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Cryptocurrency seems to have the world completely entranced nowadays. From the overwhelmingly successful Coinbase Super Bowl commercial, to A-list celebrities like Justin Bieber and Gwyneth Paltrow collecting NFTs, everyone is trying to get in on the action. But while it may be very tempting, diving head first into the volatile crypto market can be super risky.
Before taking the plunge, here are three steps to dipping your toes into the crypto pool responsibly.
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1. First make sure you have a strong financial foundation
“The world of crypto is moving fast, but it’s also important to remember that cryptocurrencies are high-risk investments that can be extremely volatile,” Tony Molina, a CPA and senior product specialist at robo-advisor investment platform Wealthfront, tells Select. “First assess your current savings and then decide what kind of risk you want to take on from there.”
Beyond having an emergency fund, or savings, on hand to fall back on, you’ll also want to make sure you have ticked a few other financial goal boxes like paying off high-interest credit card debt that can eat away at any possible investing returns. And you’ll want to be putting money into a retirement account like an IRA, Roth IRA or employer-sponsored 401(k). And if your employer does a 401(k) company match, make sure you are contributing enough to meet that match before investing in crypto, since the match is essentially free money. For example, if your company matches up to 6% of your salary, contribute 6% so you’re first doubling what you’re able to put away before you’re strategizing investing elsewhere.
2. Find the right crypto platform for you
Luckily for beginners who are ready to take on the risk of crypto, there are several methods when you’re just starting out.
You can easily buy cryptocurrency through traditional finance apps like Cash App, a peer-to-peer payment service owned by Block, Inc. (formerly called Square) that allows users to buy bitcoin only or PayPal, which allows users to purchase four different cryptocurrencies: bitcoin, ethereum, bitcoin cash and litecoin. Robinhood, the popular trading app, supports seven cryptocurrencies for purchase by users, and personal finance provider SoFi allows for crypto purchases of 21 different coins and crypto tokens on its app. These apps will not let you send your tokens off to a crypto wallet that you own.
The above apps that support crypto trading offer a limited selection, however, which may make buying crypto on a centralized exchange (managed by a single company) instead more favorable. Popular crypto exchanges include Coinbase, Gemini and Kraken. With a centralized exchange, investors get some insurance in case of cybersecurity breaches, regulatory clarity since they are licensed businesses and help safeguarding assets. In exchange, however, there is essentially a middleman between you and your assets, and your funds can be frozen or constrained at any time.
If you want more ownership over your crypto after making a purchase from a centralized exchange like Coinbase, you can transfer your assets to a crypto wallet that you have more direct ownership over.
“For those who want to get crypto exposure through a more traditional brokerage account, you might consider doing this through crypto trusts,” Molina suggests. A crypto trust is pretty similar to any other financial trust, except it exclusively holds cryptocurrency. For example, the Grayscale Bitcoin Trust allows you to “buy into” bitcoin through a brokerage account.
Trusts are a good option for those who want don’t want to manage safeguarding their own cryptocurrency, and pass on wealth from coins to loved ones later down the line. Robo-advisors like Wealthfront allow you to invest up to 10% of your portfolio in these trusts so you can eliminate some risk.
3. Diversify your investments beyond crypto
Molina’s rule of thumb is to allocate a maximum of 10% of your portfolio to crypto, then use a longer-term passive investing strategy for the rest of your financial assets. “It’s important to understand crypto as a another part of your long-term investment strategy,” he adds.
Diversification ensures that you are effectively spreading out your risk. This way, when the crypto market does experience some volatility, you have more opportunities to have other pieces of your portfolio make money to offset any loss.
To start investing in crypto responsibly, first make sure you’ve met other financial goals that allow you to take on substantial risk. You can then shop around for the crypto platform that works for you, knowing that you won’t allocate more than 10% of your investment portfolio to buying coins.
Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.