The buzz around cryptocurrency became a roar in recent years as more and more options are becoming available to investors. And while you’re likely in for the financial rollercoaster of your life when it comes to cryptocurrency, the long-term rewards may be worth the inevitable short-term risks. Cryptocurrency is built on blockchain, a promising technology that stores data in blocks that are then chained together, and it seems to be an investment trend that will be around for quite a while.
There are thousands of different cryptocurrencies, with Bitcoin being the first and most established. Cryptocurrencies operate on a principle known as decentralized finance, or DeFi, meaning they are beyond the scope and reach of any central government or authority. This lack of governmental oversight, while appealing to many, is still far too risky for others. So, before you sell all of your belongings and drain your savings just to cash in on this hot commodity, you should ask yourself a few questions first.
Are You Ready For An Emergency?
No matter what your investment goals are, you need to make sure you have a solid emergency fund– liquid cash in an accessible savings account– in place first. How much you need to keep in there is circumstantial, but having up to six months of cash to cover your living expenses is necessary before considering a big crypto purchase. If you have an unstable employment situation, such as something in real estate, or if you work gig-type jobs, then you may even want to consider increasing the amount you have in emergency funds.
As we’ve learned in the last year, there’s no predicting the economic impact of global or national disasters, and setting yourself up for a long series of rainy days is always going to be a good idea whether you’re investing or not.
Are Your Other Expenses Fully Addressed?
Do you still have soul-crushing student loans? Does your existing debt have high-interest rates tacked onto it? Make sure you’ve addressed your other expenses and have a complete and realistic understanding of how they will be paid off in a timely manner.
If you decide you are in a position to invest in cryptocurrency, experts suggest investing only what you’d be okay losing. Meaning, if investing and losing everything you put into crypto doesn’t render you unable to keep your financial agreements in check, then you can feel confident allocating those funds.
What Are Your Crypto Goals?
Why do you want to buy crypto? What do you want to accomplish with this investment? Any expert on the matter will agree that cryptocurrency is an aggressive, higher-risk investment.
Unlike the stock market and its long record of increasing in value over time, cryptocurrencies and their role in the economy long-term are still unknown. But many experts believe the long-term value in cryptocurrency points to its underlying blockchain technology as well as its potential to drive innovation in conventional finance. Decentralized currency is a founding principle of crypto, but its value can be considered still too volatile for buying and selling things. Limited institutional adoption is just one major barrier to more widespread use of cryptocurrency in place of cash. The acceptance of crypto as an alternative to traditional currencies depends on several factors, including the adoption by businesses and people.
Simply put: if your answer is to get rich quickly, then cryptocurrencies are not your friend. Can you make a ton of money quickly? Of course. It is not, by any means, a guarantee, and you’re more likely to watch a series of intense fluctuations since the value of some cryptocurrencies can drastically raise or plummet with one Elon Musk tweet.
Can You Handle The Risk?
Very rarely do people invest some money and not care if they lose every penny. Of course, that’s understandable with any investment. But with crypto, the value can rise and fall by the hour, and there are no guarantees cryptocurrencies won’t collapse completely and be rendered worthless overnight.
Instead of viewing crypto as an investment, consider it speculation. Trent Porter, a financial advisor with Priority Financial Partners in Denver, Colorado, says, “Invest in a stock, you get the dividend. Invest in real estate, you get the rent. The only thing you’re buying with cryptocurrency is the hope that someone else will pay more for that hope than you did.”
It’s likely you already know someone (or know someone who knows someone) who made out like a bandit at the start of the cryptocurrency craze. But for every “get rich quick” story, there are dozens of cases where an investor lost it all. If those stories of people whose financial woes were soothed overnight via cryptocurrency are what’s piquing your interests, you may need to sit down and reconsider.
How Do You Plan to Buy Cryptocurrency?
You need to research where you’ll purchase your crypto, as these exchanges are largely unregulated. As an investor in crypto, you lose the oversight and protections you usually get with banks and conventional mainstream investment platforms. With no one to oversee, it’s entirely on you to evaluate and assess the different levels of security and insurance offered by other exchanges.
Which Cryptocurrencies Are You Interested In?
It’s not like there are a handful of cryptos from which to choose; there are thousands of different options, and it’s in your best interest to narrow down which ones are the most appealing. Bitcoin was the first cryptocurrency and remains the biggest and most popular, and it seems to be the most promising choice for investors. Bitcoin has the longest track record of increasing value over time, so it might be the best place to start. If you’re new to the crypto world, it makes sense to opt for what’s already somewhat understood instead of going for more volatile, lesser-known options– even if there’s some hype surrounding them.
For example, with Bitcoin came the eventual launch of Dogecoin. And while Dogecoin has seen a big rise in value and popularity in recent weeks, it was, quite literally, started as a joke. With so many blockchain-based currencies out there, many will inevitably disappear due to their potential uselessness.