What to consider before investing in cryptocurrencies

Create a strong financial foundation and learn everything you can about the asset class before diving in

epa08951657 Illustration of cryptocurrencies such as Bitcoin (bottom-R), Ethereum (C), Ripple (R) and Cardano (L) on a monitor showing a stock barometer, Duesseldorf, Germany, 20 January 2021. Cryptocurrency Bitcoin has experienced drastic ups and downs in recent weeks and months. At times, its price has increased more than fivefold over the course of the year. The price has risen particularly sharply, by more than 100 per cent since mid-December 2020. However, Internet currencies, of which there are now thousands, are known for their extreme price fluctuations. Regulators, such as the German Bafin recently, therefore repeatedly warn against investing in cryptocurrencies. Recently, the president of the European Central Bank, Christine Lagarde, called for stricter regulation of Bitcoin.  EPA/SASCHA STEINBACH

Investing in cryptocurrency can be as easy as a few taps on your phone and with the asset class all over the news and coming up in conversations with friends, it’s tempting to dive right in. However, depending on your financial situation and appetite for investing risk, cryptocurrency might not be an appropriate investment for you right now – or ever.

“I am the biggest crypto hippie you’ll talk to in a very long time,” says Tyrone Ross, chief executive of Onramp Invest, a cryptoasset platform for registered investment advisers. And yet, he cautions against it. “I don’t think the general public should be investing in crypto.”

Picture your finances as an ice cream sundae, with crypto as the cherry on top. It makes up a small proportion of the overall sundae, and not everyone wants one. And before you fish that cherry out of the jar, you need to assemble the rest of your dessert. In non-ice-cream terms, that means creating a strong financial foundation and learning everything you can about cryptocurrency before you put any real money in.

Put financial safeguards in place

First and foremost, you need to prepare for those times when things don’t go as planned.

Over the past year, workers who lost income because of the Covid-19 pandemic had to tap into savings or take on debt to afford their bills. This time has been a stark reminder of the importance of having an emergency fund.

“When you’re young, you can feel like Superman or Superwoman, but when the bubble happens, you could easily be out of a job for nine to 12 months,” says Theresa Morrison, a financial planner in Tucson, Arizona. “Don’t underestimate systemic shocks to the market.”

Ms Morrison recommends saving up six months of living expenses if you’re single, or around three months if you share expenses with a working spouse or partner. But stashing away even a few hundred dollars can be helpful when you’re faced with an unexpected expense. And if you have any high-interest debt, like credit card debt, paying this down can further strengthen your financial position.

Review your insurance coverage, too, because these policies can provide much-needed money during difficult times. Life insurance can be especially important if you have dependents.

Quote
Don’t underestimate systemic shocks to the market
Theresa Morrison, financial planner

Save and invest for future plans

Once you have money set aside for emergencies, begin thinking about your short-, medium- and long-term financial goals. Retirement is, of course, a big thing to save for, so contribute to retirement accounts (especially if you have access to a plan with an employer match). But set specific savings goals for other major life steps.

“Most people want to travel every year, buy a house in 10 years, get married in 10 years. These things cost money,” Ms Morrison says. “Put down how much it’ll cost in today’s terms and figure out how much to save out of your pay cheque every month. From my experience, that alone can be $1,000 a month.”

Get educated about cryptocurrency

You’ve got the money and you’re ready to jump on the cryptocurrency bandwagon, only you have no idea how someone even buys the asset. Or how it will fit into your overall financial plan. Or if it’s too risky for you.

Time out. Don’t do anything with your money that you don’t understand. Dedicate some time to learning everything you can about cryptocurrency. Understanding the mechanics is important, but so is learning what kind of investor you are because that also affects the kinds of investments that would be a good fit for you.

“There’s a process you have to go through 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 hold these assets and have them not be insured? If something happens to you, who in your family knows about this stuff to retrieve it?” Mr Ross says. “People don’t do the right due diligence before dumping money into something. I know that’s not the right answer, but it’s the truth.”

Start small

Once you have a grasp on how it all works, you can begin to think about allocating some of your excess cash (after you pay your bills and meet your monthly savings goals) towards cryptocurrency. But keep your investment totals small and manageable.

Mr Ross recommends investing up to $500 or so. This way, even if you lose it all, it’s an amount you specifically budgeted.

“If you invest in crypto, think of it as dead money. Money you’ll never get back,” says Danny Lee, a financial planner in Denver. “At the end of the day, it’s going to be a speculative investment.”

Updated: October 4th 2021, 4:30 AM
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