If you’ve ever considered investing in cryptocurrency, you’re far from alone. About 16% of all adults in the U.S. have invested in some form of cryptocurrency, according to Pew Research Center.
If you have not yet tried your hand at crypto, you might wonder if investing in something like Bitcoin is a great way to make extra cash. The answer depends on a number of factors, but you should know upfront that investing in crypto carries a lot of risk.
Because of that risk, people with certain personality types or in specific financial situations should steer clear of cryptocurrency investments. Find out if you are among the groups that might be best off avoiding crypto so you can steer clear of making a foolish money mistake.
People nearing retirement
If you’ve been saving for retirement using a 401(k) or Roth IRA, you might have considered adding a crypto investment to your retirement savings portfolio. After all, most seniors can’t live off Social Security alone.
The temptation to invest in something like crypto — a high-risk investment with the possibility of high rewards — is understandably strong.
However, if you are nearing retirement, the money you have saved is about to become your main source of income. That means this is no time to risk it all.
Many experts say that once you’re close to retirement, you should make more conservative investment decisions. And investing in a market sector that can lose a lot of money fast — as has been true of cryptocurrency recently — is highly risky.
People who don't understand crypto
Crypto is complicated, to say the least. It would take a long time to explain exactly what crypto is, how it works, and which cryptocurrencies offer the best return on investment.
It’s never a good idea to invest in something you don’t understand, but it’s especially inadvisable with a volatile, unregulated product like cryptocurrency.
So, if this sentence marks the exact moment you realized there are more than 19,000 cryptocurrencies, hopefully, it’s also the moment you understand that you should think long and hard about whether you know crypto well enough to invest in it.
People who don't have an emergency fund
A Bankrate survey from last year revealed that 51% of all Americans don’t have enough cash saved to live three months without pay. Instead, half the country lives closer to paycheck to paycheck without the money to cover sudden expenses like medical bills, rent changes, or massive inflation spikes.
If you’re hoping to garner some extra cash that you can use to start your emergency fund, we can see why you’d look to cryptocurrency and its “win big” reputation.
But in reality, if your paycheck is already stretched to its breaking point, you literally can’t afford to wager hard-earned cash on something where the value fluctuates daily and unpredictably — and often wildly.
People not taking advantage of their employer 401(k) match
If you don’t contribute at least up to the company match in a 401(k) plan, you are literally throwing away free money.
About 92% of American employers offer a match on 401(k) contributions, according to research from Aon Hewitt. If your employer matches some of your contributions dollar for dollar, you are doubling your money on that portion of your savings.
If you’re not taking advantage of that employer perk, you probably should be. Unlike cryptocurrency, growing your 401(k) with an employer match is a solid investment strategy with a guaranteed payoff.
Before you do something drastic like shuffle your retirement money into a crypto investment, consider taking advantage of more stable money-making strategies — starting with signing up for your employer’s 401(k) match.
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People carrying credit card debt
If you’re already in debt, the possibility of a huge payout from a crypto investment sounds like a quick, easy way to put your finances back in the black. But crypto carries big risk and doesn’t come with a guaranteed return on investment.
Instead of turning to cryptocurrency to get out of debt, consider tried-and-true debt payment strategies like paying down your debt slowly and steadily, or meeting with a nonprofit credit counselor.
You’ll likely repay your debt much faster with these approaches than you would by throwing money away in a get-rich-quick investment scheme.
People who think they will get rich quick
Investing in crypto might be a good long-term strategy. Nobody knows what the future holds, and it’s possible that over time, you will be glad you plunked down your money on crypto.
However, investing in crypto in the hope of getting rich quickly is dangerous. As we have seen this year, the value of cryptocurrencies can plunge fast. And since crypto is intentionally unregulated and decentralized, it comes with a higher risk of scams.
A cryptocurrency investment could be one useful slice of a more comprehensive investment portfolio that pays off over the course of years or decades. But on its own, cryptocurrency isn’t likely to make you an overnight billionaire.
People who are risk-averse
Cryptocurrency trading is risky — generally riskier than investing in company stock and traditional currencies.
And investing in cryptocurrency is exponentially riskier than putting your money in a savings account or CD. The Federal Deposit Insurance Corp. insures accounts for up to $250,000 when you deposit money with most banks. Even if that bank collapses, you’re guaranteed to get your money back.
With cryptocurrency, though, you aren’t guaranteed anything. If your crypto exchange of choice is hacked, your digital wallet could be drained, and you won’t have a built-in method of recourse.
And since there are thousands of cryptocurrencies, it’s hard to know which one to invest in, especially if you’re a layperson who doesn’t know much about crypto and how it works.
The bottom line
We all dream of ways to quickly crush our debt or save more cash fast. But if you can’t afford to lose money at this point in your life, you probably shouldn’t invest in crypto.
Instead of throwing cash at an investment with no guaranteed return, consider building your financial foundation with well-known, established strategies: Update your budget, consider gig work, reassess your retirement portfolio, and meet with a financial counselor for pro tips.