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Bitcoin had an incredible run in 2020, with its year-over-year growth surpassing 220% between January and December of that year.
The digital currency’s meteoric rise has caught the interest of average American investors looking to diversify their portfolios and build wealth faster than with traditional assets. However, there are considerations to keep in mind before getting started with cryptocurrency investing.
If you want to invest in Bitcoin, first take a moment to review these five critical questions listed below. This way, you can make a truly informed investment decision.
Invest in Bitcoin: Ask These 5 Questions First
Below, in no particular order, are a handful of critical questions that we encourage all prospective Bitcoin investors to consider before making their first purchase.
1. What Can I Afford to Lose?
The cardinal rule of cryptocurrency investing—and, well, investing more generally—is to never invest more than you can afford to lose. When it comes to cryptocurrency, the risk profile of the asset is disproportionately high.
As of mid-August 2021, the 30-Day Bitcoin Volatility Index (BVI) sits at 3.45%, which, although comparable to the S&P 500, is known to fluctuate dramatically. For example, in March 2020, the BVI reached as high as 10.88%.
In other words, Bitcoin and other cryptocurrencies follow unpredictable and erratic price patterns that don’t conform to fundamental analyses. As a high-risk, high-reward asset, investors should proceed with caution and only dedicate a small portion of their wealth to this asset class.
2. What Percentage of My Wealth Should I Allocate?
As a rule, it’s better to play it safe when investing in nascent asset classes. I find that a conservative allocation of 5-10% of one’s wealth in cryptocurrencies is often enough to make a considerable positive impact when the market’s high, but also not risky enough to inflict irreparable damage in the event of a downturn.
3. Why Do I Want to Invest in Cryptocurrency?
We’re often asked by our readers, “Should I invest in Bitcoin?” However, I think the better question is often “Why should I invest in Bitcoin?” This is because it’s imperative that investors, and especially retirement investors, get started for the right reasons.
If you’re most motivated to invest in Bitcoin because you want to get rich quick, you might want to rethink whether this asset is right for you. Every year, more retail investors pile into the cryptocurrency market which has the effect of inflating the market. Therefore, every passing year the likelihood of another surge that created fortunes similar to 2011 and 2013 becomes smaller.
Instead, I believe investors should consider diversifying with Bitcoin because it’s a fundamentally sound technology. Ask yourself why you should invest in Bitcoin. Just as you would with a blue-chip technology stock, you would also invest in Bitcoin as a long-term hold because it provides fundamental value as a decentralized, frictionless store of value.
4. How Will I Invest in Bitcoin?
There are many ways to invest in Bitcoin, and investors should think carefully about how to invest in Bitcoin before getting started. In many cases, prospective Bitcoin owners opt for a Roth or traditional Bitcoin IRA since these account types allow for tax-free or tax-deferred growth, respectively. However, those who’ve already maxed out their annual IRA contributions may be better off investing in Bitcoin outside of an IRA or 401(k).
If you still have questions about cryptocurrency or Bitcoin questions that go beyond the scope of this article, I recommend reading our article on the basics of Crypto IRA investing.
5. Is My Portfolio Already Diversified?
Bitcoin and other cryptocurrencies represent only one way to diversify your portfolio. If you want to truly protect your retirement savings from financial market volatility or the risk of a stock market collapse, you need to diversify across several asset classes that are uncorrelated to conventional financial markets.
In essence, cryptocurrencies shouldn’t be the sole diversifying asset in your portfolio. Other alternative assets, such as real estate (and REITs), precious metals, annuities, and other investment vehicles non-correlated to the stock market might also have a rightful place in your portfolio depending on your risk tolerance.
In many cases, dedicating 20-35% of one’s wealth to alternative asset classes represents a relatively low-risk allocation of resources if one wants to hedge against market volatility. Prudent investors may want to avoid allocating more than 50% of this portion of their portfolio to cryptocurrencies, given their own history of market risks.
Ready to Invest in Bitcoin? Get Started Today
These days, investing in cryptocurrencies has never been easier. If you’ve decided to diversify your portfolio with digital currencies and invest in Bitcoin, you can get started by browsing our exclusive list of the world’s most reputable Bitcoin IRA companies.