Should I invest in crypto? What a great question! Have you wondered if you’re crypto-ready?
Crypto remains an uncommon investment. Less than 20% of the US population has owned or traded cryptocurrency (Pew Research, Andrew Perrin).
Investments in cryptocurrency, like all investments, are risky. Bitcoin, Ethereum, and other cryptocurrencies are becoming more mainstream. It’s important to establish investment ground rules. In this post, I recommend seven requirements before taking the crypto plunge. These boundaries will help minimize risk and provide protection.
Before purchasing any cryptocurrency answer these seven questions. If you answer “YES” to all seven then feel free to cautiously proceed. If you cannot answer these questions in an affirmative manner then you should tap the brakes.
Question #1
Can you explain cryptocurrency to a young child or a golden retriever?
One of my favorite movies is Margin Call. In this scene, the CEO asks someone to explain something simply. When we know something well we can explain it simply. If it’s too complicated to explain then we probably should pass on the investment.
When you can explain it then you’re 1/7th closer to your crypto debut.
Here’s a list of my favorite business movies of all time.
Question #2
Do you have a fully-funded emergency fund?
Financial professionals recommend an emergency fund with three to six months’ expenses. I’m a bit more conservative and recommend at least one year of expenses in cash.
Resist the urge to dip your toes into risky investments before getting the basics in place.
If you’re not sure what an emergency fund is, here’s an article that I wrote on various savings accounts.
Crypto is risky. Buying Bitcoin before you have an established emergency fund is the epitome of putting the cart before the horse.
Can you explain crypto to a young child?
Is your emergency fund fully funded?
Question #3
Have you paid off all unsecured, consumer debt?
Credit card debt is like an albatross around your neck. Your financial life will be severely hindered until you’ve conquered this giant.
The average credit card interest rate is 16.17% (creditcards.com). It’s only going to increase when the Fed begins ramping up interest rates.
Crypto is risky (yes, I know that I’ve said it already). Use your extra funds to eliminate credit card debt before buying Bitcoin or any other cryptocurrency.
Overly conservative? Perhaps.
Question #4
Are you maxing out your 401(k) or IRAs?
When I say “maxing” I don’t mean just enough to get the full match. I mean fully maxing out your contributions.
In 2022 the amount is $20,500. The max IRA contribution in 2022 is $6,000.
If you have an employer-sponsored plan max it out before buying crypto. For those of you utilizing IRAs make sure you’re hitting the $6,000 limit before purchasing crypto.
Crypto is risky. It’s riskier than mutual funds. We have decades of data on purchasing stocks and bonds to provide insight.
Crypto is still a baby.
Buying crypto before maxing your 401(k) is like taking superfood supplements while always eating fast food.
Question #5
Can you afford to lose 100% of your crypto investment?
I’ve been through several stock market corrections. During the housing crisis many of us “lost” nearly half of our portfolios. It was brutal.
The loss was temporary for me.
Why?
I didn’t sell my investments. Instead of selling, I purchased more while everything was on sale!
Crypto has experienced its own volatility. Technically, it’s up since its inception but has had a rough time recently.
It’s possible that crypto might get totally wiped out someday. Can you afford to lose everything that you’ve invested in it?
If it will wipe you out financially then you probably should skip crypto.
Question #6
Do you have at least 1ox your annual salary in term life insurance?
Term life insurance is one of the most affordable components of a solid financial plan. Why do so few individuals carry term life insurance?
About half of the US has no life insurance coverage. Many others are covered modestly by their employer (usually a 1-year salary).
Life insurance needs to be portable. Having a group policy through your employer is fine but it’s usually inadequate. Group coverage lapses when you lose your job.
Getting term life insurance is fairly painless and affordable through a company such as Policy Genius. I’m a satisfied Policy Genius customer. If you don’t have adequate coverage check them out (referral link).
Buying adequate term life insurance should come before dipping your toes in crypto.
Question #7
Is your last will & testament current and properly executed?
Talking about how people will divide our stuff after we did is a bit depressing. I get it. However, it’s another way we prove to our family that we love them.
If you have dependents then a last will & testament is a crucial piece to your personal financial plan.
You can complete a DIY last will & testament through Legal Zoom for around a hundred dollars. If you have an extra $250-$300 you might consider hiring a proper attorney to create one for you.
To be candid, if $300 makes you squeamish for a will then you have no business buying crypto.
Should I Invest In Crypto At All?
Crypto is risky. Stock investments are risky. Bonds, contrary to popular belief, are risky.
Keeping your money out of the market is risky because of inflation. If your bank pays you a paltry 0.05% and inflation is hovering around 7% you’re assuming a risk.
Cryptocurrency can be a legitimate component of your personal financial plan. Most professionals recommend no more than 5% of total assets in crypto.
Ric Edelman states that 1% is a good allocation for most investors in this article. If it crashes it should not impair your portfolio.
If it goes on another bull run then you should actually notice some gains.
If you’re not in the crypto game but considering it, do your homework.
Can you explain it simply to someone? Are you maxing out your retirement accounts? Is your emergency fund filled to the top? Are you free from consumer debt and not carrying a credit card balance? Do you have adequate life insurance? Is your last will & testament current? If crypto totally crashed would your plan be irreparably harmed?
How’d you do on the quiz?
Did you pass with flying colors?
If so, proceed with caution.
Crypto can be purchased in places such as Coinbase, Robinhood, and even PayPal!
I dare you to profit!
PS — You might think that I am being overly cautious and perhaps that’s true. There is a reason though. Too many families chase the latest and greatest “get rich quick scheme” at the expense of the foundational things.
Don’t be that family.
The brutal truth is that most families should totally skip the crypto craze.