What to consider before investing in cryptocurrencies
Investing in cryptocurrency can be as easy as a few taps on your phone, and with the asset class all over the news and in conversations with friends, it’s tempting to dive straight in. However, depending on your financial situation and your appetite for investment risk, cryptocurrency may not be a suitable investment for you right now – or never.
“I’m the biggest crypto hippie you’ve been talking to for a very long time,” said Tyrone Ross, Managing Director of Onramp Invest, a crypto-asset platform for registered investment advisers. And yet, he cautions against this. “I don’t think the general public should invest in crypto.”
Imagine your finances as an ice cream cup, with crypto as the icing on the cake. It is only a small proportion of the overall sundae, and not everyone wants it. And before you fish that cherry out of the jar, you need to assemble the rest of your dessert. In other than ice cream terms, it means building a solid financial foundation and learning all you can about cryptocurrency before investing real money in it.
Set up financial guarantees
First and foremost, you need to prepare for those times when things don’t go as planned.
Over the past year, workers who have lost income due to the Covid-19 pandemic have had to dip into their savings or go into debt to pay their bills. This time was a stark reminder of the importance of having an emergency fund.
“When you’re young you may feel like Superman or Superwoman, but when the bubble bursts you could easily find yourself out of a job for nine to 12 months,” says Theresa Morrison, a financial planner in Tucson, Arizona. “Don’t underestimate the systemic shocks in the market.”
Ms. Morrison recommends saving six months of living expenses if you’re single, or about three months if you’re sharing expenses with a spouse or working partner. But setting aside even a few hundred dollars can come in handy when you’re faced with an unexpected expense. And if you have high interest debt, like credit card debt, paying it off can further strengthen your financial situation.
Also review your insurance coverage, as these policies can provide much needed cash during tough times. Life insurance can be especially important if you have dependents.
Save and invest for future projects
Once you’ve put money aside for emergencies, start thinking about your short, medium, and long-term financial goals. Retirement is, of course, a great thing to save, so contribute to retirement accounts (especially if you have access to a plan with an equal employer). But set specific savings goals for other milestones in life.
“Most people want to travel every year, buy a house in 10 years, get married in 10 years. These things cost money, ”Ms. Morrison said. “Write down how much it will cost you in today’s terms and figure out how much to save on your paycheck each month. In my experience, this alone can cost $ 1,000 per month.
Learn About Cryptocurrency
You have the money and you are ready to jump on the cryptocurrency bandwagon, only you have no idea how someone is even buying the asset. Or how it will fit into your overall financial plan. Or if it’s too risky for you.
Free time. Don’t do anything with your money that you don’t understand. Take the time to learn all you can about cryptocurrency. It is important to understand the mechanics, but it is also important to learn what type of investor you are, as this also affects the types of investments that would be right for you.
“There is a process you need to follow to determine if this new asset class is right for you. What’s your plan? How old are you? What are your goals? How tech savvy are you? Do you understand what it means to own these assets and not to insure them? If something happens to you, who in your family knows about this thing to get it back? Mr. Ross said. “People don’t do their due diligence before they put money into something. I know this is the wrong answer, but it is the truth.
Once you understand how it all works, you can start thinking about allocating some of your excess money (after you’ve paid your bills and hit your monthly savings goals) to cryptocurrency. But keep your investment totals small and manageable.
Ross recommends investing up to about $ 500. That way, even if you lose everything, it’s an amount that you specifically budgeted for.
“If you invest in crypto, think of it as dead money. Money you will never get back, ”says Danny Lee, financial planner in Denver. “At the end of the day, it will be a speculative investment.”
Update: October 4, 2021, 4:30 a.m.