Investing in cryptocurrencies can be appealing, especially when you hear stories of people being catapulted into millionaire status almost overnight. But these types of investments are complicated, and achieving this kind of success is not only rare, but also nowhere near as easy as it seems.
Before investing your first dollar in this intriguing asset class, prepare yourself by doing these three things.
1. Expect a roller coaster ride
When you invest, what you buy helps determine the volatility of your accounts each day. Holdings like investment grade US bonds will trade fairly regularly, while stocks fluctuate more. But even for the latter, stock market crashes – short-term declines of 10% or more in value – are rare.
When you buy crypto, you are signing up for daily highs and lows, including short-term abrupt changes. It shouldn’t come as a surprise if you see your accounts doubling in value or dropping in half in a very short period of time.
The table below shows how much the value of bitcoin changed in a recent two-week period:
|Dated||The last price||% Change|
|08/06/21||$ 32,996.47||N / A|
While that kind of gain in just a week might sound like a lot, losing almost that much in the same amount of time can also come as a shock. Making sure you can handle these ups and downs will involve knowing more about what to expect. And while you probably can’t avoid it entirely, you can better prepare for it.
2. Start with small amounts
You can dive into cryptocurrency starting with small amounts. Dogecoin could trade for as little as $ 0.20, while Ether costs $ 2,000. And if the latter is too high, you can buy fractional shares.
But investing too much money in crypto could derail your progress towards a major milestone, like retiring if you suffer a major loss, so sticking to smaller positions means the rest of your assets won’t fluctuate. excessively. And more importantly, it will allow you to test how you feel about this volatility with real in-game money.
If you aren’t stressed out about the ups and downs, you can potentially add more to your crypto balances. On the other hand, if you find volatility too stressful, you can keep a small investment for fun or sell it and revert to your usual investment strategy.
3. Regularly monitor its performance
You don’t need to be glued to your computer screen to track the performance of your crypto holdings 24/7, but it’s probably not the type of investment you can set and forget. . If you own something like an index fund or an ETF, your performance or allocations shouldn’t deviate too much from the index it tracks, so you can own them with very little management.
However, the more complicated your investment strategy becomes, the more you need to review it. Adding different asset classes or sectors to your portfolio could mean that at a minimum you rebalance your holdings when an investment – due to growth or attrition – represents a different percentage of your accounts than it does. that you originally designated.
And you should regularly review your actions in case the outlook for a particular company or industry has changed enough that it no longer matches your goals. But for the most part, you’ll be making minor adjustments, and anything you own will be remembered for many years.
Cryptocurrency is completely different: when you buy, it’s not necessarily a long-term investment. Instead, you might end up trying to trade more frequently to take advantage of the volatility. And because these digital currencies can fluctuate so much, it can be tempting to buy and sell often, even on a daily basis.
But timing the market is incredibly long and difficult to do. If you want to get exposure to cryptocurrency without the volatility and need to track your portfolio constantly, a solid alternative is to look for crypto-related stocks or ETFs.
Investing in cryptocurrencies can be lucrative, but this type of reward usually comes with a corresponding level of risk. To navigate it successfully, you need to know the pros and cons so that you really understand what your investment journey could look like.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.