Financial news coverage often features stories about investors making and losing millions through cryptocurrency investments, tempting some investors to add them to their portfolios; but doing so without first considering your individual investment goals, risk tolerance, liquidity needs and liquidity needs can be risky business. Before considering cryptocurrency as an option for yourself it’s essential that you conduct thorough due diligence on what exactly cryptocurrency offers and whether its characteristics match up.

Cryptocurrencies are digital assets that can be exchanged for real currency or used to buy items, with popular examples such as Bitcoin and Ethereum being highly secure and fast transfer options that appeal to investors.

Crypto markets tend to be highly unstable, with individual coin prices fluctuating widely in a short amount of time. Because of this high-risk nature of cryptocurrency investments, only those comfortable dealing with significant price swings should consider them as investments.

Investment of any asset class requires research and due diligence prior to making a commitment. Investors who enter cryptocurrency investments due to fear of missing out (FOMO), or because someone told them it’s “hot”, may be disappointed with their results.

Keep in mind that cryptocurrency prices don’t depend on fundamental factors like corporate earnings or interest rates; rather, their valuation is determined largely by speculation and investor activity – something long-term investors might find difficult to stomach.

While some cryptocurrencies claim to provide anonymous payment, this is often not true. While some crypto transactions may remain private, most leave digital trails that the Federal Bureau of Investigation can use to identify both sender and recipient. Furthermore, most cryptocurrency companies don’t profit, with many in industries which have seen declining or stagnant growth over time.

Also be mindful that adding cryptocurrency investments could reduce the overall diversification of your portfolio. Aiming for a balanced approach consists of diversifying across a wide variety of sectors, countries and industry groups is ideal. Too much exposure to one industry or sector may make achieving financial goals harder when bad news impacts that sector.

While cryptocurrency investments may tempt some investors, it’s wise to do your homework first before adding them to your portfolio. Understand the risks associated with each investment and determine how it fits into your overall investing plan before proceeding. If unsure, connect with one of Ramsey Solutions SmartVestor Pros who can offer tailored guidance tailored specifically for you and your situation.