Are you thinking about investing in Bitcoin (CRYPTO:BTC)? You aren’t alone. The virtual currency has become a very popular investment and with good reason. It’s the most well-known of the cryptocurrencies. And unlike many other tokens, at least some businesses actually accept it as a payment method. It’s also a favorite of celebrity investors and financial gurus including Elon Musk and Suze Orman.
But before you bite the bullet and purchase some, it’s crucial to make sure adding it to your portfolio is actually a smart move. And to do that, you need to consider your investment goals.
That’s because there’s really only one good reason to add the virtual currency to the list of the investments you own.
You should invest in Bitcoin if this is your goal
If you’re hoping to make a quick profit on Bitcoin, or your investing objective is to become a crypto millionaire, adding it to your portfolio could be a decision you’ll come to regret.
That’s because timing your investment perfectly to see short-term gains is really difficult when the price of the cryptocurrency fluctuates so much. And Bitcoin would likely need to see much more widespread adoption before it has a solid chance of becoming a millionaire maker for most people who invest reasonable sums in it.
But there is a good reason to add Bitcoin to your portfolio. In fact, the best and only reason why most investors should purchase some of the tokens is if doing so helps to build a diversified portfolio. In other words, if you’ve made a reasoned choice that you should have some exposure to cryptocurrencies along with your other assets, then Bitcoin could be a good buy.
Diversification is essential to successful investing. When you spread your money around a broad mix of different assets, you stand a better chance of some of them performing really well — even if others don’t. You also reduce your risk from any individual investment, since you are limiting the amount of cash you put into it.
Bitcoin is one of those assets that could outperform your expectations, potentially providing much higher returns than many other investments out there. That’s because it’s one of the safer crypto investments due to the solid team behind it, its established reputation, and the innovative blockchain technology it’s built on.
But you could also lose most of your money if it falls out of favor due to its environmental effects or because other cryptocurrencies turn out to improve upon its payment capabilities. The crypto market is also largely unregulated, relatively new and untested, and is extremely volatile — much more so than the stock market. And the cost of virtual currencies can often become divorced from their underlying value, driven instead by social media hype and celebrity tweets.
Because of the outsize risks, it’s especially essential to purchase Bitcoin or any other cryptocurrency only as part of a well-balanced portfolio that gives you exposure to an appropriate level of risk based on your investment timeline and goals.
So if you’re thinking about adding Bitcoin to your portfolio, make absolutely sure that it fits within your broader pool of investments in a way that’s likely to help you accomplish your long-term objectives. If you do that, you should hopefully end up happy with your decision in the long run.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.