As bitcoin drops below $40,000, here's what to know before investing in cryptocurrency: 'You have to be comfortable with the swings'
The cryptocurrency market, along with other riskier assets, is taking a big hit.
Bitcoin is down 11% in the last 24 hours, according to CoinGecko. Hitting its lowest level since August, the largest cryptocurrency by market value dropped below $40,000 on Friday, and is currently trading at around $38,378. Some analysts predict that it could fall even lower.
Along with it, ether, the second-largest, is down 14% in the same timeframe. It's currently trading around $2,779.
This comes as the Nasdaq and S&P 500 suffer losses as well. Cryptocurrencies and tech stocks have been falling at the same time this month, showing an increasing correlation between the two.
Additionally, there's concern over the potential for more cryptocurrency regulation in the U.S., as well as how the Federal Reserve potentially dialing back its monetary policy would impact the overall market. Globally, other regulators are focusing on cryptocurrency markets as well. On Thursday, for example, Russia's central bank proposed banning the use and mining of cryptocurrencies.
This dip isn't unusual for bitcoin; cryptocurrencies are known for their volatility. As quickly as prices rise, they can tumble back down. Because of this, experts say it's important to consider if you can handle the ups and downs before investing in bitcoin or any other cryptocurrency.
"It's a very volatile asset class," Anjali Jariwala, certified financial planner, certified public accountant and founder of Fit Advisors, previously told CNBC Make It. "You have to be comfortable with the swings and you have to be comfortable also losing your money."
Each investor's risk tolerance will vary. It's important to understand how much you can personally tolerate.
For some people, the volatility "may be OK, that may coincide with your appetite for risk and your own risk tolerance and investment time horizon," Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, previously told CNBC Make It. "But, you still got to live with it."
Other investors may prefer something more stable.
Regardless of your tolerance level, financial experts warn that this volatility makes bitcoin and other cryptocurrencies a riskier investment than something like a low-cost index fund, which allows investors to buy a collection of stocks at once, rather than bet on a single asset.
If you decide to invest anyway, "you have to make sure that it's money that you can really afford to lose," Jariwala said.
Boneparth agrees: "Be very careful about how much you allocate and understanding what you can tolerate, because if 80% of your net worth is tied to bitcoin, and it goes down 30%, that's rough."
Depending on what you can afford, a smaller allocation in bitcoin can hedge any potential downturns in the market.
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