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Cryptocurrency seems to have completely fascinated the world these days. resounding success Coinbase Super Bowl Ad, List A celebrities like Justin Bieber and Gwyneth Paltrow collect NFTs, everyone is trying to get in on the action. But while it may be very tempting, diving headfirst into the volatile crypto market can be very risky.
Before you take the plunge, here are three steps to dip your toes into the crypto pool responsibly.
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1. Make sure you have a solid financial base first
“The crypto world is changing rapidly, but it’s also important to remember that cryptocurrencies are high-risk investments that can be extremely volatile,” said Tony Molina, CPA and Senior Product Specialist at the platform. investment robo-advisor. wealth front, says Select. “Evaluate your current savings first, then decide what kind of risk you want to take from there.”
Along with having an emergency fund or savings to lean on, you’ll also want to make sure you’ve checked a few other financial goal boxes, like paying off interest rate credit card debt. high which can eat away at any possible investment. Return. And you’ll want to put money into a retirement account like an IRA, Roth IRA, or employer-sponsored 401(k). And if your employer does a corporate 401(k) match, make sure you contribute enough to respond to that match before you invest in crypto, because the match is essentially free money. For example, if your business matches up to 6% of your salary, contribute 6% in order to first double what you can set aside before considering investing elsewhere.
2. Find the right crypto platform for you
Fortunately for beginners who are ready to take the risk of crypto, there are several methods when you’re just starting out.
You can easily buy cryptocurrency through traditional financial apps like cash appa peer-to-peer payment service owned by Block, Inc. (formerly known as Square) that allows users to only purchase bitcoins or PayPalwhich allows users to purchase four different cryptocurrencies: bitcoin, ethereum, bitcoin cash, and litecoin. Robin Hoodthe popular trading app, supports seven cryptocurrencies for purchase by users and personal finance provider SoFi allows crypto purchases of 21 different crypto coins and tokens on its app. These apps will not allow you to send your tokens to a crypto wallet that you own.
The above apps that support crypto trading offer a limited selection, which can make buying crypto on a centralized exchange (run by a single company) more favorable. Popular crypto exchanges include Coinbase, Gemini and kraken. With a centralized exchange, investors get some reassurance in the event of a cybersecurity breach, regulatory clarity since they are licensed companies, and help protect assets. In exchange, however, there is essentially an intermediary between you and your assets, and your funds can be frozen or limited at any time.
If you want more ownership over your crypto after making a purchase from a centralized exchange like Coinbaseyou can transfer your assets to a crypto wallet that you directly own.
“For those who want to gain crypto exposure through a more traditional brokerage account, you may want to consider doing so through crypto trusts,” Molina suggests. A crypto trust is quite similar to any other financial trust except that it exclusively holds cryptocurrency. For example, the Grayscale Bitcoin Trust allows you to “buy” bitcoin through a brokerage account.
Trusts are a good option for those who don’t want to handle backing up their own cryptocurrency and passing on the coin wealth to loved ones later. Robo-advisors like wealth front allow you to invest up to 10% of your portfolio in these trusts to eliminate certain risks.
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 investment strategy for the rest of your financial assets. “It’s important to understand crypto as another part of your long-term investment strategy,” he adds.
Diversification ensures that you spread your risk effectively. This way, when the crypto market experiences some volatility, you have more opportunities to make money from other parts of your portfolio to make up for any losses.
At the end of the line
To start investing in crypto responsibly, first make sure you’ve achieved other financial goals that allow you to take substantial risks. You can then research the crypto platform that suits you, knowing that you will allocate no more than 10% of your investment portfolio to buying coins.
Editorial note: Any opinions, analyses, criticisms or recommendations expressed in this article are those of Select’s editorial staff only and have not been reviewed, endorsed or otherwise endorsed by any third party.