Important Things to Know About Bitcoin

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Bitcoin and other cryptocurrencies have become hot investments with seemingly Cinderella-esque, get-rich-quick potential, but before diving into this new asset class, most investors should pump the brakes.

Bitcoin, ethereum, ripple, litecoin and IOTA, for example, are types of digital currency that use cryptography to regulate how and when units are created, as well as to safeguard secure transfer of funds, says Billy Funderburk, a certified financial planner with Funderburk Financial in Longmont, Colorado. Blockchain is a public ledger of sorts that records cryptocurrency transactions anonymously. The cryptocurrencies could then be used to buy things or held for future appreciation.

Such currencies are intriguing in part because they are unregulated by governments, limited supply, and privacy in financial transactions. But they are also complex instruments to understand, purchasable only through specialized online venues, and are not so cheap anymore, making them risky investments, experts say. That is despite their promising potential for growth.

"It is important to recognize that the cryptocurrency market is still in its very early stages, which usually translates into huge opportunities for first-movers with good execution," says Duncan Rolph of Los Angeles-based Miracle Mile Advisors. "It is also accompanied by substantial risk for investors as there will likely only be a couple of winners over the long run."

The price of bitcoin fluctuates wildly, bouncing between $12,600 and $19,100 in the last 30 days. A year ago, bitcoin was about $800.

"Despite naysayers like me, the price of bitcoin will never come down," says Joe Pindar, director of strategy, at Gemalto, an international digital security company. "The absence of sell-side pressure means that retail investors will push the price of bitcoin to stratospheric levels."

So before you jump into the crypto game, consider the following tips:

Decipher between investing and speculating, and do so in small doses. Don't buy a cryptocurrency just because it's the trendy thing to do.

If bitcoin or another cryptocurrency becomes something that is held as part of institution portfolios, then its value will go up, but that remains to be seen, says Rob May, co-founder and CEO of Talla, which builds intelligent blockchain assistants, and founding partner of Half Court Ventures, a cryptocurrency investment firm.

If you decide to invest, do so only with what you can afford to lose and have an exit strategy, Funderburk says. Keep an eye open for less hyped cryptocurrencies that will likely build on bitcoin's strengths and even be better.

One way to get in the game without having much to lose is using disposable income, such as selling stuff in your basement you were going to throw out anyway, says James Song, CEO of Exsulcoin, a blockchain technology company.

"If you make any substantial gains, sell off enough to recover your cost basis. If you buy $100 worth of a coin and it increases in value to $120, sell off $100 of the coin and put it back into your pocket. Let the remaining $20 ride the upside wave," he says. "That way, if it all crashes tomorrow, you're not losing anything. That's the best play to make for the next six months of 2018."