Cryptocurrency fever is here, and the prices of digital currencies are reaching staggering heights.
As of this writing, Bitcoin (CRYPTO: BTC) is priced at around $45,000 per token, up more than 380% since this time last year. The price of Ethereum (CRYPTO: ETH) has surged around 1,600% over the past year, and Dogecoin (CRYPTO: DOGE) has skyrocketed by a whopping 19,000% in the same time period.
Crypto could potentially be a lucrative investment, but it's not right for everyone. Here are a few signs you're ready to take the plunge.
1. You have a high tolerance for risk
Cryptocurrency is a high-risk investment, and it's subject to extreme volatility. Bitcoin, for example, has lost roughly 80% of its value in the past. In just the past week, its price has dropped by around 20%. While it has managed to recover from past dips, not all investors can tolerate that level of volatility.
In addition, cryptocurrency in general is a highly speculative investment. We're in uncharted territory with crypto, and nobody knows whether it will amount to anything over the long term or not. While cryptocurrency could be life-changing, it could just as easily be worthless in the future.
This isn't to say that crypto is necessarily a bad investment. But if you're going to invest, you'll need a high tolerance for risk to be able to survive the rollercoaster of volatility.
2. You have a well-stocked emergency fund
Because cryptocurrency is so risky, it's important to make sure you have a healthy emergency fund before you invest.
If you don't have an emergency fund and you're faced with an unexpected expense, you may be forced to sell your crypto investments. Considering how volatile cryptocurrency is, you could end up selling when prices are at rock bottom, locking in your losses.
Aim to save enough to cover at least three to six months of living expenses in your emergency fund. That way, if you do incur an unexpected expense, you can afford to leave your crypto investments alone.
3. You have a diversified portfolio
A diversified portfolio is crucial no matter how you choose to invest, but it's even more important when you're investing in cryptocurrency. If your crypto investments take a turn for the worse, you'll need a strong portfolio of stocks to fall back on.
One of the easiest ways to build a diversified portfolio is to invest in broad-market index funds or ETFs, like an S&P 500 ETF. This way, you get broad exposure to hundreds of strong stocks across a wide variety of industries.
If you'd prefer to invest in individual stocks, try to invest in at least 10 to 15 stocks from multiple industries. Ideally, you'll have a core portfolio of strong, stable stocks before you add cryptocurrency to the mix.
4. You've done your homework
Not all cryptocurrencies are created equal, so it's important to do your research when deciding which one to buy. Bitcoin has the longest track record, Ethereum has potential in several ways, and Dogecoin is perhaps the riskiest cryptocurrency of them all. But they aren't your only choices, and there are dozens of different types of digital currencies to choose from.
Before you invest any money, ask yourself the critical questions about each currency you're considering. Does it have a competitive advantage in the crypto industry? Does it have real-world uses? Does it have potential for long-term growth? The more research you do before investing, the better your chances of choosing the best cryptocurrency for you.
Investing in crypto is a big decision, and it's not going to be the right move for everyone. If you have the right investing personality and have prepared your finances, you just may be ready to invest in cryptocurrency.
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Katie Brockman 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.