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New to Crypto? Do These 3 Things Before You Buy

The Motley Fool
The Motley Fool
 2022-01-23

Cryptocurrency prices have been on a downhill slide. Bitcoin (CRYPTO: BTC) has lost roughly half of its value over the last couple of months, currently priced at around $36,000 per token -- down from its all-time high of nearly $70,000 per token in mid-November.

While this downturn may be an intimidating time to invest, slumps like this can actually be fantastic buying opportunities.

Cryptocurrency is more affordable than it has been in months. While past performance isn't always indicative of future returns, this type of volatility is normal for crypto. That means there's a good chance major cryptocurrencies like Bitcoin and Ethereum (CRYPTO: ETH) will eventually bounce back. By investing now, you could potentially see substantial returns down the road.

If you've decided you're ready to invest in crypto , now is a great opportunity. However, there are a few things to keep in mind before you buy.

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Image source: Getty Images.

1. Consider your risk tolerance

The most important thing to know about cryptocurrency is that it's a speculative investment. This means nobody knows for certain whether it will succeed over the long term, and its growth so far is based mostly on its potential.

This makes crypto a higher-risk investment, so be sure you know what you're getting into before you buy. Cryptocurrency does have a lot of potential, and it's possible you could make a lot of money over the long run. But it could also fail, and you may lose everything you invest.

Before you invest, consider how much risk you can tolerate. If you're willing to ride out the inevitable periods of volatility for a chance at earning substantial returns over the long term, crypto may be the right investment for you.

2. Determine how much you can afford to invest

Because there is a chance cryptocurrency could fail, it's important to only invest money you can realistically afford to lose.

Also, be prepared to keep your money invested for several years, if not decades. Because crypto prices often fall at the drop of a hat, it's best to avoid investing any money you may need in the foreseeable future. If prices plummet and you realize you need to sell your investments to cover an unexpected expense, you could end up selling for less than you paid.

Keep in mind, too, that crypto should only make up a small portion of your overall portfolio (usually around 5% or less). If you choose to invest in crypto, make sure you're still contributing regularly to the rest of your portfolio, too.

3. Do your research

Not all cryptocurrencies are created equal, so it's crucial to do your research before you buy. Some investments get a lot of hype and see their prices skyrocket essentially overnight, only to crash soon after .

The best cryptocurrencies are the ones with the most long-term potential. These investments will have at least some real-world uses already, with the potential to become widely adopted someday.

If you're not sure where to start, you may choose to stick with the biggest players in the crypto space: Bitcoin and Ethereum. While they aren't perfect or guaranteed to succeed, they are two of the strongest and most popular cryptocurrencies right now -- and they also have the best chance of surviving downturns.

Right now may be a fantastic time to buy cryptocurrency when prices are lower, but it's important to make sure it's the right investment for you. By considering your personal preferences and doing your research, you'll be more prepared when you begin investing.

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Katie Brockman owns Bitcoin and Ethereum. The Motley Fool owns and recommends Bitcoin and Ethereum. The Motley Fool has a disclosure policy .

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