The Bitcoin Investment: Your Portfolio's Worth?

Bitcoin is a very risky asset type. It is a volatile currency, and even the most solid Bitcoin investment should be treated as a high-risk investment. For example, in the past, Bitcoin's price fell by over 80% in several months. Financial experts commonly recommend investing no more than you are willing to lose. So, how much have you invested in Bitcoin?

How much money can be made by investing in Bitcoin?

Investing in Bitcoin can be lucrative, but it is a risky and volatile asset, and there is no guarantee of making money.

Bitcoin's price is extremely volatile. In November 2021, it hit an all-time high of just under $69,000, but as of June 2024, it was worth around $24,000. That's a significant loss if you bought at the peak. However, if you bought in January 2021 and sold at the peak, you would have made a 115% profit.

Bitcoin's price can change dramatically, and it is challenging to find the "right time" to buy or sell.

One guideline for investors is to invest no more than 10% of your portfolio in individual stocks or risky assets like Bitcoin.

There are a few ways to make money with Bitcoin:

• Trading: You can make money by buying and selling Bitcoin within short windows, moving in and out of positions as the market changes. However, this is challenging to do successfully, and you are more likely to lose money.
• Long-term holding: Buying and holding Bitcoin as a long-term investment, or "HODLing," can be a low-effort way to make money in the long term, as long as you sell it for more than you bought it for.
• Bitcoin ETFs: In January 2024, the SEC approved spot Bitcoin ETFs, which provide an easy way for investors, including 401(k) investors, to gain exposure to Bitcoin. However, they lack the benefits of actual cryptocurrency ownership, and they may be subject to high volatility.
• Credit card rewards: Some credit cards offer crypto rewards programs, allowing you to earn a small percentage of your purchases in Bitcoin or other cryptocurrencies.
• Lending: You can lend your Bitcoin to other investors or institutions and earn interest on your assets. However, this is a relatively new and risky category, and you could lose your investment if the borrower defaults.
• Mining: Bitcoin mining involves using computers to solve complex equations to validate transactions on the Bitcoin blockchain. Miners are rewarded with Bitcoin. However, mining is very competitive, and the upfront and ongoing costs can be high, making it challenging for individual investors to turn a profit.

There are also risks associated with investing in Bitcoin, including regulatory, security, insurance, fraud, and market risks.

Overall, investing in Bitcoin can be profitable, but it is a risky and volatile asset, and there is no guarantee of making money. It is essential to carefully consider your financial profile, portfolio, risk tolerance, and investment goals before investing in Bitcoin.

How volatile is Bitcoin?

Bitcoin is considered a volatile asset, but its volatility is decreasing as it matures. Volatility is a measure of how much the price of a financial asset varies over time. The more volatile an asset, the more risk is associated with holding it.

Bitcoin's price can vary significantly in a short period of time. For example, in November 2022, Bitcoin recorded a 10-day volatility of more than 100%, meaning its price changed by more than 100% within a 10-day window. Bitcoin's price has also been known to rise or fall by thousands of dollars within a single day.

There are several reasons for Bitcoin's volatile price history. Firstly, like most commodities, Bitcoin's price is heavily influenced by supply and demand. As Bitcoin has a limited supply of 21 million coins, its price is likely to climb as the circulating supply gets closer to this limit. Secondly, speculation about price movements plays a critical role in Bitcoin's value at any given moment. Media outlets, influencers, industry figures, and cryptocurrency fans can all create investor concerns, leading to price fluctuations.

Bitcoin's volatility is also driven by large investors, known as "whales", who hold enough Bitcoin to influence its market value. If these whales were to suddenly sell their Bitcoin holdings, it could cause a panic that leads to a rapid decline in Bitcoin's price.

Additionally, fear and greed are two primary drivers behind Bitcoin's volatility. Due to its reputation for volatility, investors fear missing out on big upswings or falling victim to large downswings, leading them to panic buy or sell, thus influencing demand and prices.

Despite its volatility, Bitcoin has historically compensated investors well for the risk. From 2020 to early 2024, Bitcoin had a Sharpe ratio of 0.96, compared to the S&P 500's ratio of 0.65 over the same period. This indicates that while Bitcoin has higher risk, investors have been more rewarded for taking that risk.

Bitcoin's volatility is also decreasing as it matures. In May 2024, Bitcoin's volatility reached new all-time lows on a yearly scale. As of 2024, Bitcoin is less volatile than 33 of the S&P 500 companies, including Netflix. As the asset class matures and its market cap grows, new capital inflows will have less impact on the market, leading to decreased volatility.

Who are the biggest investors in Bitcoin?

There are several big investors in Bitcoin, ranging from individuals to companies. Here is a list of some of the biggest investors in Bitcoin:

Roger Ver – “The Bitcoin Jesus”

Ver is one of the earliest and most prominent investors in Bitcoin. He is also known for his support for Bitcoin-related start-ups, such as Ripple and Kraken. Ver is believed to be one of the wealthiest investors in the crypto world, with a wallet containing more than 100,000 bitcoins.

Barry Silbert

Silbert is the founder of Digital Currency Group, a leading company in the cryptocurrency world. As of 2020, his company has invested in over 125 blockchain-related companies. Forbes estimates his net worth to be approximately 500 million US dollars.

Gavin Anderson

Anderson is an iconic figure in the world of Bitcoin investing. He started working full-time on Bitcoin in 2010 and dedicated himself to promoting it to the public and developers. He created the first Bitcoin faucet, giving bitcoins to people to help the crypto community grow.

Tyler and Cameron Winklevoss – The Billionaire Twins

The Winklevoss twins are believed to be the first Bitcoin billionaires. By April 2013, they reportedly owned $11 million worth of bitcoin, when it was valued at about $120 per coin. They are also interested in investing in other cryptocurrencies, such as Ethereum, and blockchain projects. In 2015, they launched Gemini, one of the most influential crypto exchanges.

Kingsley Advani

Advani invested in Bitcoin early on, turning his $34,000 investment into a million dollars in less than a year. He is now a prominent advisor, helping young people master the art of trading.

Corporate Investors

Several companies have also invested heavily in Bitcoin. Here are some of the most notable ones:

• MicroStrategy: This data analytics firm has purchased approximately 108,992 bitcoins, worth more than $5.4 billion as of August 2021.
• Tesla Motors: The electric vehicle giant invested $1.5 billion in Bitcoin, revealed in an SEC filing in February 2021.
• Square: The digital payments company, founded by Jack Dorsey, owns about 8,027 bitcoins, with a value of about $386 million as of March 2021.
• Galaxy Digital Holdings: Michael Novogratz’s investment company held around $761 million worth of bitcoin as of March 2021.

How does Bitcoin compare to other assets?

Bitcoin is a unique asset, and its value is determined by different factors compared to traditional assets. Here is a comparison of Bitcoin with other assets:

Bitcoin vs. Traditional Currencies

Bitcoin, the first and most well-known cryptocurrency, has grown in popularity since its creation in 2009. Unlike traditional currencies, Bitcoin is not backed by a central bank or government. Instead, its value is derived from its limited supply, increasing demand, and its use as a medium of exchange, a store of value, and a unit of account. Bitcoin's decentralised nature also makes it censorship-resistant and free from government control or influence.

Bitcoin vs. Gold

Gold is often considered a safe-haven asset and a store of value, similar to Bitcoin. Both assets share attributes such as scarcity, durability, and fungibility. However, Bitcoin has advantages over gold in terms of divisibility, transferability, and verifiability. While gold is difficult to divide accurately, Bitcoin can be divided into eight decimal places, known as satoshis. Additionally, Bitcoin is much easier to store, transport, and insure than gold. Transactions on the Bitcoin blockchain are also publicly verifiable, while gold can be forged or diluted, making its value more questionable.

Bitcoin vs. Stocks

Bitcoin has historically been viewed as a risky asset, and its price movements have become more correlated with stock market performance, especially during the pandemic. When stock markets are risk-averse, Bitcoin's performance tends to suffer, and vice versa. This correlation has raised concerns about the diversification benefits of Bitcoin and the potential for contagion across financial markets.

Bitcoin vs. Other Asset Classes

Compared to other global asset classes, Bitcoin and the overall crypto market cap still have a long way to go. For example, gold has a market cap of $12.8 trillion, while global real estate is valued at around $280 trillion. However, Bitcoin's narrative as "digital gold" and its potential to enhance portfolio returns on a risk-adjusted basis have attracted institutional investors.

How does one store Bitcoin?

Bitcoin is stored in digital wallets, which are a type of computer software that connects to the Bitcoin network. When you purchase bitcoin, you're given a public key and a private key. The public key is used to encrypt information and is your wallet address, while the private key allows you to decrypt the information and access your bitcoin. It is important to keep your private key secure and not share it with anyone.

There are several types of bitcoin wallets, each with its own pros and cons. Here are some of the most common ones:

• Hot Wallets: These are connected to the internet and are typically available online or on smartphones. They are convenient for quick transactions but are more vulnerable to hacking. Examples include mobile wallets (e.g. BitPay), web or online wallets (e.g. Coinbase), and desktop wallets (e.g. Bitcoin Core).
• Cold Wallets: These wallets cannot be accessed through the internet and are considered more secure. They often involve physical devices like USB sticks, where bitcoin is stored securely offline. Examples include hardware wallets (e.g. Ledger Nano X, Trezor) and paper wallets.
• Hardware Wallets: These are small, portable devices similar to USB drives that store your private keys securely offline. They are considered more secure than hot wallets since they are not connected to the internet. Examples include Ledger Nano X and Trezor.
• Multi-Signature Wallets: These require multiple private keys from multiple machines or people to move the bitcoins, adding an extra layer of security.
• Desktop Wallets: These are programs that reside on your computer. They are not considered the safest option as they are vulnerable to hacking.
• Mobile Wallets: These are programs hosted on mobile devices. While convenient, they are not very secure.
• Web-Based Wallets: These are wallets hosted by a web service, where your keys are stored by a third party. This option is not recommended as it is not secure.

When choosing a bitcoin wallet, it is important to prioritise security. Cold wallets are generally considered the safest option, especially hardware wallets, as they are not connected to the internet and are therefore less vulnerable to hacking. However, hot wallets are more convenient for frequent transactions. Many serious bitcoin investors use a hybrid approach, keeping the majority of their crypto wealth in cold storage and a smaller spending balance in a hot wallet.

Frequently asked questions