Bitcoin, the largest cryptocurrency by market value, hit an all-time high on Wednesday, surging above $66,000. Its previous record of $64,899 was set in mid-April.
This surge comes after the first U.S. bitcoin futures exchange-traded fund made its market debut on Tuesday.
With all the hype, investors may feel tempted to buy in on the fear of missing out, or “FOMO.”
“A lot of people who have yet to get into the space or really learn more about it are going to be bombarded with a lot of noise right now,” Douglas Boneparth, certified financial planner and president of Bone Fide Wealth, tells CNBC Make It.
But before investing in bitcoin or any other cryptocurrency, it’s important to step back from the noise and excitement and first understand what it means to invest in a digital asset, he says.
To do that, Boneparth recommends asking yourself three questions.
- Why am I investing?
First, assess why you want to invest in the first place.
If you’re just afraid of missing out, then you should probably pause before moving forward. It’s important to truly understand bitcoin, cryptocurrency or any asset prior to investing in it.
″‘Educate before allocate’ is a phrase that me and my friends are using,” says Boneparth, who has invested in bitcoin since 2014.
Taking a step back may be difficult, especially now as bitcoin hits an all-time high, but it’s worth taking some time to research what it is, how it operates and what the risks are before parting with your money.
- Can I handle volatility?
Next, consider how well you handle extreme swings in price, since bitcoin is a notoriously volatile asset. “That’s not easy to handle for most investors,” Boneparth says.
For some people, the volatility “may be OK, that may coincide with your appetite for risk and your own risk tolerance and investment time horizon,” Boneparth says. “But, you still got to live with it.”
Other investors may prefer something more stable.
But regardless of your tolerance level, financial experts warn that the volatility makes bitcoin and other cryptocurrencies a riskier investment than something like a low-cost index fund, which should be kept in mind.
- How much can I afford to allocate?
Once you understand how much volatility you can stomach, you can determine how much money you can afford to invest.
“Be very careful about how much you allocate and understanding what you can tolerate, because if 80% of your net worth is tied to bitcoin, and it goes down 30%, that’s rough,” Boneparth says. Depending on what you can afford, a smaller allocation in bitcoin can hedge for any potential downturns in the market.
Regardless, remember that financial experts warn to only invest an amount you can afford to lose, as there is a possibility of losing your entire investment.
