There's a hot investment everyone seems to be talking about these days, and it's cryptocurrency. Whether you've been following the news on Bitcoin, Dogecoin, or Ethereum, you may be tempted to get in on the cryptocurrency action and buy some digital currencies for your portfolio.
While cryptocurrency may be a smart investment for some people, here are a few signs that you may be better off steering clear.
1. You're very risk-averse
There's no such thing as a risk-free investment. Heck, you could put money into a so-called safe investment like bonds only to have your issuer default on its payments. But there's a general hierarchy of risk when it comes to investing, and while stocks are up there as far as volatility goes, cryptocurrency leads the pack.
Cryptocurrency hasn't been around as long as stocks have, and assessing its value is far more difficult than digging into a company's financials and determining whether its stock price is likely to go up or down over time. Also, a lot of cryptocurrency's success will hinge on how widely adopted it becomes.
Right now, there are some merchants that accept cryptocurrency as a form of payment, but that's hardly the norm. And if cryptocurrency doesn't take off in that regard, its value may wane over time.
This isn't to say that you can't or won't make money with cryptocurrency. But if taking risks in your portfolio isn't something you normally do, then you may not want to stray from that strategy — even if cryptocurrency is hot right now.
2. You don't own a lot of stocks
A diverse portfolio can help you grow wealth and protect you from losses during periods of market volatility. But if you don't already own a lot of stocks, then you may want to focus on loading up on more of them before putting money into cryptocurrency.
Cryptocurrency can be a good way to diversify, but it's also more speculative, so if your portfolio right now consists of three tech stocks and one bank stock, Dogecoin, for example, may not be the best addition. Rather, you may want to focus on stocks from other sectors, like healthcare, energy, or automobiles.
3. You don't understand it
It's never a good idea to invest in something you don't understand. And let's face it — cryptocurrency can be confusing. First of all, its tax rules are complicated, and that alone could be a reason to stay away. Second, it's hard to pinpoint why cryptocurrency fluctuates in value so much.
Granted, the same could be said for stocks — sometimes, their value can plummet and it's hard to identify why. But if you don't understand the technology behind cryptocurrency and the factors that could lead to its value increasing or dropping, then it's probably wrong for you.
Make the right call
If you have a healthy appetite for risk, a diverse portfolio, and a good understanding of how cryptocurrency works, then it may be something worth putting your money into. But otherwise, you may want to steer clear, at least for now, and focus on other investments that may better align with your risk tolerance and general strategy.
Cryptocurrency isn't about to go away. If now isn't the right time to invest in it, you may find that sitting tight and revisiting it in a few months' time is the best way to go.
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