It’s easy to invest in cryptocurrency: simply acquire a virtual wallet on your phone, open it, and generate an address. With crypto increasingly talked about in the news and mentioned among friends, it might be tempting to dive right in. However, crypto may not be a suitable investment for you currently — or ever — depending on your financial situation and appetite for risk.
“I am a big fan of crypto, but I don’t think the general public should be investing in it,” says Tyrone Ross, CEO of Onramp Invest, a cryptoasset platform for registered investment advisors.
Consider a crypto-powered ice cream sundae with cherry on top. It makes up a tiny part of the overall dessert, and not everyone wants it. You’ll need to build the rest of your meal before you pull that cherry out of the jar. That means establishing a solid financial foundation and learning everything you can about cryptocurrency before investing any real money in it, in non-ice-cream terms.
1. Put financial safeguards in place
First and foremost, you must be prepared for when things don’t go as planned.
Over the last year, individuals who lost income owing to the epidemic had to draw upon their savings, take on debt, or join hardship programs to pay their bills. This period has served as a harsh reminder of the importance of having an emergency fund.
Theresa Morrison, a financial planner in Tucson, Arizona warns that “When you’re young, you can feel like Superman or Superwoman,” but if the market crashes “you could easily be out of a job for nine to twelve months.” She urges people not to “underestimate systemic shocks to the market.”
Saving up six months of living expenses if you’re single, or around three months if you share them with a working spouse or partner, is advised by Morrison. But putting away even a few hundred dollars might be useful when an unexpected expense arises. Paying down any high-interest debt, such as credit card debt, can also help your financial situation by strengthening it further.
Furthermore, check that your insurance policy covers what you need it to; this way, you will have additional financial support in tough times. Life insurance is doubly important if you have someone depending on you.
2. Save and invest for future plans
Begin thinking about your short-, medium- and long-term financial objectives as soon as possible after you’ve set aside money for emergencies. Retirement is a major goal to save for, so contribute to retirement accounts (especially if you have access to a plan with an employer match). However, make certain savings targets for other critical life transitions.
“The majority of people wish to travel every year, purchase a home in 10 years, and marry in 10 years. These expenditures need money,” Morrison points out. “Put down how much it will cost today’s dollars and calculate how much you’ll save from your pay each month. From my experience, that can be as much as $1,000 per month on its own.”
3. Get educated about cryptocurrency
You’ve got the cash and you’re ready to join the crypto wagon, but you have no idea how someone purchases it. Or how it will affect your overall financial plan. Or if it’s too dangerous for you.
Before you spend any money, make sure to research everything about cryptocurrency that you can. Understand the market and learn what investment strategies would work for someone with your personality type.
“You have to go through a process to see if this new asset class is suitable for you. What are your plans? How old are you? What are your aspirations? Are you tech-savvy enough to understand what it means to have these assets and not be insured? If something terrible happens, who in your family knows how to retrieve the items?” Ross adds. “People don’t do adequate research before putting money into anything. That isn’t the most exciting answer, but it’s true.”
If you still want to dabble in crypto, start small
Once you understand how crypto works, you can start to think about allocating some of your extra cash (after you pay your bills and save monthly) toward it. Ross recommends investing $500 or less so that even if everything goes wrong, it’s an amount you were comfortable losing.
Danny Lee, a financial planner located in Denver, stated: “If you choose to invest in cryptocurrency, do so with the mindset that it’s equivalent to throwing your money away. It likely will never be recovered.” At the end of the day, cryptocurrencies are nothing more than speculative investments.