The Right Time To Invest In Bitcoin?

Bitcoin is a risky investment, so it's important to think carefully about your goals and strategy before you decide to invest. One common rule of thumb is to invest no more than 10% of your portfolio in individual stocks or risky assets like Bitcoin.

Cryptocurrencies are digital assets that are usually created using blockchain technology. This makes it possible to exchange them without the need for a central authority such as a bank.

Bitcoin's value comes from its store of value and payment system, as well as its finite supply. However, its price is extremely volatile, and it is subject to daily or even hourly fluctuations.

If you are thinking of investing in Bitcoin, you will need to set up an account with a cryptocurrency exchange such as Coinbase, Kraken, Gemini, or Crypto.com. You will also need a personal digital wallet outside of your exchange account, and a secure internet connection.

One strategy for investing in Bitcoin is called Dollar-Cost Averaging (DCA). This is a long-term strategy where an investor regularly buys smaller amounts of an asset over a period of time, no matter the price. This can be an effective way to reduce the impact of market volatility.

Dollar-cost averaging

The benefits of DCA include removing the stress and uncertainty of trying to time the market and making emotional decisions based on short-term price movements. It also allows you to build your Bitcoin investment over time, even if you only have a small amount of money to invest. Additionally, DCA can reduce the impact of market volatility on your portfolio and lower your average cost per Bitcoin.

To use DCA for investing in Bitcoin, you first need to set a budget and decide on the intervals for your purchases. You then need to find a reputable platform or app that allows you to automatically purchase Bitcoin at regular intervals. Examples of popular Bitcoin DCA apps include Swan in the US, Relai in Europe, and Bitnob in Africa.

Once you have set up your DCA plan, you can make regular bank transfers, and the app will purchase Bitcoin for you automatically based on your predetermined settings. It is important to use a secure, non-custodial wallet to ensure the safety of your Bitcoin investment.

DCA is a popular investment strategy for Bitcoin and other assets, but it may not be suitable for everyone. It is important to consider your unique investment circumstances and consult a financial professional before undertaking any new investment strategy.

The role of crypto in your portfolio

Diversification

Diversification is a key part of smart risk management. Allocating between risk-on and risk-off assets can hedge against volatility. However, even the lauded 60/40 rule (60% high-risk investments, 40% low-risk investments) can't protect a portfolio against systematic risk. Cryptocurrencies, such as Bitcoin and Ethereum, are seen by many as an asset that can protect against undiversifiable hazards.

Regular Diversification Won't Save You

Systematic risk acts as a domino effect, rippling through markets and taking them down one by one. With global quantitative easing and a potential stock market bubble, the chances of a market-wide breakdown are high. Most traditional assets, including stocks and bonds, are correlated, meaning that even a 60/40 split won't shield investors in the event of system-wide failure.

Crypto Exposure

Analysts, hedge funds, and investors have been advocating for an allocation of crypto in portfolios for years. A study by crypto fund manager Bitwise Asset Management found that a portfolio consisting of 5% bitcoin, 38% bonds, and 57% stocks doubled returns compared to the traditional 60/40 split over four years. Another study from the National Bureau of Economic Research assessed the role of bitcoin within portfolio diversification and found that a minimum allocation of 1% in an overall portfolio was prudent, with higher allocations resulting in better overall returns.

Crypto Volatility

Crypto is a volatile asset class, so a little goes a long way. An allocation of around 5% to crypto could help maximize risk-adjusted returns for investors. However, investors should consider their own circumstances and financial goals before investing in crypto. Crypto is a high-risk asset class and may not be suitable for investors with near-term capital needs and/or high-risk aversion.

Crypto as a Long-Term Investment

While crypto can be extremely volatile, with large price movements over short periods, it is also seen as a worthwhile long-term investment. Bitcoin, for example, is up an admirable 46% this year, and Ethereum, the second-largest cryptocurrency by market cap, is beating bitcoin with a 140% rise this year.

Tips for Investing in Crypto

• Diversify your crypto portfolio: Split your portfolio into high-, medium-, and low-risk investments with corresponding weightings.
• Consider holding stablecoins: Stablecoins are cryptocurrencies that try to base their market value on an external reference like a currency or commodity, providing liquidity for your portfolio.
• Rebalance your portfolio: The crypto market is very volatile, so your decisions should change depending on the current situation.
• Allocate new capital strategically: Avoid overweighting. Just because a coin made a lot of money today doesn't mean it will in the next few weeks.
• Do your research: Don't rely solely on the advice of others. Trust your own judgment and do your own research.
• Only invest what you can afford to lose: No one can predict what will happen in the future, so make sure you only invest what you're comfortable losing.
• Buy the dip: Buying during price dips can be a good strategy, but timing dips is tricky. Make sure your exposure to bitcoin is appropriately sized so that you can survive 50% to 80% drawdowns.
• Dollar-cost averaging: Use this strategy to cope with volatility. Divide the total amount you want to invest across periodic purchases of the target asset, investing the same amount each month or quarter regardless of market trends.
• Safe storage: Consider using a cold wallet, which is a small, encrypted portable device that allows you to download and carry your Bitcoin offline. Cold wallets are considered much more secure than hot wallets, which are apps on internet-connected devices.

How to store your Bitcoin

Storing your Bitcoin safely is essential to avoid losing your investment to theft, hacks, or user error. Here are some options for storing your Bitcoin:

• Hot Wallets: These are online wallets, or apps on devices such as computers, phones, or tablets, that are constantly connected to the internet. They are convenient for transactions and are typically free to download and use. However, they are susceptible to hacks and should not be used for storing large amounts of Bitcoin. Examples of hot wallet providers include Coinbase, Binance, and Kraken.
• Cold Wallets: Cold wallets are offline wallets that are not connected to the internet, making them a much more secure option than hot wallets. They can be brought online temporarily to make transactions. Examples of cold wallets include hardware wallets (e.g. Ledger Nano X, Trezor Model T) and paper wallets. Hardware wallets are considered the safest option for storing large amounts of Bitcoin. Paper wallets, which involve printing your private and public keys on paper, are less commonly used today due to the risk of user error, theft, or damage.

When choosing a wallet provider, it is important to consider security features such as two-factor authentication, as well as fees for sending or selling Bitcoin. Additionally, it is recommended to back up your Bitcoin wallet regularly and use strong passwords to protect your private keys.

How to buy Bitcoin

Bitcoin is a decentralised digital currency that operates without the oversight of banks and governments. It is the first and largest cryptocurrency, with a market cap of over $1 trillion. Here is a step-by-step guide on how to buy Bitcoin:

Choose a Crypto Exchange or Brokerage:

You need to select a cryptocurrency exchange or brokerage platform that offers Bitcoin trading. Examples include Coinbase, Binance, eToro, Robinhood, and Kraken. These platforms provide an interface for buying and selling Bitcoin and other cryptocurrencies.

Connect Your Payment Method:

After signing up and verifying your identity, you will need to connect a payment method to fund your account. This can be done by linking a bank account, debit card, or credit card. It is generally recommended to avoid using credit cards due to the high transaction fees and interest charges associated with cash advances.

Place a Bitcoin Buy Order:

Once your account is funded, you can place a buy order for Bitcoin. You can either use a market order to purchase at the current market price or use a limit order to specify the price you want to pay. The amount of Bitcoin you can purchase will depend on your budget and investment strategy.

Store Your Bitcoin in a Wallet:

After purchasing Bitcoin, you need to decide where to store it. You can choose between a hot wallet, which is an online wallet provided by the exchange or a third-party provider, or a cold wallet, which is an offline storage device. Cold wallets are generally considered more secure but require additional technical knowledge to set up.

Consider Security and Investor Protections:

When dealing with cryptocurrencies, security is crucial. Enable two-factor authentication and use strong passwords for your accounts. Additionally, be aware that Bitcoin and cryptocurrency investments are not insured by the Securities Investor Protection Corporation (SIPC) like traditional brokerage accounts. Some exchanges provide private insurance, but it's important to understand the risks involved.

The future of Bitcoin

Bitcoin is a risky investment, so it's important to carefully consider your goals and strategies before investing. One common rule of thumb is to invest no more than 10% of your portfolio in individual stocks or risky assets like Bitcoin.

Bitcoin's future is difficult to predict, but there are several factors that could influence its price trajectory. Here are some key considerations:

Supply and Demand Dynamics

Bitcoin halving events occur roughly every four years, reducing the rewards for miners by half. This automatically programmed periodic decline in the supply of new Bitcoins typically sparks bullish price action. As demand increases against a limited supply, the price of Bitcoin is likely to rise.

Market Sentiment and Investor Behaviour

Market sentiment has a significant impact on Bitcoin's price. Positive news, recommendations from influential figures, or institutional investments can trigger FOMO among investors, leading to price increases. Conversely, negative news, regulatory uncertainties, or security breaches can cause panic selling and sudden price declines.

Technological Advancements and Adoption

Bitcoin's value is linked to its adoption and utility. Technological developments that improve the network's scalability, security, and efficiency can enhance confidence in Bitcoin and drive up its price. Increased merchant acceptance and widespread use cases further contribute to the perception of Bitcoin as a viable payment method.

Regulatory Developments

The regulatory landscape significantly impacts the cryptocurrency market. Favorable regulations that provide clarity and legitimacy can attract institutional investors and boost Bitcoin's price. Conversely, adverse regulations or prohibitive measures may dampen market sentiment and negatively affect its price.

Macro-Economic Conditions

The broader economic environment, including inflation rates and the performance of other asset classes, can also affect Bitcoin's price. For example, higher interest rates and a potential global recession could impact investor sentiment and push prices down.

Environmental Considerations

Bitcoin has faced criticism and potential regulatory intervention due to its high energy consumption and associated environmental impact. If these concerns escalate, it could threaten Bitcoin's price action.

Institutional Adoption

The approval of spot Bitcoin ETFs and the growing interest from institutional investors have added legitimacy to Bitcoin and fuelled price increases. As more institutions recognise its potential as a hedge against the legacy banking system, capital inflows are expected to increase, further driving up prices.

Network Effects and Adoption

Max Keiser, a Bitcoin advocate, often mentions network effects. As more individuals, institutions, and merchants adopt Bitcoin, its user base will grow, leading to wider acceptance as a medium of exchange and store of value. This increased adoption will likely have a positive impact on Bitcoin's price.

Long-Term Price Potential

While short-term price predictions vary, some analysts and investors predict a very positive long-term trajectory for Bitcoin, with prices reaching $1 million or more per BTC in the coming decades. These predictions are based on Bitcoin's limited supply, increasing global adoption, and its potential to become a global reserve currency.

In conclusion, the future of Bitcoin is highly dependent on various factors, including supply and demand dynamics, market sentiment, technological advancements, regulatory developments, and macro-economic conditions. While short-term price movements can be volatile, the overall consensus points towards a positive long-term trajectory, with the potential for Bitcoin to become an increasingly mainstream and widely accepted asset.

Frequently asked questions