4 things to do before buying bitcoin, according to experts

Bitcoin made headlines throughout 2020 as its value rose by 288% and hit an all-time high of $40,000 in early 2021. Those are big numbers — and you’re not alone if they’ve piqued your interest in the cryptocurrency.

In 2020, 81% of financial advisors surveyed by Bitwise Asset Management said their clients had asked about cryptocurrencies. But many experts think their clients would be wise to sit this trend out.

“When people bring up Bitcoin to me, I think a lot of times what they really want is to get started in investing and they are wondering what they should invest in,” said financial planner Sophia Bera. In response to curious clients, she shares her motto: “Simple first, sexy later.”

If you’ve been thinking about buying bitcoin through your stock-trading app or brokerage, here are a few things to consider before spending your hard-earned cash on what could be a flash in the pan.

1. Fund your financial goals first

Bera works with many young people at her firm, Gen Y Planning — and lately, they’ve been asking more questions about bitcoin.

In general, she encourages anyone who’s considering investing in cryptocurrencies to make sure the basics are covered first. This includes saving for retirement by maxing out your 401(k) or Roth IRA, making sure you pay off any high-interest credit card debt, having a plan to pay off your student loans and, finally, making sure you have a three-month emergency fund set aside. If those bases are covered, only then should you consider bitcoin.

2. Build a diversified portfolio

You probably already know that investing is a smart way to grow your money over time. But cryptocurrency is extremely volatile, so it’s not the best bet if you want to build wealth that lasts. If your retirement savings are on track and you want to invest in a taxable brokerage account, Bera recommends building a diversified portfolio that includes things like index funds and exchange-traded funds.

You could also use a

robo-advisor
like Betterment, which will manage your money based on your goals. Bera recommends making a monthly automatic contribution and letting the robo-advisor to do the rest.

3. Limit your bitcoin investment to 5% of your portfolio

In general, Bera thinks it’s best to limit risky investments, including individual stocks, to just 10% of your portfolio. Since cryptocurrency is even riskier, she advises keeping it to 5%.

“Even when we are talking about individual stocks, we don’t want that to take up too much of a portfolio,” said Bera. “But even individual stocks have a lot more longevity and history. They have financials to back up their value.”

4. Understand the risk

Although bitcoin’s value reached an all-time high in the second week of January, it’s important to understand its highly speculative and volatile nature.

Bera said more clients started asking about bitcoin when it reached a high of more than $17,000 in December of 2017, only to drop to less than $4,000 a few weeks later. Her advice? When it comes to bitcoin, only invest your “fun money” — money you can afford to lose.

“Cryptocurrency is much more like gambling than any other type of investing,” said Bera. “It can be very exciting when it’s going up, but it can crash very quickly, so don’t risk more than you can afford to lose.”