The Bitcoin (CRYPTO: BTC) boom isn't over yet, as the cryptocurrency continues its upward trend. Since the beginning of the year, Bitcoin's price has jumped nearly 100% as investors scramble to get involved in the digital currency mania.
Despite its popularity, though, it's still an incredibly risky investment. While some investors believe it's a gamechanger, others aren't as optimistic about its potential. It's also experienced extreme price fluctuations, dropping by roughly 20% on three separate occasions since January of this year.
Nobody knows what the future has in store for Bitcoin, and not everyone can stomach the risk involved in investing in the cryptocurrency. However, if you're determined to invest in Bitcoin, there are ways to limit your risk to better protect your money.
1. Make sure you have a well-diversified portfolio
No matter where you choose to invest, it's always wise to have a well-diversified portfolio. However, if you're considering investing in Bitcoin, a healthy portfolio is especially critical to limit your risk.
The more diversified your portfolio is, the less impact Bitcoin will have on your overall investments if it takes a turn for the worse.
Aim to invest in at least 10 to 15 different stocks from multiple industries if you're choosing to invest in individual stocks. Or you can invest in index funds or ETFs, which provide instant diversification because each fund includes hundreds or even thousands of stocks.
Also, it's a good idea to make sure your core portfolio is as stable as possible. For example, you could choose to invest the bulk of your money in S&P 500 index funds, then invest a very small amount in Bitcoin. That way, even if Bitcoin doesn't perform well, most of your money is still safe.
2. Invest through an ETF
Investing in Bitcoin directly is possible, but it can be a hassle. Cryptocurrencies trade differently from regular stocks, and to invest directly in Bitcoin, you'd need to create a digital wallet and sign up on a cryptocurrency exchange. This can also be a security concern because if you lose the password to your digital wallet, you can't access your investments.
A Bitcoin ETF would mimic the price of the cryptocurrency, but you wouldn't be investing in Bitcoin directly. In other words, the ETF would make it so that you can invest in Bitcoin like you would any other stock through a traditional exchange.
Currently, the Securities and Exchange Commission (SEC) hasn't approved any U.S.-based Bitcoin ETFs. However, Bitcoin ETFs do exist in Europe and Canada, and some experts believe the SEC will start allowing them in the U.S. within the next year or so. If or when that happens, it will make it easier (and safer) for Americans to invest in Bitcoin.
Keep in mind, though, that even if you do invest in a Bitcoin ETF, it's still important to have a diversified portfolio. Just as you would by investing in Bitcoin directly, make sure the bulk of your money is spread across a wide variety of stocks in addition to a Bitcoin ETF.
3. Consider crypto stocks
Perhaps the safest way to invest in Bitcoin doesn't involve investing in Bitcoin at all, but instead investing in crypto stocks.
A crypto stock is a company that is involved in the cryptocurrency market in some way. Examples of crypto stocks include:
- Tesla: CEO Elon Musk recently announced a $1.5 billion investment in Bitcoin, and the company also allows payment in the form of Bitcoin.
- Square: The company allows users to offer cryptocurrencies, including Bitcoin, as a form of payment. It has also purchased more than $200 million worth of Bitcoin since October 2020.
- Salesforce: Although not directly involved with Bitcoin, the company builds blockchain solutions — which is the technology behind cryptocurrencies. If Bitcoin becomes mainstream, Salesforce could benefit from it.
The key to investing in crypto stocks is to invest in them because they are solid companies — not solely because they're involved in cryptocurrencies. Strong companies will do well over the long term regardless of what happens with Bitcoin. But if Bitcoin does turn out to be a life-changing investment, these stocks may experience even higher returns.
Is it time to invest in Bitcoin?
There are a variety of ways to invest in Bitcoin, with some safer than others. Keep in mind, though, that at the end of the day, Bitcoin is still a highly volatile investment. Even if you try your best to mitigate your risk, only invest money you're prepared to lose.
Bitcoin has the potential to be a lucrative investment, but it's not right for everyone. If you choose to invest in Bitcoin, be sure you've done your homework and invest wisely to keep your money as safe as possible.
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Katie Brockman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bitcoin, Salesforce.com, Square, and Tesla. The Motley Fool has a disclosure policy.