Smart Bitcoin Investments: Turning $100 Into Thousands

Bitcoin is a decentralised digital currency with a decentralised network of computers spread worldwide, meaning no single institution controls the Bitcoin network. Investing $100 in Bitcoin can be profitable, but it depends on the right time to invest or making regular investments. It is a volatile financial asset, and its value is driven by various factors like scarcity and the potential for high returns. Investing in Bitcoin also comes with risks, including price volatility, lack of regulatory framework, and susceptibility to digital threats.

How to invest $100 in Bitcoin

Investing $100 in Bitcoin can be a great way to get started with digital currencies. While it may not make you wealthy, it is a good starting point to dip your toes into the world of cryptocurrencies.

Bitcoin is a volatile asset, and its price can fluctuate significantly in a short period. This means that investing $100 can lead to substantial gains, but also comes with the risk of losing some or all of your investment. It's important to be mentally prepared for these price changes and to only invest what you can afford to lose.

When investing a small amount like $100, it's recommended to consider it a long-term investment. Historically, holding Bitcoin for a longer time has been beneficial due to potential long-term price increases. Additionally, investing regularly, even in small amounts, can be a good strategy.

To get started with investing in Bitcoin, you will need a secure crypto wallet, a reputable cryptocurrency exchange, and a payment method. You can choose between a hardware wallet, which is a physical device providing extra security, or a hot wallet, which is connected to the internet and allows for easier transactions.

When choosing a cryptocurrency exchange, look for user-friendly platforms like Coinbase or Binance, which offer a wide variety of cryptocurrencies. It's also important to consider security features, trading fees, and the range of cryptocurrencies available.

Remember, investing in Bitcoin is speculative and carries risks. It's crucial to do your research, understand the potential risks, and have a solid investment strategy that aligns with your financial situation and goals.

Bitcoin's volatility

Bitcoin is a highly volatile financial asset. Its value is driven by a variety of factors, including supply and demand, investor sentiment, government regulations, and media hype. Due to its volatility, investing in Bitcoin carries significant risks and should be approached with caution.

Supply and Demand

Like most commodities, the price of Bitcoin is heavily influenced by supply and demand. As an asset, Bitcoin has a limited supply of 21 million coins by design. The closer the circulating supply gets to this limit, the higher the prices are likely to climb. Additionally, the actions of “Bitcoin whales"—investors with large enough holdings to influence market value—can also impact volatility. If these investors were to liquidate their Bitcoin holdings suddenly, it could cause a rapid decrease in prices as other investors panic and follow suit.

Investor Sentiment

Speculation about price movements plays a critical role in Bitcoin's value at any given moment. Investor fears of missing out on big price movements or falling victim to large downswings can lead to panic selling or buying, further influencing demand and prices. Fear and greed are two primary drivers behind Bitcoin's volatility.

Government Regulations

Government agency views and regulations can also affect Bitcoin's price. For example, the Internal Revenue Service (IRS) in the United States considers Bitcoin a convertible virtual currency and a capital asset if used as an investment instrument. The tax stance taken by the IRS means that taxes are a factor in Bitcoin's market price, contributing to its volatility unless the tax regulations remain stable.

In 2021, China's government and central bank announced that all cryptocurrency transactions were illegal, leading to a massive shutdown of cryptocurrency mining farms in the country. This caused a decrease in Bitcoin's price as miners were forced to relocate.

Media Hype

Media outlets, influencers, industry moguls, and cryptocurrency fans can create investor concerns or hype, leading to price fluctuations. For example, in late October 2021, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF, Bitcoin's price skyrocketed as investors jumped at the chance to gain exposure to a cryptocurrency on an official exchange. However, once the hype died down and investors realized the ETF was linked to Bitcoin through futures contracts, prices dropped back down.

Impact of Volatility

Volatility means that an asset is risky to hold, as its value may substantially increase or decrease over a short period. The more volatile an asset, the more people will want to limit their exposure to it. Volatility also increases the cost of hedging, contributing to the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Mitigating Risk

Investing in Bitcoin carries inherent risks due to its volatile nature. It is recommended to only invest what you can afford to lose and consider it a long-term investment. Additionally, investing a fixed amount into Bitcoin at regular intervals, known as Dollar-Cost Averaging (DCA), can help mitigate the impact of volatility.

Risks and benefits of investing in Bitcoin

Risks

Bitcoin and other cryptocurrencies are associated with several risks that investors should be aware of before deciding to invest. Here are some of the key risks:

• Volatility and Fluctuation: The price of Bitcoin is extremely volatile and constantly changing, making it unpredictable and risky. There is no guarantee of a return on investment.
• Cyberattacks and Hacking: Cryptocurrency is technology-based and vulnerable to cyberattacks and hacking. If bitcoins are lost or stolen, there is usually no way to retrieve them.
• Fraud: The lack of security in the bitcoin market creates a high risk of fraud, with many buyers losing their investments on exchanges and mining losses.
• Little or No Regulation: The bitcoin market currently operates with little to no major regulations, as it is a new form of currency. This lack of regulation could lead to problems in the future if bitcoin competes with government currency.
• Technology Reliance: Bitcoin is entirely reliant on technology, and if the technology fails or is compromised, the cryptocurrency becomes worthless.
• Block Withholding: Bitcoin mining relies on solving mathematical equations called "blocks." However, a mining pool can withhold blocks and hide them from honest miners, allowing a select few to benefit while others lose out.
• Regulatory Risk: The battle between cryptocurrency projects and regulators creates uncertainty around longevity and liquidity.
• Security Risk: Cryptocurrency exchanges are digital and vulnerable to hackers, malware, and operational glitches.
• Insurance Risk: Bitcoin is not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). While some exchanges provide insurance, it is usually limited to specific failures or breaches.
• Fraud Risk: Despite the security measures within blockchains, there are still opportunities for fraudulent activity.
• Market Risk: As with any investment, bitcoin values can fluctuate wildly and are highly sensitive to news and events.
• Access and Security: There is a risk of losing access to one's Bitcoin if account passwords or digital keys are lost or misplaced.
• High Fees: Cryptocurrency exchanges often charge high fees for buying and selling, and the software and hardware requirements for enabling transactions can be complicated and costly.
• Uncertain Future: It is unclear whether Bitcoin and other cryptocurrencies are here to stay or will be replaced by central bank digital currencies in the future.

Benefits

Despite the risks, investing in Bitcoin and other cryptocurrencies offers several potential benefits:

• Decentralization and Accessibility: Cryptocurrencies are decentralized, allowing users unrestricted access to their coins without the need for trusted third-party involvement. Anyone with an internet connection and a crypto wallet can access and use cryptocurrencies, even those without access to traditional banking.
• Lower Fees and Faster Transactions: Crypto transactions often have lower fees and faster transfer times compared to traditional bank transactions, especially for global wires.
• Blockchain Technology: Cryptocurrencies operate on blockchain technology, which is fully public, immutable, and transparent. Every transaction can be tracked, providing security and corruption-free verification.
• High Return Potential: While volatile, cryptocurrencies have yielded high returns in the past, depending on when they were purchased.
• Portfolio Diversification: The cryptocurrency market has extended immensely over the past decade and is largely unrelated to other markets like stocks or bonds, making it an acceptable source of portfolio diversification.
• Inflation Protection: Cryptocurrencies like Bitcoin have a limited supply, which can protect against inflation as demand increases.
• Cost-Effective Transactions: Cryptocurrencies can enable cost-effective, global fund transfers by eliminating the need for third-party intermediaries.
• Privacy: Cryptocurrency transactions provide a level of privacy as they are pseudonymous, and investors have an identifier and wallet address rather than personal information attached to their transactions.

How to buy Bitcoin

To buy Bitcoin, you'll need to set up an account with a cryptocurrency exchange or trading service, connect a payment method, place an order, and ensure safe storage for your purchased cryptocurrency.

Choosing a service or venue

Popular exchanges in the U.S. include Coinbase, Kraken, Gemini, and Binance. These platforms allow you to trade Bitcoin directly and usually support a wide array of other cryptocurrencies. Additionally, certain traditional brokers and stock trading apps, such as Robinhood, Webull, TradeStation, and Fidelity, are beginning to offer Bitcoin and other crypto assets.

When creating a cryptocurrency exchange account, it is recommended to use two-factor authentication and a long, unique password that includes a variety of letters, special characters, and numbers.

Connect a payment method

At most exchanges, you can connect your bank account directly or link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, it is advised against due to the high interest charged on such transactions.

Place an order

Almost all crypto exchanges offer both market and limit orders, and some also provide stop-loss orders.

Safe storage

It is important to store your Bitcoin in a secure crypto wallet. There are two types of wallets: hot wallets and cold wallets. Hot wallets are apps on devices such as computers, phones, or tablets, which are connected to the internet. Cold wallets, on the other hand, are physical devices not connected to the internet, providing an extra layer of security. Cold wallets are a good choice for long-term investments but may not be as convenient for frequent trading or transactions.

How much Bitcoin should you buy?

The amount of Bitcoin you should buy depends on several factors, including your financial situation, investment goals, and risk tolerance. Here are some key considerations to help you decide:

• Risk tolerance: The crypto market is highly volatile, so consider investing an amount you feel comfortable losing entirely. It's crucial to keep a cool head and only spend what you can afford to lose.
• Profit tolerance: Consider how you would react if your investment increased significantly in value. A reasonable investor should not get too greedy and should take profits when necessary.
• Market timing: Research the market cycles and consider where the market currently stands. Generally, the further the market is from its all-time high, the better the opportunity to invest.
• Diversification: Don't put all your eggs in one basket. Consider allocating your capital across different investment vehicles, such as real estate, stocks, and gold, in addition to cryptocurrencies.
• Investment goals: Determine your investment goals and profit expectations. If you're aiming for substantial profits, a $100 investment in Bitcoin may not be sufficient.
• Regular investments: Instead of investing a lump sum, consider investing a fixed amount into Bitcoin at regular intervals to mitigate the impact of market volatility.
• Research and understanding: Before investing, thoroughly research the market and understand the potential risks and rewards. Remember that investing in Bitcoin is speculative and carries no guarantees of returns.

Ultimately, the decision on how much Bitcoin to buy is yours alone and should be based on careful consideration of your financial situation, risk tolerance, and investment goals. It's essential to approach Bitcoin as a speculative investment and only invest what you can afford to lose.

Frequently asked questions