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Want to jump into crypto investing? Ask yourself these 3 questions first

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Cryptocurrencies, once an obscure corner in the financial world, are going to be mainstream.

But individual investors considering crypto are likely to encounter a world different from what they have seen in traditional finance. Prices can fluctuate wildly while quickly trading assets backed up only by blocks of computer code.

Despite the complexity, sector analysts say the approach to investing in cryptocurrencies is not that different from other high-risk investments: do not invest money you can not afford to lose, make sure you have your other financial bases covered and stay patient.

“Most of the information that people come across has to do with crypto trading. It’s about how to buy the next hot crypto. It’s about how to identify the next currency that will reach the moon,” says Steve Larsen, a certified financial planner in Washington state. “Crypto investments are very different. It’s about buying something that has some basics that you think will be valuable in the long run.”

Larsen, who trains investment advisers to talk to their clients about digital assets, says he believes the underlying technology, known as blockchain, has potential. In a blockchain network, computers work together to authenticate transactions without the help (and massive costs) of central authorities like banks or government regulators.

1. Are you in a position to buy crypto?

Typically, if you decide to buy crypto, it belongs to a cluster of relatively risky assets that make up a small percentage of your total portfolio – 5% to 10% is one common guideline.

Larsen says he does not recommend anyone Invest in cryptocurrencies Before meeting other short-term and long-term financial health goals. He said investors should eliminate any consumer debt, for example, and make sure they invest enough to get matching contributions from their employers to retirement accounts like 401 (k) s.

Beyond that, purchasing a crypto does not require a material financial commitment. Some online exchanges allow customers to buy at intervals of dollars or less.

Matti Greenspan, CEO of research firm Quantum Economics, says one way to get into crypto is to put aside a few dollars available a week.

Related: Buying Bitcoin or any other crypto is a big leap of faith and you do not want to be the ‘big fool’

2. Preparing homework?

Crypto exchange Recent years have made buying, holding and selling easier. However, if you do not want to delegate the security of your finances to stock exchange operators, you will need to do some research on How digital wallets work And which one is best for you.

More broadly, however, it helps to understand what blockchain technology is, how competing products are used and what the chances are of success. Plus, there’s a lot of hype around cryptocurrencies, which means investors need to keep an eye out for red flags.

“This industry is riddled with unused coins, and in many cases are real scams, meaning they are just people who want to get your money,” says Greenspan, who is based in Tel Aviv, Israel. The wisdom, he says, is to find the real innovators.

Although you may not need a background in encoding, it’s worth the effort to explore how to use cryptocurrency. One way to do this is to read the white paper, often a technical document detailing how the network will work.

Bitcoin BTCUSD,
-0.52%,
For example, built to be actual digital money used as payment for goods and services.

Ether, the second most valuable cryptocurrency, can also be used as payment or to compensate users who help launch Ethereum ETHUSD,
-0.50%
Network. The network is built to execute “smart contracts” that can be settled automatically when certain conditions are met.

Greenspan recommends examining how the supply of cryptocurrency is distributed, including whether there is a maximum supply that can rotate.

He said such inquiries “may be very tedious, but they will definitely give you a central spotlight on what is going to happen with the price of the currency over time”.

Related: Is Bitcoin a Hedge Inflation? With the consumer price index rising to a high of over 31 years, crypto is trading close to a high

3. How will you diversify?

All cryptocurrencies face one built-in risk: blockchain technology is fairly new, and no one knows for sure that it will provide the economic benefits that its proponents rely on.

“Every investment … in every crypto asset out there is a gamble on the future that transactions, assets and information in general will be retained and transferred more and more in the basic blockchain,” says Sean Stein Smith, assistant professor of business and economics at Lehman College in New York.

And even if a blockchain meets the expectations of people who invest in the field, there will still be cryptocurrencies that will not succeed. Greenspan recommends dividing your investments between a number of assets that you think have long-term potential.

See: Should I buy a Bitcoin ETF? Here’s what some professionals say is worth considering

There are not many options in the field of cryptocurrencies that equate to mutual funds or other investment tools that give everyday investors wide exposure to many assets.

In addition to the new BITO of the ETF linked to Bitcoin,
+ 1.23%,
Some of the funds traded on the stock exchange focus on companies that work on blockchain-related efforts. Other ETFs offered will actually hold crypto, but these have not yet been approved. Investors may also consider the shares of companies in the cryptocurrency industry, such as Coinbase.

No matter how you approach cryptocurrencies, investment diversification should be considered across your entire investment portfolio, and alternative investments should usually form only a small portion of this.

The author owned a bitcoin at the time of publication. NerdWallet does not endorse or advise readers to buy or sell Bitcoin or any other cryptocurrency.

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Andy Rosen writes for NerdWallet. Email: arosen@nerdwallet.com. Twitter: @https: //twitter.com/andyrosen.

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