What to know before investing in crypto

How crypto investing works

One of the most common ways to invest in crypto is through a crypto trading platform. In this case, it’s a little bit like exchanging your dollars for another form of currency. People who make these trades speculate that the crypto or currency they traded for will increase in value so they can sell at a profit. Sometimes, the opposite happens instead.

Another way to invest in crypto is by buying shares of publicly traded companies that are heavily involved in the crypto industry. For example, you can buy shares of a crypto trading platform, crypto “mining” companies, or businesses that are known for investing in cryptocurrencies. Because of how invested these companies are in crypto, their long-term success may be very dependent on the success of the industry itself.

You should consider consulting a financial advisor if you’re thinking about investing in either cryptocurrencies or stocks tied to the crypto industry.

How crypto gets its value: The value of a cryptocurrency is determined by what people are willing to pay for it. Scarcity is, in part, what drives some investors to see some cryptocurrencies as valuable. Bitcoin, for example, has a quantity limit. Once 21 million bitcoins have been “mined” or created, no new bitcoins will be created after that.^{Disclosure 3} Some crypto enthusiasts argue that this could help bitcoin serve as a potential hedge against inflation, similarly to gold.

Can you spend crypto? An important thing to know if you’re investing in crypto is that it may not be as easy to spend as your regular money. A small number of businesses accept major cryptocurrencies like bitcoin as a form of payment today. But in most cases, you’ll likely need a crypto debit card, which some crypto exchanges offer. This type of card essentially converts the crypto from your connected account into dollars when you swipe it.

Potential risks of crypto investing

Crypto investing can be risky—especially if you put too much into it and your investments aren’t diversified. Because of how new and volatile it is, it may be riskier than many other types of investments. Consider consulting a financial advisor before choosing to invest.

These are some of the possible drawbacks of crypto investing:

• The history has been volatile. Even the most established crypto, bitcoin, has experienced dramatic highs and lows throughout its short history. If you find yourself investing in crypto at the wrong time before a major swing, it could be stressful and result in significant losses.
• The future is unpredictable. Many people speculate, but nobody knows for sure what the value of bitcoin and other cryptocurrencies will be in 1, 5, 10, or 20 years.
• It’s not insured. With most banks, your cash deposits up to $250,000 are covered by federal insurance in case the bank fails. Crypto, however, isn’t covered by this same FDIC insurance. So if the crypto trading platform you’re using goes out of business, you could be out of luck.
• You can lose coins or wallets. Rather than letting a brokerage or bank hold onto your crypto, you can choose to store your crypto in your own digital wallet. While some industry enthusiasts prefer their sense of security, people have also lost their wallets and coins. It’s estimated that up to 3.8 million bitcoins have been lost by their owners.^{Disclosure 4}
• The rules of buying and selling crypto could change over time. It’s likely that lawmakers will continue to try to regulate the cryptocurrency industry over time (which could have a long-term impact on their values, but nobody knows for sure).
• You have to watch out for scams. There are many different types of scams related to crypto that you should be aware of. “Pump and dump” schemes—where people hype up the value of a new cryptocurrency so it spikes in price, but then quickly sell it before the price drops—are a type of scam that have cost many hopeful investors money.
• Its environmental impact is under scrutiny. The act of mining cryptocurrency can require a lot of energy. The bitcoin network, for example, is said to use more energy annually than some entire countries.^{Disclosure 5} However, the energy efficiency and potential environmental impacts of cryptocurrencies could change if the technology continues to evolve.

If the thought of your crypto losing most of its value in mere days—which has happened before^{Disclosure 6} —makes you feel uneasy, then crypto investing may not be for you. But there are many other ways to invest with lower risk to achieve your financial goals. Retirement plans like a 401(k) or IRA, for example, may be safer investment vehicles for building long-term wealth.

6 tips if you’re going to invest in crypto

If you’re going to try investing in crypto, proceed with caution—and consider these tips.

1. Be prepared for big potential price swings. The volatile history of crypto means there can be dramatic highs and lows—sometimes overnight. If you’re OK with the cryptocurrency roller coaster, it could be a way to diversify a part of your overall investment portfolio. But you should never invest more than you could stomach losing.
2. Start small—and keep it a small part of your total portfolio. Starting small with your investments may help mitigate the risk of investing in crypto. If it’s only a small part of your portfolio, then it may help keep any potential losses lower in case the industry sputters.
3. Consider dollar-cost averaging. This is a common investing best practice that means buying regular increments of an asset over time rather than making one large investment at once. It may help you start small and stay in touch with the constantly changing prices of your crypto assets.
4. Do your research. This is especially important if you’re considering investing in a new coin or crypto that doesn’t have much of a history. But even if it’s a more established one—like bitcoin or ethereum—ask yourself: “Why this crypto?” Do you understand why people are enthusiastic about it? Do you really believe in its value? Just like when you’re investing in shares of a company, you should understand what you’re investing in and feel good about its future if you’re going to put your money into it.
5. Have a plan for how you’ll store it. This could mean setting up your own crypto wallet or relying on a trading platform to hold onto your crypto for you.
6. It shouldn’t be your main financial priority. Because investing in crypto could be risky, make sure your financial well-being is covered first. This means you should have an emergency fund in place, a plan for managing debt, and that you’re investing for retirement.

The uncertain future of crypto investing

Some supporters of cryptocurrency see a cashless future where crypto can act as a global currency without major government interference. But the lack of consistent government oversight could also pose problems. Without more backing and insurance from banks or governments, the currency’s potential and stability could be at risk.

Although there’s a lot of uncertainty about the industry, some investors, especially younger ones, are curious about crypto. One study found 94% of cryptocurrency investors are between 18 and 40 years old^{Disclosure 7} —and another found that Gen Z and millennial investors are more likely to own cryptocurrency than a retirement account (even though most financial experts wouldn’t advise this).

It’s up to you whether you want to accept the risks of investing in crypto. It could be a way to diversify your portfolio—but be sure that your investment decisions don’t put your financial well-being in peril, since crypto’s longevity is just as unpredictable as its value.