Cryptocurrency may be the rising star of the investing world, but it can also be risky.
Some cryptocurrencies have experienced explosive gains over the past year and even made millionaires, but others have crashed and burned. There’s no telling what the future has in store for crypto. While it could eventually become widely adopted, there’s no guarantee it will succeed.
That said, it can be difficult to sit on the sidelines while crypto prices are soaring, even if you’re skeptical about its potential. Fortunately, there are a few ways to invest in crypto as safely as possible.
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1. Only invest money you can afford to lose
First and foremost, don’t invest any money you expect to need in the next several years. Cryptocurrency can be incredibly volatile in the short term, so expect to leave your money invested for at least a few years, if not decades.
Also, don’t invest any money you wouldn’t be comfortable losing. While crypto prices are surging right now, it’s still speculative at this point. There’s still a chance it could fail, and if that happens, you may lose all the money you’ve invested. To prevent crypto from devastating your finances, only invest an amount you can realistically afford to lose.
2. Do your research before buying
Not all cryptocurrencies are created equal, and some are stronger long-term investments than others. It’s important to avoid getting caught up in the hype and stick to cryptocurrencies with stronger underlying fundamentals.
Some cryptocurrencies, such as Shiba Inu (CRYPTO:SHIB) and Dogecoin (CRYPTO:DOGE), have seen an incredible amount of growth in the short term. However, both are risky investments because their growth is based primarily on hype and not on their merits as a cryptocurrency.
Investments such as Bitcoin (CRYPTO:BTC) and Ethereum (CRYPTO:ETH), though, are more solid choices. These cryptocurrencies have real-world utility and the potential to see long-term growth. While they may not grow as quickly as their short-term counterparts, they’re much safer choices.
3. Make sure the rest of your portfolio is strong
One of the most effective ways to limit your risk when investing in crypto is to double-check that the rest of your portfolio is filled with a diverse selection of solid stocks. This way, if your crypto investments don’t succeed, you’ll still have a strong portfolio to fall back on.
A well-diversified portfolio should include at least 10 to 15 stocks, but it’s wise to aim for at least 20 to 30 stocks to further limit your risk. Also, the more variety you can include, the better. This means investing in stocks from multiple industries and including stocks from small, midsize, and large corporations.
Finally, make sure all the stocks within your portfolio have strong underlying fundamentals. The healthier the companies, the more likely it is that these stocks will perform well over time. This can help offset the risk of investing in crypto and keep your portfolio safer.
Cryptocurrency may be risky, but it can also be an incredibly rewarding investment. By being strategic about how you invest, you can reduce your risk as much as possible and maximize your earnings over time.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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