Cryptocurrencies can make a splashy addition to an investment portfolio, with the potential for eye-popping returns. But it’s important to approach this asset with caution and a long-term perspective.
One of the most significant risks of cryptocurrencies is their price volatility. As with other investments, the value of a cryptocurrency is determined by supply and demand: how many are available to buy and how strongly people want them. But there are additional factors at play with crypto, including the fact that it’s not backed by a central bank or government. As a result, its value is highly volatile, with prices changing rapidly and often for reasons that are hard to understand or predict.
Another risk is that cryptocurrencies are not as regulated as traditional securities. That means that platforms that buy and sell them may not be as secure, and some have already shut down. Additionally, cryptocurrencies are not insured by the FDIC or SIPC, so investors should only invest money that they’re willing to lose.
A final concern is that cryptocurrency trading requires specialized skills and knowledge. For example, a successful trader needs to be able to identify which assets are likely to go up or down, and knows how to react to sudden movements in the market. This is a complex task for anyone, but can be especially challenging for newcomers who don’t have the skills to execute trades quickly and efficiently.
There are several ways to get started with crypto, including online exchanges that offer a variety of options and traditional brokerage firms. Some of these services have low minimums, making it easy to start small and scale up as your confidence grows.
Some investors have also opted to purchase cryptocurrencies directly from the companies that develop them. This can be a great way to support innovative projects, and can provide more direct exposure to the technology’s future prospects. However, this can be a very high-risk approach, as it’s not possible to rely on the same financial reporting standards that are required for regulated stocks and bonds.
Finally, a growing number of retailers and service providers are starting to accept crypto payments, which can be an easy way to test the waters. Some early adopters include Overstock, Microsoft and Overwatch. It’s also possible to donate to nonprofit organizations using Bitcoin, and to give crypto to friends and family as a gift.
Cryptocurrency may provide opportunities for investors, but it’s critical to have all of your other finances in order before you start investing. That means having an emergency fund, a manageable amount of debt and a well-diversified portfolio of other investments. A financial advisor can help you create an overall strategy and ensure that your individual investment decisions are working in concert to help you meet your goals.