Bitcoin made headlines throughout 2020 as its value rose 288% and reached an all-time high of $ 40,000 in early 2021. Those are big numbers – and you’re not alone if they’ve piqued your interest in the cryptocurrency.
In 2020, 81% of financial advisers surveyed by Bitwise Asset Management said their clients had requested cryptocurrencies. But many experts think that their clients would be wise to stand out this trend.
“When people bring me Bitcoin, I think many times what they really want is to start investing and they wonder what they should invest in,” said financial planner Sophia Bera. In response to curious clients, she shares her motto: “Simple first, sexy later.”
If you’ve been thinking of buying bitcoin through your app or stock trading brokerage, here are a few things to consider before spending your hard earned cash on what could be a flash in the pan.
1. Finish your financial goals first
Bera works with many young people at her company, Gen Y Planning – and lately, they’ve been asking more questions about bitcoin.
Generally, she encourages anyone who is considering investing in cryptocurrencies to get the basics covered first. This includes saving for retirement by increasing your 401 (k) or Roth IRA, making sure you pay off any high interest credit card debt, having a plan to repay your student loans and, finally, making sure you have dri- one month emergency fund set aside. If those grounds are covered, only then should you consider bitcoin.
2. Build a diversified portfolio
You probably already know that investing is a smart way to grow your money over time. But cryptocurrency is highly volatile, so it’s not the best bet if you want to build wealth that lasts. If your retirement savings are on track and you want to invest in a taxable brokerage account, Bera recommends building a diversified portfolio that includes things like index funds and exchange-traded funds.
You could also use a
like Betterment, which will manage your money based on your goals. Bera recommends making a monthly automatic contribution and letting the robo-adviser do the rest.
3. Limit your bitcoin investment to 5% of your portfolio
Overall, Bera thinks it is best to limit risky investments, including individual stocks, to just 10% of your portfolio. Since cryptocurrency is even more risky, she advises keeping it to 5%.
“Even when we’re talking about individual stocks, we don’t want that to take too much of a portfolio,” Bera said. “But even individual stocks have a lot more longevity and history. They have money to supplement their value.”
4. Understand the risk
Although the value of bitcoin reached its highest level in the second week of January, it is important to understand its highly speculative and volatile nature.
Bera said more clients started asking for bitcoin when it peaked at more than $ 17,000 in December 2017, only to drop to less than $ 4,000 a few weeks later. Her advice? When it comes to bitcoin, you can only invest your “fun money” – money you can afford to lose.
“Cryptocurrency is much more like gambling than any other type of investment,” Bera said. “It can be very exciting when it goes up, but it can break down very quickly, so don’t risk it more than you can afford to lose.”
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