The cryptocurrency market has seen its share of ups and downs. After reaching dizzying heights and attracting tons of new investors, Bitcoin, Ethereum, Litecoin and other cryptocurrencies saw their prices crash just a few months later.
But unlike some past crashes, the decline of Bitcoin and its brethren was followed by a sharp rally, one that is once again attracting new investors. If you are thinking about adding some cryptocurrency to your investment portfolio, you are not alone. But before you go all in, you need to do your homework. Cryptocurrency can be part of a smart investment portfolio, but buying Bitcoin is no substitute for contributing to your 401(k) or starting a traditional college fund for your kids. Here are some smart and timely tips for incorporating these alternative investments into your existing portfolio.
Recognize the Risk
Before you invest in any new asset class, from gold and other precious metals to Bitcoin and related cryptocurrencies, you need to recognize the risk. Unlike stocks, which reflect the anticipated value of future earnings, and bonds, which are backed up by the companies behind them, the value of alternative investments is largely a function of what people are willing to pay for them.
Sometimes investors are willing to pay a lot – just witness the incredible rise of Bitcoin. Other times, investors are willing to pay very little – just look at the recent decline in those same prices. If you want to add these volatile assets to your existing portfolio, you need to recognize the risk.
It helps to view cryptocurrencies as speculations. If they do well, you will be handsomely rewarded. If things go poorly, you could lose all your money. Viewed through this lens, cryptocurrency investments take on a new light, and that can help new investors limit their risk.
Do Your Homework
Cryptocurrencies are not like other types of investments, and it is important to do your homework. From how these virtual coins are bought and sold to where and how they are held, there are a lot of differences.
The decentralized nature of the blockchain make cryptocurrencies unique, and new investors need to know what they are getting into. Before you invest a single penny, think about how you plan to hold your cryptocurrency purchases – will you keep them online at an exchange or store them offline in a virtual wallet? Each of these approaches has its risks and benefits, and making the right choice means climbing a steep learning curve.
Choose an Appropriate Percentage
When approached intelligently, cryptocurrency investments could become a valuable part of your investment portfolio, but it is important to set a limit. As referenced above, these alternative investments are best-considered speculations, the online equivalent of a lottery ticket or gambling in a cryptocurrency casino.
If you want to play in the cryptocurrency market, it is best to do it with money you can afford to lose. If you want to take a chance on an established cryptocurrency like Bitcoin, or one of the thousands of new competitors, go right ahead. Just recognize the risk and set your loss limit accordingly.
Resist the Temptation
Investment vehicles are the only things that become more attractive as the price rises. When Bitcoin and its rival cryptocurrencies were selling for pennies a coin, few people took notice, and even fewer chose to invest. But when these virtual coins soared to all-time highs, new investors came out of the woodwork, spurred to action by the fear of missing out.
If you plan to make cryptocurrency part of your investment portfolio, resisting temptation will be key. It is tempting to chase those rising prices, and even more tempting to sell when values start to fall. Cryptocurrencies can be part of a solid investment portfolio, but it is important to keep them in their place.