Smart Bitcoin Investment: How Much To Invest?

Bitcoin is a digital currency that has become increasingly popular in recent years. It is a decentralised form of currency, existing entirely online, and uses cryptography for security. Due to its decentralised nature, no single institution controls the Bitcoin network, making it a democratic form of money.

Bitcoin is considered a high-risk and volatile asset, and its value is driven by various factors such as scarcity and the potential for high returns. While investing in Bitcoin can be profitable, it is important to consider the risks involved, such as price volatility and the lack of regulatory framework.

When deciding how much to invest in Bitcoin, it is crucial to assess your risk tolerance, profit tolerance, and financial circumstances. Most experts recommend investing a small percentage of your portfolio in Bitcoin, typically suggesting a maximum of around 5% to 30% of your investment capital.

Additionally, it is important to only invest an amount you are comfortable losing and to diversify your investments across multiple assets to minimise risk.

Risk tolerance

• Understand Your Emotional Response: Recognize your emotional response to financial losses. Some people may lose sleep over a 1% drop in their portfolio value, while others may brush off a 10% loss. Knowing how you react emotionally will help you determine your risk tolerance level.
• Long-term vs. Short-term Goals: Consider your investment horizon. If you're investing for the long term, market turbulence may have less impact than if you're saving for a short-term goal, such as a house or a car.
• Volatility of Crypto: Cryptocurrencies, including Bitcoin, are highly volatile. The value can soar or plummet within a short period. For example, in 2017, the total market capitalization of cryptocurrencies surged by almost 4,500%, only to crash by 80% in 2018.
• Regulatory Uncertainty: The regulatory environment surrounding cryptocurrencies is constantly evolving, and governments and financial institutions are still figuring out how to regulate them. Changes in laws and policies can significantly impact the value and legality of Bitcoin.
• Technological Risks: Blockchain technology, which underpins Bitcoin, is secure, but it is not without its challenges. Issues like scaling, transaction speed, and energy consumption are ongoing concerns. Any significant technological failure or breakthrough can drastically affect Bitcoin's value.
• Market Maturity: The cryptocurrency market is relatively new and lacks the depth, breadth, and stability of traditional financial markets. This immaturity leads to lower liquidity, less regulatory oversight, potential for market manipulation, and inadequate investor protections.
• Impact of Media and Public Perception: Cryptocurrencies are highly sensitive to public sentiment, often influenced by social media, news coverage, and influencer opinions. This can result in rapid and speculative price swings driven more by hype than fundamental market factors.

When deciding how much to invest in Bitcoin, consider an amount that you feel comfortable losing entirely. Keep in mind that investing in cryptocurrencies is a risky and speculative endeavour, and there is always the possibility of losing your entire investment. Assess your financial situation, risk tolerance, and investment goals before making any decisions.

Profit tolerance

When deciding how much to invest in Bitcoin, it is important to consider your profit tolerance. This means reflecting on how you will react if your investment increases in value. If you become too greedy, you may hold on for too long and miss the opportunity to make a reasonable profit.

For example, many investors became millionaires during the cryptocurrency boom of late 2017, but their greed prevented them from cashing out. They lost their profits during the 2018 market crash.

Therefore, it is important to remain emotionally detached from your investment, whether your assets appreciate or depreciate. This will help you to make rational decisions and avoid the temptation to 'panic sell' at a loss.

If you are investing in Bitcoin, you should be prepared to hold your investment for the long term. Bitcoin is a highly volatile asset, and its value can fluctuate widely over short periods. As such, it may take time for your investment to pay off, and you should be ready to wait for the right moment to sell.

Additionally, it is crucial to remember that there are no guaranteed returns with Bitcoin. The value is highly dependent on market demand, and if demand falls, the price may plummet.

Before investing, you should ask yourself:

• Will I be comfortable if my investment doubles in value?
• Will I rent a bigger apartment or buy a fancy car?
• Will I fall in love with my cryptocurrencies and hold them forever?

Market cycles

Bitcoin has historically followed a four-year cycle tied to Bitcoin halving events, which happen approximately every four years. A halving event cuts the Bitcoin reward miners receive for mining new blocks and verifying transactions by 50%. As a result, Bitcoin supply continues to increase but at a slower rate. The last halving took place on 19 April 2024, and the next is expected in April 2028.

The four-year cycle can be divided into two parts: the uptrend and the downtrend. A typical cycle consists of a three-year uptrend, followed by a one-year downtrend or bear market. Bitcoin has also exhibited a larger 16-year cycle, which may reflect how humans adopt new technologies.

Each cycle can be broken down into several phases. Phase 1 is the accumulation phase, where prices are low, but small signs of growth appear. This is followed by a bull market with exponential price increases and large corrections. Eventually, the market will see a major correction, with bear market periods resulting in significant drawdowns.

It's worth noting that the timing of these cycles can be unpredictable, and they don't always unfold accurately. However, understanding market cycles can help investors make more informed decisions about when to enter and exit the market.

Diversification

Allocate Across Major Cryptocurrencies

Bitcoin was the first cryptocurrency, but there are now over 7,000 coins and tokens built on various blockchains. Consider allocating portions of your portfolio to widely adopted coins like Ethereum, Litecoin, Cardano, Polkadot, and Solana. Each of these cryptocurrencies has active developer communities, institutional investment, and real-world traction, indicating promising growth trajectories. Spreading your investment across multiple coins can smooth out the inherent volatility of any individual coin.

Diversify into Stablecoins

Stablecoins are cryptocurrencies designed to hold stable real-world value, typically pegged to fiat currencies like the US dollar. Major stablecoins include Tether, USD Coin, and Binance USD. Holding stablecoin positions can help manage the volatility of your portfolio during turbulent market periods. They also provide liquidity for trading, lending, and transferring funds between exchanges.

Hold Strategic Altcoins

Beyond the largest market cap coins, there is a diverse range of alternative cryptocurrencies (altcoins) built for specific use cases, including decentralised finance (DeFi), decentralised apps (DApps), non-fungible tokens (NFTs), metaverse platforms, and gaming. Researching and investing in altcoins that align with growth trends can generate significant returns.

Diversify Time Horizons

Cryptocurrency investing includes assets geared towards varying time horizons. Construct your portfolio to include positions aligned with short, medium, and long-term strategies. Take profits on short-term holdings during peak hype cycles, while continuing to build your long-term holdings.

Spread Across Exchanges and Wallets

Storing your cryptocurrency portfolio across multiple exchanges, wallets, and cold storage solutions reduces the risk of hacking or bankruptcy. Savvy investors typically utilise a combination of online exchanges, offline hardware wallets, and secure Bitcoin wallet solutions. It is recommended not to keep the majority of your holdings in any single place.

Diversify Beyond Cryptocurrency

While this article focuses on diversifying your cryptocurrency holdings, it is important to remember that diversification across different asset classes is also crucial. This can include stocks, bonds, real estate, and other investment vehicles. By diversifying beyond cryptocurrency, you can further reduce the risk associated with investing and protect your wealth.

Dollar-cost averaging

The benefits of using DCA to invest in Bitcoin include:

• It is a disciplined and low-stress investment approach. By removing the need to make decisions based on short-term price movements, you can alleviate emotional reactions to market movements while growing your Bitcoin investment over time.
• It is straightforward and easy to understand. You don’t need extensive financial or cryptocurrency expertise to get started.
• It removes the need to time the market, which is almost impossible even for professionals.
• It prevents you from panic buying or selling due to market volatility.
• It allows you to build your Bitcoin investment over time, even if you only have a small amount of money available to invest.

However, it's important to remember that investing in Bitcoin has its risks, and you shouldn’t invest all your savings. Bitcoin is a risky asset, and it is up to the investor to make their own financial decisions.

Frequently asked questions