Cryptocurrency is the latest phenomenon in the investing world, but how safe is it really? While some people have made millions buying cryptocurrency, you could easily lose everything.
Even the experts are divided about whether crypto is a good investment or not. Some celebrity billionaires like Elon Musk have promoted cryptocurrencies like Bitcoin (CRYPTO: BTC) and Dogecoin (CRYPTO: DOGE) on social media, while other investors like Charlie Munger and Warren Buffett have famously voiced their criticism of cryptocurrency.
Cryptocurrency can be incredibly risky — so risky that some would consider it more of a gamble than an investment. And there are a few things you should know before you buy.
1. Investments are long-term, while gambling is short-term
The truth is, cryptocurrency could be either an investment or a gamble, depending on your strategy.
If you're buying crypto for the sole purpose of trying to get rich overnight, then it falls into gambling territory. But if you truly believe cryptocurrency is the way of the future and will be around for decades to come, then buying it now could be considered more of an investment.
No matter where you choose to invest, it's best to take a long-term strategic approach. Don't invest in anything you're not willing to hold for at least a few years, or ideally decades. Cryptocurrency is extremely volatile in the short term, but if you believe in its future, you could stand to make a lot of money over time if it succeeds.
There are no guarantees that cryptocurrency will succeed over the long run, and you could still lose everything even when taking a long-term approach. But you're less likely to lose money than if you were to try to time the market to make a quick buck in the short term.
2. Investing is taking calculated risks
Investing will always carry some degree of risk, even if you're investing in relatively safe places. But becoming a successful investor involves taking calculated and educated risks, and the same is true when it comes to cryptocurrency.
If you put your life savings behind cryptocurrency, that's definitely a gamble. But there are ways to invest in cryptocurrency in a more calculated and safer way.
First, make sure your financial situation is healthy and you're only investing money you can afford to lose. Next, double-check that your portfolio is properly diversified. If you're adding crypto to the mix, you'll want to be sure the rest of your investments are as strong and stable as possible. Then if crypto does fail, it won't take the rest of your portfolio down with it.
By being strategic and careful about how you invest in cryptocurrency, it's possible to reduce your risk.
3. Where you invest matters
Cryptocurrency, in general, is risky. But some cryptocurrencies are more dangerous than others, and choosing the wrong one could be a gamble.
While cryptocurrencies may be very different from stocks, you can still research them in much the same way you would other investments. With stocks, it's important to look at a company's underlying fundamentals to determine whether it's likely to grow over time. The same is true for cryptocurrencies.
As you're researching different types of cryptocurrencies, ask yourself a few questions. Does this particular cryptocurrency have any real-world utility right now? If not, how likely is it to become mainstream in the future? Does it have any advantages over its competitors? If new cryptocurrencies come along, how likely is it that this one will retain its advantages?
If you're choosing cryptocurrencies based on how trendy they are or how much their price has increased, that's more similar to gambling. But if you do your research and are buying the cryptocurrency you believe is the strongest, then it's more of an investment.
Should you invest in cryptocurrency?
Right now, cryptocurrency is still a highly speculative investment, and nobody knows where it will go. Unlike stocks, cryptocurrencies don't have a long track record. And no matter how much you try to reduce your risk, there's still a good chance you could lose money. If you're a risk-averse investor, it may be best to steer clear of cryptocurrency for now.
But if you've decided you want to invest in crypto, the best thing you can do is research your options, prepare your portfolio accordingly, and hold onto your investment for the long term. You can't eliminate risk entirely, but the more you prepare, the better off you'll be.
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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.