Should You Invest in Cryptocurrencies?

Cryptocurrencies are the way of the future, say experts like billionaire Elon Musk. Musk and many others believe that secure digital currencies like Bitcoin offer real advantages over traditional fiat currencies such as the United States dollar.

Unlike the dollar and other national currencies, cryptocurrencies aren’t regulated or managed by a government. They offer security and privacy advantages over old-school currencies, and they are more convenient as well. It’s easy to see why so many people believe that we will one day be spending Bitcoin on the things that we now buy with dollars and cents.

As cryptocurrencies like Bitcoin march toward more widespread adoption, they fluctuate in value. That has caught the attention of investors and speculators, who have rushed to buy—or sell—cryptocurrencies as they try to anticipate where the market for those cryptocurrencies will go next.

The opportunities can be massive. So can the risks. Bitcoin surged to dizzying heights in 2018 before the apparent bubble burst and sent values plunging back down. Some people lost everything by betting too much on cryptocurrencies like Bitcoin. Others made a fortune by selling at the right time or shorting cryptocurrencies. Some people did both.

The volatile market for cryptocurrencies is an exciting place. But is it a place that you should be in? Here’s what you should know before you dive in.

Who Should Invest in Cryptocurrencies—and How

Cryptocurrencies are extremely volatile. That’s what makes them so potentially lucrative for investors, but it’s also why many people should stay clear.

Nobody should be putting their retirement funds in cryptocurrency—not even aggressive investors and day traders. What cryptocurrency can be, however, is a source of income for those day traders.

If you choose to invest in cryptocurrency, invest what you can afford to lose. Your goal should be to generate more wealth from cryptocurrencies, and then to move some of that to your safer retirement holdings. With the cash you can spare, you can potentially reap huge profits—and because you’ll have the cash you can’t spare safely sequestered away, you’ll be safe even if you don’t win big.

Of course, there are ways to lose more than you invest. If you’re going to get into crypto and have the experience we just outlined, you’ll need to understand how risk works.

Understanding Risks and Opportunities

As with stocks and other investment vehicles, cryptocurrencies have risks and rewards that are tied up in each other.

Volatility means both opportunity and risk in the market, and even the most established cryptocurrencies (like bitcoin) are by no means stable. Smaller cryptocurrencies are even more likely to make massive movements in value. So if you find the best penny cryptocurrency out there and ride its rise, you’ll make a fortune. But you should expect that big movements can happen in either direction, and that you could lose your investment just as easily.

Being aware of the market’s volatility means you should be careful about your risk exposure. Simply buying cryptocurrencies is risky because the investment could drop in value. But your bigger dangers will be with things such as short-selling, where huge fluctuations can expose you to losses with no theoretical limit.

That means that savvy cryptocurrency investors need to be clear-eyed about risk. Use techniques that limit your risk exposure, and make risky bets one at a time to avoid compounding losses.

But with big risks come big opportunities, of course. With the right moves, investors can make a fortune in cryptocurrency. That’s the draw that keeps so many coming back to this speculative market, and it shows no signs of changing anytime soon.