Contemplating a Bitcoin purchase? Check these items off your list first.
If it seems like everyone you know is investing in Bitcoin these days, well, you may be on to something. Cryptocurrency is growing increasingly popular, and while there are many digital coins to invest in, Bitcoin is among the most well known. To some degree, that could make it a more viable investment than some of the other digital currencies out there.
That said, if you’re going to invest in Bitcoin, you’ll need to go in prepared. Here are three things it pays to do before adding Bitcoin to your investment portfolio.
1. Make sure your emergency fund is set
Whether you’re investing in Bitcoin or opening a brokerage account to buy stocks, the rule is the same — you really shouldn’t invest at all until you have a decent amount of money in savings. For most people, that means having an emergency fund with enough cash to cover three to six months of essential bills.
Because Bitcoin is very volatile (and stocks, too, for that matter), you can’t keep your emergency savings there. Instead, you’ll need to make sure you’re all set with your emergency fund before putting money into investments that have the potential to lose value.
2. Make sure you have a nice mix of stocks
You can’t keep all of your money in a regular savings account, because if you do, you’ll earn minimal interest on it. Investing is a great way to score higher returns that help you grow wealth, so it’s a smart thing to do. But before you sink money into Bitcoin, you may want to assemble a diverse mix of stocks. Though stocks can be volatile in their own right, at this point, they’re still typically considered to be a safer investment than cryptocurrency. So it can be a good idea to start with stocks before moving on to something riskier.
Now when we talk about having a diversified portfolio, that generally means owning stocks from different market segments. You could, for example, buy some tech stocks, some bank stocks, and some energy company stocks before adding Bitcoin into the mix.
3. Make sure you’re investing money you can afford to lose
Bitcoin is very speculative — much more so than stocks. In fact, many stocks have been around for several decades, whereas Bitcoin has only existed for a little over 10 years. While stocks have consistently proven they can recover from market crashes and downturns, Bitcoin doesn’t have that same history. As such, before you put money into Bitcoin, make sure you’re OK with the idea of potentially losing all of it.
This isn’t to say that it will play out that way, but you need to account for that possibility. So if you’re sitting on money you hope to use to buy a home or meet another goal, it probably shouldn’t go into Bitcoin anytime soon.
A lot of investors have done well with Bitcoin, and the same may happen for you. But before you invest in Bitcoin, or any cryptocurrency for that matter, it pays to check these key items off your list.
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We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Maurie Backman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin. The Motley Fool has a disclosure policy.