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A friend of mine is a serious investor. I don’t mean he’s got millions of dollars. He doesn’t. But he takes his investments seriously, is constantly learning about different areas of investing, and, while he trades a little bit, he mostly invests for the long-term in dividend stocks.

He texted me last week, “I finally cracked and bought some crypto. We’ll see how it goes.” I’m not surprised. Since seeing its price get cut in half in March 2020 from a year earlier, bitcoin (BITCOMP) is now up 1,000%. Some analysts are calling for it to go up an additional 1,000% from here.

Can It Go Higher?

Everyone wants to know whether bitcoin can continue its impressive rise. It absolutely can go higher, but it can also go lower. So can other cryptocurrencies. Bitcoin isn’t the only fish in the sea.

You may be wondering why I’m even talking about bitcoin. Very few cryptocurrencies pay dividends or generate any income. I’m writing about it today because many of you may be interested, have requested my opinion, and want to know how bitcoin fits into your overall portfolio.

Some believe cryptocurrency is a mania. Many have equated it to the 17th-century tulip bubble in the Netherlands. Nearly 400 years ago, people bid up the prices of tulips to ridiculous levels and flipped them like day traders. I personally don't believe bitcoin should be compared to tulip mania. A more accurate parallel is the dot-com boom.

After that bubble burst, there were still quality companies left that went on to become giant successes – like Amazon (AMZN) and eBay (EBAY). Sure, their stock prices came down, but they eventually rallied and made long-term shareholders profit. The companies that were junk (and there were many of them) collapsed.

I suspect that’s what will happen with cryptocurrencies. The prices of Bitcoin and other cryptos could still go considerably higher. But I wasn’t surprised that their prices fell hard last year, shaking out traders who had no business holding these assets to begin with. It got ugly and painful – just like all mania reversals. It could happen again.

But if you’re in the right currencies for the right time frame, you could do well. If you’re interested in getting in on the action, here’s what I suggest.

1. Decide how much you’re willing to lose. If you’ve ever gone to a casino and were smart about it, you had a set amount of money that you were willing to kiss goodbye if lady luck did not pick you as her dance partner that evening. The same should be true in cryptos. Knowing your total risk will make it easier to hold on when things get volatile or handle a potential loss.
2. Allocate a tiny portion of your portfolio to cryptocurrency. The Oxford Club’s Wealth Pyramid recommends only a small portion of your assets be designated for the riskiest investments. The good news is it doesn’t take much to move the needle. Let’s say you have a $100,000 portfolio and are willing to risk 2%, or $2,000, on crypto. If you made 500%, your $2,000 would have turned into $12,000 and your portfolio would have gained 10% just on the crypto alone. That’s a decent year for a balanced portfolio. If things go horribly wrong and you lose the entire $2,000, it’s not an insurmountable loss. You can come back from it even with more traditional investments.
3. Understand what cryptocurrency is and how it works. Don’t buy it just because it’s going up (or because it went down). If you don’t know what crypto is, learn about it before you buy it. There are many great free online resources where you can learn about it. The people who got burned the worst in the dot-com boom and bust didn’t know or didn’t care about the companies they bought and why their stock prices were moving in the direction they were. I avoided a lot of heartache by looking at companies’ financial statements and business plans, and by understanding that management teams had no idea how they would ever make money. They were just cashing in on a mania. So many times I was told I was crazy for not buying certain stocks during that time. When they crashed, I had no stress because I didn’t have exposure to the riskiest names.

Cryptocurrency is an exciting and potentially lucrative investment. Just be sure you understand the opportunity -- and the risk.