3 things you should know before investing in cryptocurrency

Cryptocurrency is the hottest investment on the block these days. Many investors buy the digital currency with the hopes of growing their wealth or making a quick buck, but remember that it’s a highly volatile asset.

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Hanna Horvath, CFP®

Hanna Horvath, CFP®

Managing Editor & Certified Financial Planner™

Hanna Horvath, CFP®, is a certified financial planner and former managing editor at Policygenius. Her work has also been featured in NBC News, Business Insider, Inc. Magazine, CNBC, Best Company, and HerMoney.

Published August 24, 2021 | 3 min read

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Cryptocurrency news is everywhere these days — from Dogecoin’s skyrocketing prices to Bitcoin’s gains — and you may be ready to get in on the action. Investing in cryptocurrency can lead to lucrative returns (just search “crypto millionaire” on Google) but investors should be aware of the risks. Here are some of my quick tips on investing in cryptocurrency. 

But first … what is crypto?

Cryptocurrency is digital money transferred online without a middleman. You’ve probably heard of Bitcoin or Ether, two popular types of cryptocurrency. Unlike cash, which is guaranteed by governments, cryptocurrency is backed by an open-source algorithm. But it is a currency, and since it’s completely digital, cryptocurrency allows users to make anonymous payments with virtually no fees. Some may use cryptocurrency to conduct clandestine purchases online without a paper trail, but others simply use it as an investment, buying and trading the digital currency on apps like Robinhood or Coinbase. 

Tip 1: Invest only what you can afford to lose 

Like other volatile investments, be wary of investing too much of your portfolio in cryptocurrency. Exactly what percentage of your portfolio should go into Bitcoin or Ether depends largely on your financial goals and risk tolerance — but make sure you understand just how risky these investments are. For example, if you’re planning on buying a home in a year or two, it may not make sense to put your down payment fund into cryptocurrency. Also, if the idea of losing half your money after Elon Musk tweets makes you sweat, you may want to stick to more conservative, less risky investments like index funds. Case in point: Bitcoin is trading at an all-time high right now, but took a 30% plunge just a few short months ago.  

On the other hand, if you have some extra "fun" money and want to take a risk (and don't have a set time you need to withdraw the money), investing in cryptocurrency may be for you.

Tip 2: Do your research 

Always do your own research before investing, especially if it’s a newer cryptocurrency. Pay attention to how volatile the investment has been in the past and average performance over time. If you have specific questions regarding your personal financial situation, seek out a licensed investment advisor — not a TikTok celebrity. 

In many ways, investing in crypto is a bit like gambling. It takes some strategy, from deciding which crypto coin is going to be the next big thing to figuring out the right time to buy. For some investors, that's the fun part (the potential for double-digit returns isn't so bad, either). But, like with gambling, you shouldn’t play around with money you can afford to lose. Like I said before, cryptocurrency is a fairly new investment, and can’t be counted on or assumed to perform a certain way. 

Tip 3: If it sounds too good to be true … 

It probably is. Some crypto prices are driven by viral demand and social media, and many investors will jump onto a new cryptocurrency investment without doing proper research. And like with any other investment, past performance doesn’t mean future gains. A cryptocurrency that posted double (or triple) digit returns may be a sign that investment is overvalued. It may be tempting to follow the herd, but you may lose money in the long run when the bubble bursts.

Want to learn more? Check out our guide to cryptocurrency and taxes.

Image: Neobrand / Getty Images

Hanna is a certified financial planner, which is basically a fancy way of saying she's personal finance expert. Do you have a question for her? Fill out this form and she'll get back to you.