage account in stocks, bonds, and ETFs.

Investing in cryptocurrency could make you quite wealthy. But it's important to feel comfortable with that decision before diving in.