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Building wealth is possible through cryptocurrency -- but so is losing a lot of money.
Key points
- Cryptocurrencies are volatile, and timing investments is difficult.
- There's potential to make a lot of money, but it's also likely you could lose your investment.
- Time-tested strategies are more predictable.
There are plenty of stories about cryptocurrencies that have turned small amounts of money into huge sums over a short period of time. There's even lots of news about crypto millionaires who got started young with a small investment, then ended up with huge bank accounts.
After hearing about big price increases in virtual currencies, you may wonder if it's possible to get rich via crypto investing alone. If you're considering this strategy, here's what to know.
You could get rich with crypto investing -- but you may also lose everything
If you get lucky with your crypto investment, you could make a fortune -- even if you haven't invested a lot, and even if you've only owned the assets a short time.
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The reason this is possible with cryptocurrencies is that they can be very volatile. It's possible that a particular coin will capture the attention of the right celebrity or will catch on as a social media sensation, and its price will rise quickly and dramatically.
Since the prices of cryptocurrencies are speculative, and since virtual coins are a newer and less time-tested asset class that appeals to investors willing to take on more risk, it's more likely that crypto investments will see rapid -- and often unjustified -- price increases compared to assets that attract more cautious investors.
The catch, however, is that you need to pick the right coin and buy at the right time to get rich through your investment. And it's really difficult to do that -- often, the factors that drive up the price of a coin are completely unpredictable. People aren't necessarily attracted to a cryptocurrency for investment because of the technology behind it, or its adoption among merchants as a real-world currency.
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If you jump on the bandwagon too late, or you pick a currency that doesn't get the right kind of attention, it's just as likely that you'll lose a fortune as make one. That's why even crypto enthusiasts such as Elon Musk warn not to "bet the farm" on crypto.
What should you do instead if you want to get rich?
If you hope to make a profit through investing, it's best to follow a time-tested approach: Regularly buy assets with a proven track record, such as an S&P 500 index fund that tracks the performance of around 500 or so of the largest U.S. companies.
You might include some cryptocurrencies in your portfolio if you believe that they have potential for growth. But you want them to be part of a diversified portfolio so you can maximize the chance of earning generous returns and reduce the risk of outsized losses.
You'll also want to research virtual currencies carefully to buy them for the right reasons and be comfortable holding them for a long time. This maximizes the chance that your investment pays off in the long run, and helps you build wealth over time.
