It’s been in the headlines. It’s held up the Infrastructure Bill. It’s picking up popularity. It’s here, and if you’ve found yourself wondering if you should be investing in cryptocurrency, you’re one of many. In fact, 49% of millennials and 38% of Gen Xers reported owning bitcoin1.
While bitcoin isn’t the only cryptocurrency, it’s the most popular and has been around the longest. If you got in early and held until now, you would have experienced significant returns. But chances are you weren’t one of the early adopters and now, many investors find themselves wondering if they should be putting money towards cryptocurrency in today’s markets.
So, in this piece, we’re walking through five questions that you should ask yourself before deciding to allocate money towards cryptocurrencies.
“Have I taken care of the basics?”
Cryptocurrency is far from a “traditional” investment. Some view it as an alternative investment, and some consider it as strictly speculation. Whichever side of the table you sit on, it’s always essential to have the basics of your finances under control, but if you plan to invest in cryptocurrency, you must build your financial foundation first.
This would include maxing out retirement accounts, having a fully funded emergency fund, having appropriate insurance coverage, and being on track for life goals. Having a strong financial foundation is important whether you plan to invest in crypto or not, but having one makes it easier to begin taking slightly higher levels of risk.
“Can I afford to lose this money?”
The crypto markets are highly volatile. While bitcoin has had an upward trajectory over the past decade, there have been countless significant dips in price along the way. Double-digit price swings on any given day are expected, and if you’re not comfortable with risk, it may be tough to stomach the constant volatility.
That said, we’ve seen bitcoin’s price rapidly increase from time to time as well, leaving crypto investors more bullish than ever. However, if you’re not prepared for the rollercoaster-like performance and the potential of your investment going to $0, it may not make sense to invest in it. Generally, it’s recommended to only invest money in crypto that you can afford to lose. That makes it easier to accept the imminent risk and helps reduce the impact of the volatility.
“Do I understand what I’m investing in?”
Age-old advice says to only invest in what you understand, and when it comes to crypto, this phrase couldn’t ring truer. There are plenty of legitimate cryptocurrencies out there. Still, over the past year, there’s also been an increase in illegitimate cryptocurrencies, which has created the need for education before allocation.
The crypto environment operates similarly to regular businesses because there are competitors, competitive advantages, and new companies and technology being built every day. However, since the cryptocurrency space is still so young, there’s a lot of competition and a lot of development that still has to play out – and this is one reason why some people consider it speculative rather than a proper investment. It’s impossible to know what the industry will do or look like in the future. Still, by becoming educated about crypto before investing in it, you’ll be able to have a more well-rounded perspective and begin to form opinions around how and where to allocate your money.
“Why do I want to do this?”
This question should be asked before making any investment because it helps you define your purpose. If you wanted to put money in a 401(k) or IRA, it would be safe to assume that your “why” is to save for retirement.
But when it comes to investing in crypto, do you want to invest in it because you want to try to make a quick dollar, or because that person four cubicles down talks about how great it is every day, or because you believe in the movement and direction it’s heading?
There’s no correct answer, but you need to be aware of your driving factor because this will influence how you approach and manage your investments.
“What’s my exit strategy?”
Just like with any investment, you need to have an exit strategy. This will help you build out a plan around the investments so that if your investment doubles or gets cut in half, you know what actions to take.
For example, let’s say bitcoin doubled in price within a year after you bought it. If that happened, would you sell? Would you be prepared for the tax bill?
There are many nuances within the crypto world compared to the stock market, making it even more difficult to invest safely. Having a well-thought-out exit strategy will make decisions regarding your investments that much easier.
Your exit strategy would also include having answers to questions such as:
- “How will I remain diversified & properly allocated if my crypto investments increase more than my other investments?”
- “If I’m going to hold long-term, how do I plan to include crypto assets in my estate plan?”
Cryptocurrency has picked up in popularity of the past year like how bitcoin made headlines during its bull run in the winter of 2017. However, where there’s popularity, there’s people trying to make a quick dollar – from both sides of the table. People have had a lot of time on their hands in the past year, which has led to high amounts of day trading, leading to significant losses and incredible gains. Additionally, there’s been a surge of illegitimate cryptocurrencies from people trying to cash in on the trend and take advantage of the increase of inexperienced investors, making it that much more challenging to invest in the space safely.
If you believe that cryptocurrency is the right investment for you, you must ask yourself these questions before making investments to protect yourself and your money.
1. Allcot, Dawn. Millennials Own More Crypto Than Any Other Generation. Yahoo Finance. May 30, 2021.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.