How to invest in crypto if you want to 'be very rich' or else not 'despondent about your losses,' according to a wealth advisor

"Some investors may panic," says one wealth advisor. "Be prepared to endure losses."

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If you don't known anything else about bitcoin, you've probably heard that it's volatile. The asset hit a record high of $41,973 in early January before dropping 15% days later — shedding nearly $200 billion from the crypto market. On Friday afternoon, the value of 1 coin was about $38,000. On Monday morning, after Tesla announced that it had bought $1.5 billion worth and would start accepting payments in the digital currency, the value of 1 coin soared to a new record high of over $44,000.

It isn't just bitcoin that can be erratic, either. There are more than 1,000 so-called altcoins currently out there, and nearly 50 of those each have a market capitalization of at least $1 billion.

Navigating the virtual market can be tricky even for pros, and predicting whether the value of a coin goes up or down on any day can be quite hard to predict. But there is one rule to follow that can make you smarter about investing in bitcoin or other cryptocurrencies, says Erika Safran, a CFP and principal at Safran Wealth Advisors: Only put in what you can live without for at least a decade and can afford to lose altogether.

"Invest in funds you won't need for at least a decade," says Safran, who is herself a crypto investor. "Why? You will either be very rich, or you won't be despondent about your losses. Prices are ridiculously volatile and unless your goal is to hold the assets forever, or a really long time, some investors may panic and incur large losses."

In other words, as with other kinds of investing, think long term. And especially if you've taken a financial hit in the pandemic, make sure you're on track to meet your other financial goals first.

Here's what you need to know about investing in crypto to ensure your overall portfolio stays healthy.

Only invest money in crypto you can afford to lose

Cryptocurrencies aren't physical coins or bills. They're exchanged virtually using cryptography, or a system of secret messages. And they're not managed by a central banking system like the Federal Reserve.

The price of bitcoin is speculative since it has no intrinsic value, like gold does, for instance. So it's key to take a disciplined approach when investing.

Experts suggest you put the vast majority of your money in less risky, more traditional long-term vehicles, and only invest a small amount in crypto if you have some extra money to play with. That could protect your portfolio from a loss if the value of your asset tanks.

While the potential rewards of investing are high, the losses can be just as steep, Safran underlines. "There are no assets or cash flow, no hard commodity, and while it is a currency, most folks don't use it day in and day out. Those who aren't traders typically buy and hold onto it," she says. So "be prepared to endure losses, which hurt if you sell."

Why the best time to start investing is now, even if the market is hot

Video by Helen Zhao

How to buy in, and how to secure your investment

Crypto has crossed increasingly into the mainstream: In 2020, fintech companies like Square and PayPal invested in bitcoin or allowed their users to buy and sell the digital currency on their platforms in some fashion. An HSB survey last year revealed that at least 36% of businesses in the United States, including Microsoft and AT&T, accept bitcoin as a form of payment.

You can purchase digital currencies directly through exchanges like Coinbase or Bitstamp, from individual sellers, or through an initial coin offering, which is like an initial public offering, or IPO, for debuting new coins.

Remember, though, that crypto is not strongly regulated or protected by the Federal Deposit Insurance Corporation, so that leaves an opening for fraudsters to try scams.

Remember to secure your account responsibly, too. Bitcoin and other digital currencies have special tech measures in place that make it much harder to recover private keys if they're lost, and locked-out investors can't simply ask to reset their passwords with their mother's maiden name. Of the roughly 18 million bitcoins circulating, 20%, worth about $140 billion, are inaccessible, The New York Times reports, because investors have lost keys.

Invest in funds you won't need for at least a decade. Why? You will either be very rich, or you won't be despondent about your losses.
Erika Safran
CFP, principal at Safran Wealth Advisors

Ted Rossman, a Bankrate industry analyst, suggests simplifying the process if you're having trouble keeping track of passwords, but not by reusing the same ones. Instead, try using a password manager like NordPass, LastPass, or Dashlane. "These are very secure and have the added advantage of setting and remembering strong, unique passwords for you," he says.

Lastly, make sure the website you're using to manage your coins is encrypted, meaning the URL starts with "https" not "http." Encrypted files disguise the content of any information you enter to protect potentially sensitive information from being read or accessed by another party.

What Elon Musk and other top investors have said about bitcoin

Tesla CEO and social media darling Elon Musk has been a pretty consistent fan of digital currencies. Crypto brand dogecoin soared more than 50% after the billionaire tweeted his approval of it.

He has also declared himself "a supporter of bitcoin" and briefly added the hashtag #bitcoin to his Twitter bio even before Monday's blockbuster announcement.

Many other investing pros aren't sold even on a buy-and-hold, long-term bet on crypto, though. Berkshire Hathaway Chief Executive Officer and Chairman Warren Buffett has said that he is not interested: "Cryptocurrencies basically have no value and they don't produce anything," he said in a "Squawk Box" interview last year.

"In terms of value: zero. I don't have any cryptocurrency and I never will."

Buffett shares that sentiment with a handful of other top investors, including "Shark Tank" investors Kevin O'Leary and Mark Cuban, who have both said they are wary of investing in crypto.

With all the hype surrounding cryptocurrencies, you may be thinking about getting in even if you were skeptical a few years ago during the first bitcoin craze. Digital cash has been gaining ground fast with both novice and veteran investors. The total market value of all cryptos soared past $1 trillion for the first time in January.

Still, most experts echo Buffett, O'Leary, and Cuban in urging caution. "While cryptocurrencies have found new fame recently, the crypto market is not based on any real fundamentals," says Safran. "From my perspective right now, it is a technical game."

If you plan to invest in crypto successfully, she explains, be sure that you're financially prepared, and that you understand how the market works.

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