Smart Bitcoin Investment: How Much To Invest?

Bitcoin has seen some incredible growth in recent years, with a single Bitcoin worth around $40,000 in January 2024, compared to $500 in May 2016. But with big gains come big risks, and Bitcoin has also experienced devastating losses.

If you're thinking about investing in Bitcoin, there are a few things to consider. Firstly, it's a volatile asset, and it's important to do your research and understand the risks involved. It's generally recommended that cryptocurrencies make up no more than 5% to 10% of your investment portfolio due to their high risk and volatility.

You'll also need to decide how much you want to invest. This will depend on your financial situation and risk tolerance. A common strategy is dollar-cost averaging, which involves investing a small amount regularly, rather than a lump sum, to reduce the impact of market fluctuations.

When it comes to buying Bitcoin, you'll need to use a crypto exchange, such as Coinbase or Binance.US. You can fund your account with a bank account, debit card, or credit card, although credit cards are generally not recommended due to high transaction fees and interest rates.

Once you've purchased your Bitcoin, you'll need to store it in a digital wallet, which can be online (hot wallet) or offline (cold wallet).

Remember, investing in Bitcoin is risky, and you could lose some or all of your investment. It's important to do your own research and consult a financial advisor before investing.

How much Bitcoin should you buy?

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

Discretionary Income

Assess your discretionary income, which is the money left over after covering all essential expenses such as mortgage payments, food, travel, debt, and savings. It is generally recommended not to invest more than you can afford to lose.

Dollar-Cost Averaging

Consider adopting a dollar-cost averaging strategy, where you invest a fixed amount regularly, such as at the end of each week or month. This approach helps to smooth out the impact of market volatility and ensures you don't put all your money in at a market peak.

Volatility

Bitcoin is known for its high volatility, with prices fluctuating significantly over short periods. Be prepared for potential declines in the short term and consider a long-term investment horizon to ride out the ups and downs.

Risk Tolerance

All investments carry risk, but Bitcoin is considered significantly riskier than traditional assets like stocks, bonds, or real estate. Evaluate your risk tolerance and be aware that there is a chance of losing some or all of your investment.

Diversification

Diversifying your investments across various assets, both digital and traditional, is a prudent strategy. Consider allocating a portion of your portfolio to other cryptocurrencies (altcoins) or investing in stocks, property, or other asset classes.

Expert Recommendations

Industry experts generally recommend that cryptocurrencies, including Bitcoin, should comprise no more than 5% to 10% of your overall portfolio. This is due to the high-risk nature of cryptocurrencies, and balancing your portfolio with more established asset classes is advisable.

Remember, there is no one-size-fits-all answer, and the amount of Bitcoin you should buy depends on your individual circumstances and investment strategy. It is crucial to carefully evaluate the risks and do your own research before investing.

How to buy Bitcoin

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, Crypto.com, Binance, and Robinhood. These exchanges carry a variety of different fees and consumer protections, so do your due diligence before choosing.

Step 2: Connect Your Exchange to a Payment Option

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 not advisable as cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges.

Step 3: Place an Order

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

Step 4: Safe Storage

Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered but not recommended for large or long-term cryptocurrency holdings.

Hot Wallets vs Cold Wallets

Online wallets, also known as hot wallets, are apps on internet-connected devices such as computers, phones, or tablets. These wallets generate the private keys to your coins.

A cold wallet isn't connected to the internet and is, therefore, less risky. These offline wallets or hardware wallets can be stored on a USB drive.

You can buy bitcoin through a payment processor like PayPal. There are two ways to do this: by connecting your account to a debit card or bank account or by using the balance of the PayPal account to purchase cryptocurrencies from a third-party provider.

Using a credit card to buy bitcoin is similar to using a debit card, but not all exchanges allow this due to associated processing fees and the risk of fraud. Credit card processing can tack on extra charges, and credit card issuers treat bitcoin purchases as cash advances, which incur higher interest rates.

Alternative Ways to Buy Bitcoin

You can also buy bitcoin at specialised ATMs and via peer-to-peer (P2P) exchanges.

Things to Consider Before Buying Bitcoin

• Privacy and security are important issues in the Bitcoin world.
• The history of transactions made on the blockchain is transparent, but identifying user information is not.
• Check out the legal, regulatory, and tax status of purchasing bitcoin where you live.
• Bitcoin is a risky investment, so it's important to carefully consider your goals and strategy before deciding how much to invest.
• Only invest funds that you can afford to lose.
• Don't take on credit card debt to make the purchase.
• Understand investor protections. Bitcoin and other cryptocurrency investments are not insured by the Securities Investor Protection Corporation for exchange failures or theft.

Where to store Bitcoin

There are several options for storing your Bitcoin, each with its own pros and cons. Here are some of the most common methods:

Hardware Wallets

Hardware wallets are physical devices that store your private keys and allow you to interact with your wallet without exposing your data. They are considered one of the safest ways to store your Bitcoin, as they are not connected to the internet and are therefore not vulnerable to online hacking attempts. Examples of popular hardware wallets include Trezor and Ledger.

Cold Wallets/Cold Storage

Cold wallets, or cold storage, refer to any type of Bitcoin storage that is not connected to the internet. This can include hardware wallets, as well as other methods such as USB drives or paper wallets. Cold storage is considered a safe way to store Bitcoin because it is not accessible via an internet connection.

Software Wallets

Software wallets are programs that you download and install on your computer or mobile device. They are convenient and allow you to access your Bitcoin on the go, but they are also more vulnerable to hacking attempts as they are connected to the internet. Examples of software wallets include desktop wallets and mobile wallets.

Web/Hot Wallets

Web wallets, or hot wallets, store your private keys on a server that is constantly online and controlled by a third party. They are convenient but less secure, as the organisations running the websites can gain access to your private keys and your funds. Examples of web wallets include exchange wallets, such as those provided by Coinbase and eToro.

Crypto Exchanges

You can also store your Bitcoin on the crypto exchange where you purchased it. Many exchanges, such as Coinbase and eToro, provide integrated Bitcoin wallets. However, this method is not without risks, as exchanges can be targeted by hackers. Additionally, you don't have direct control over your private keys when using an exchange wallet.

Paper Wallets

Paper wallets are physical documents that contain a public address for receiving Bitcoin and a private key that allows you to spend or transfer Bitcoin. They are considered highly secure as the keys are stored offline, making them immune to hacking attempts. However, you need to take precautions when creating and storing your paper wallet to ensure that it is not lost, stolen, or damaged.

How much is Bitcoin worth?

Bitcoin (BTC) has seen meteoric growth in recent years. In May 2016, you could buy 1 BTC for about $500. As of January 2024, a single Bitcoin is hovering around $40,000. That’s growth of approximately 7,900%.

The most Bitcoin ever traded for is $68,789 in November 2021. The most recent Bitcoin bottom was in December 2022. At that time, Bitcoin traded for $16,291. That’s a 76% decrease in price over the course of approximately one year.

As you can see, the price of Bitcoin is extremely volatile, and it can fluctuate widely.

Bitcoin's Value

Bitcoin's value comes from its store of value and payment system and its finite supply.

How to Value Bitcoin

It's difficult for even financial analysts to determine a true value for Bitcoin because it does not generate cash flow or revenue, nor does it represent ownership of physical assets or intellectual property. Instead, its price is tied exclusively to investor sentiment, which can be unpredictable and inconsistent.

Experts generally agree that cryptocurrencies shouldn’t make up more than 5% to 10% of your portfolio. Given its position as the first and largest cryptocurrency, Bitcoin could easily be a sizable portion of those holdings.

There are many reasons why experts believe Bitcoin and other cryptos should only be a small percentage of any investor’s portfolio. One reason is that although cryptocurrencies have been lucrative for some long-term investors, cryptocurrencies in general still suffer from extreme volatility.

How to Invest in Bitcoin

There are a number of different ways for investors to gain exposure to Bitcoin. Investors can buy the cryptocurrency directly in their accounts on platforms like Robinhood Markets Inc. (ticker: HOOD), Coinbase Global Inc. (COIN), PayPal Holdings Inc. (PYPL) and Cash App.

Alternatively, more advanced traders can trade Bitcoin futures and options on futures contracts to gain leverage or hedge their positions.

Risks of Owning Bitcoin

• Bitcoin is a risky investment with high volatility.
• Bitcoin is prone to periods of extreme volatility, such as its roughly 80% crash in late 2017 and 2018.
• It's difficult for even financial analysts to determine a true value for Bitcoin because it does not generate cash flow or revenue.
• Bitcoin also poses a significant risk to the environment. Bitcoin mining produces about 40 billion tons of carbon dioxide annually, a huge red flag for any investors concerned about environmental, social and governance, or ESG, principles.

Should you invest in Bitcoin?

Bitcoin is the world's most popular and most valuable cryptocurrency, with a market cap of more than $360 billion. It has been one of the best-performing assets since its creation in 2009, skyrocketing in price from $1 in April 2011 to a peak of $68,789 in November 2021.

However, Bitcoin is a risky and volatile investment. Its price can be extremely unpredictable, and it has experienced several major crashes, including an 80% decline in 2013 and a 76% decrease between November 2021 and December 2022.

Key Considerations

• Risk and volatility: Bitcoin is a high-risk and volatile asset. Its price can be extremely unpredictable, and it has experienced several major crashes.
• Diversification: It is generally recommended that cryptocurrencies should make up no more than 5%-10% of your portfolio. Diversifying your investments across multiple assets can help to balance the risk.
• Regulation: The cryptocurrency market is currently very loosely regulated, but increased regulation in the future could impact Bitcoin's appeal to investors.
• Environmental impact: Bitcoin mining produces about 40 billion tons of carbon dioxide annually, which may be a concern for investors who prioritize environmental, social, and governance (ESG) principles.
• Transaction irreversibility: Transactions made in Bitcoin are irreversible, so if you lose or forget your wallet credentials, your Bitcoin could be lost forever.
• Consumer protections: Crypto exchanges lack basic consumer protections like insurance from the Securities Investor Protection Corporation and the Federal Deposit Insurance Corporation, which are found in traditional financial products.
• Tax implications: Before investing in Bitcoin, be sure to check out the legal, regulatory, and tax status of purchasing it in your country or state.
• Dollar-cost averaging: This strategy involves investing a fixed amount in Bitcoin at regular intervals (e.g. weekly or monthly), rather than investing a lump sum all at once. This helps to reduce the risk of investing a large sum just before a price crash.
• Discretionary income: It is recommended that you only invest in Bitcoin with your discretionary income, i.e. the money left over after covering all essential expenses such as food, housing, and debt. This helps to ensure that you do not put yourself in a financially vulnerable position.

Investing in Bitcoin can be tempting, especially when its price is skyrocketing, but it is a risky and volatile asset. If you choose to invest, it is important to thoroughly understand the risks and consider how it fits into your overall investment strategy and financial goals. It is generally recommended that you only invest in Bitcoin with money you can afford to lose and that you diversify your investments across multiple assets.

Frequently asked questions