Cryptocurrency has quickly become a mainstream alternative investment strategy. It’s a digital form of currency that can be exchanged online for goods and services (depending on the company)—essentially, it’s virtual money.
If you’ve gotten this far in your research, you probably know that cryptocurrency is a highly volatile market that isn’t for the faint of heart. But as the saying goes, high risk can result in high reward. Before you invest everything you have in cryptocurrency, consider these four clever ways to invest.
1. Understand How Crypto Fits Into Your Portfolio
Before putting all your eggs in one volatile basket, be sure you know how this asset could fit into your portfolio. Even though crypto is much more mainstream and widely accepted, it’s still a volatile investment or speculation depending on who you ask. You should consider carefully and thoughtfully before you decide to put money there.
Start by thinking about your risk tolerance. If you prefer safer, tried and true investments, then crypto is unlikely the best route for you. But if you’re comfortable with volatility - extreme volatility - you may want to give your portfolio some exposure.
We recommend keeping the percentage of your portfolio tied to crypto relatively low—between 1-5%. Even if you enjoy the thrill of a risky investment, never forget the age-old rule that you should only invest in such amounts that you’re willing to lose.
Remember that it’s all about balance. Crypto could add some diversification to your portfolio, but if you’re interested in alternative investing, know it’s not the only choice out there.
2. Establish The Basics First
Before venturing into alternative investments, you must have your financial basics covered. Skipping this step could put your financial health at risk. To ensure that your financial basics are in order, consider:
- Retirement: Are you maxing out your retirement accounts? Whether you’re contributing to a 401(k), Roth IRA, or both, maxing out your retirement account contributions is ideal. Maybe you’ll end up being able to retire a few years earlier - wouldn’t that be nice!
- Debt: Do you still have high-interest debt? Credit cards and other high-interest debt add up quickly, so it’s important to have that under control before considering alternative investments.
- Emergency fund: Do you have 3-6 months of living expenses saved? An emergency fund is crucial for your financial and emotional wellbeing. When unexpected events happen, an emergency fund is there to take some of the burdens off of your shoulders and reduce immediate stress and worry.
- Budget: When was the last time you took a deep dive into your expenses and cash flow? Before you consider investing in cryptocurrency, sit down with your financial planner and develop an updated breakdown of your expenses.
Going back to the basics of investing can help uncover anything that may be lacking in your financial plan. Once you have the basics down, you can get your feet wet in alternative investing.
3. Invest Indirectly with Cryptocurrency Stocks
You don’t have to mine Bitcoin to expose your portfolio to this new asset. In fact, you may be surprised to learn that your portfolio already has decent exposure based on the companies or ventures you’re currently investing in.
One of the easiest ways to get investment exposure to crypto (without actually having to buy crypto itself) is to purchase stock in a company involved in cryptocurrency or the blockchain technology industry. Prominent companies in the S&P 500 have crypto holdings, so your portfolio has some crypto exposure indirectly via whatever you have invested with them.
Investing in cryptocurrency stock has less risk than the alternative of actually buying crypto itself. Purchasing stock from Tesla is an excellent example of investing indirectly in crypto. Because Tesla makes considerable investments in Bitcoin, you would benefit if cryptocurrency becomes more widely adopted as a stakeholder. Even if crypto doesn’t become the new go-to investing strategy, you still have indirect exposure to Bitcoin
Keep in mind that you still need to complete other due diligence before buying stock in a company—cryptocurrency is only one piece of the puzzle. Before investing in the stock of any individual company rather than a mutual fund (which automatically results in diversification), you should research industry trends, competitive advantages, price-to-earnings ratio, etc. Strong, long-term investments should be your top priority.
4. Open A Crypto-Specific Investment Account
Coinbase is one of the most popular cryptocurrency exchanges because you can invest directly with the US dollar. You can also earn interest on your Tether (USDT) and earn token rewards throughout the platform.
You may also be able to earn rewards in crypto by using certain credit cards. Coinbase customers, for example, can now use Mastercard credit and debit cards to make purchases. With Mastercard’s involvement in crypto, other major credit cards will likely follow suit. But remember that unless you pay off your credit cards entirely every month, you will be paying interest on your balance, which will reduce or negate whatever returns you achieve.
In addition to investing, other platforms like Nexo allow you to safely buy crypto and even use crypto as collateral for a loan. Think of it as a bank, but for cryptocurrency. A platform like Nexo is great due to high-interest rates and no lockup periods, but again, you must do your research before committing to anything.
Even Paypal, Cash App, and Venmo now allow US residents to buy, sell, and hold Bitcoin. The fees and security levels vary between apps.
Bonus, Work With Your Financial Team
If you’re going to invest in crypto, you want to do so safely and efficiently. You can never do enough research when it comes to an investment opportunity. As always, prioritize security, check out investment fees, and understand the investment history.
While you need to do your own research, don’t hesitate to ask questions (you can’t find everything on the internet!).Luckily for you at Pro Wealth, you never have to be on your own. Your financial team at Pro Wealth is here every step, so you have as much clarity and information as possible to make an intelligent investment decision. If you have any questions about how investing in cryptocurrency could affect your financial plan, get in touch with our team.