Smart Money Moves: Investing In Bitcoin

Bitcoin is a highly volatile cryptocurrency, making it a risky investment. Its value changes daily, and it has seen some extreme highs and lows. For example, in November 2021, Bitcoin hit an all-time high of almost $69,000, but by November 2022, it had lost more than 75% of its value, trading at less than a third of its previous value. However, by August 2024, it had recovered to over $50,000.

Returns on $1000 investment over 10 years

Returns on a $1000 investment over 10 years would depend on when you bought and sold the Bitcoin.

Bitcoin was trading for approximately $3.50 at the start of May 2011, so $1000 would have bought approximately 286 Bitcoins. If you held onto these for 10 years, by April 2021, your investment would be worth approximately $15.6 million.

However, if you had bought $1000 worth of Bitcoin 10 years ago, and sold it in February 2024, your investment would have grown by 7,644% and be worth around $77,443.

Bitcoin's volatility makes it a risky investment, and financial experts recommend investing no more than you are willing to lose.

If you had invested $1000 in Bitcoin five years ago, your investment would have grown to over $13,000 by February 2024. If you had invested $1000 a year ago, it would be worth around $2,331 as of February 2024.

Bitcoin's volatility

Bitcoin is a highly volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of Bitcoin is measured by how much its price fluctuates relative to the average price in a given period.

Bitcoin's price movement this cycle has already been more positive than in previous cycles. This is partly due to the U.S. Securities and Exchange Commission's (SEC) approval of Bitcoin exchange-traded funds (ETFs) in January 2024, which has driven record inflows. Institutional adoption of Bitcoin ETFs has mushroomed, with major Wall Street players like Goldman Sachs entering the Bitcoin investment scene.

Bitcoin's low this cycle has been $15,000, but in 2021, it broke past $65,000. On the whole, Bitcoin will likely scale a similar upward price trajectory this year, making potential price apexes of $250,000 reasonable.

How to calculate Bitcoin profits

Calculating Bitcoin profits is essential for investors to optimise their investment strategies and make informed financial decisions. Here is a step-by-step guide on how to calculate your Bitcoin profits:

Choose the Relevant Cryptocurrency

Select the type of cryptocurrency you are investing in or plan to invest in, such as Bitcoin (BTC) or Ethereum (ETH). This field is usually optional, and you can simply enter the buy and sell prices if you prefer.

Investment Amount

In the 'Investment' field, input the amount of money you have invested or plan to invest in the chosen cryptocurrency. For example, if you invest $500 in Bitcoin, enter $500. This step is crucial for calculating your potential profits accurately.

Buy and Sell Prices

Determine the fair market value of the cryptocurrency at the time of purchase ('Buy Price') and the price at which you plan to sell or dispose of it ('Sell Price'). For instance, if you bought Bitcoin when its price was $50,000 and plan to sell when it reaches $55,000, enter these values accordingly.

Investment and Exit Fees

Consider any relevant fees associated with acquiring and disposing of your cryptocurrency. Enter these fees in the 'Investment Fee' and 'Exit Fee' fields, respectively. These fees can include transaction costs or charges imposed by the exchange or broker. If you don't have this information, you can leave these fields blank.

Calculate Total Gain or Loss

Once you have entered all the necessary information, the calculator will determine your total gain or loss on the investment. It will also express the profit in terms of the percentage return on investment (ROI).

It is important to remember that cryptocurrency values fluctuate, and investing in them is speculative and risky. Therefore, it is advisable to consult with a qualified professional before making any investment decisions and to diversify your investments to manage risk effectively.

Taxes on Bitcoin profits

The IRS classifies Bitcoin as property, and transactions involving it are taxable by law. Capital gains taxes apply to sales of Bitcoin. If you sell Bitcoin for a profit, you're taxed on the difference between your purchase price and the proceeds of the sale. This also includes exchanging Bitcoin for another cryptocurrency, or using Bitcoin to pay for goods or services.

The tax you pay depends on two factors: how long you owned the Bitcoin before selling, and your total income for the year. If you owned Bitcoin for one year or less before selling, you’ll face higher tax rates of between 10% and 37%. If you owned Bitcoin for more than a year, your tax rates will be between 0% and 20%. The highest tax rates apply to those with the largest incomes.

The IRS has added a question to tax return forms asking about crypto activity. For the 2023 tax year, the question reads: “At any time during 2023, did you: (a) receive (as a reward, award, or payment for property or services); or (b) sell, exchange, or otherwise dispose of a digital asset (or a financial interest in a digital asset)?"

If you mined Bitcoin or acquired it as payment for goods or services, that value is taxable immediately, like earned income. You don't wait to sell, trade or use it before settling up with the IRS.

If you sold Bitcoin for less than you bought it for, the amount of the loss can offset the profit from other sales. You can declare these losses on your tax return and reduce your tax liability.

Cryptocurrency exchanges are required to file a 1099-K for clients with more than 200 transactions and more than $20,000 in trading during the year.

It's important to keep careful records of your crypto transactions. You'll need records of the fair market value of your Bitcoin when you mined or bought it, as well as records of its fair market value when you used or sold it.

Crypto Tax Software

Because of the complexity of crypto taxes, you may need special crypto tax software to keep track of your trades. If you only have a few dozen trades, you can record them by hand.

Bitcoin's value compared to gold

Bitcoin and gold are very different assets, each with its own unique characteristics, advantages, and disadvantages.

Gold has been a store of value for thousands of years, used by civilisations for currency, jewellery, and decorative ornaments. It is rare, durable, and malleable, and its value has persisted through human history. Gold is also in high demand across multiple industries, including space travel, electronics, and jewellery. Its practical applications give it intrinsic value, and its long history makes it a reliable investment.

Bitcoin, on the other hand, is a relatively new digital currency, created in 2008. It is a decentralised cryptocurrency, meaning it has no central bank and can be sent electronically from user to user. Bitcoin is "mined" virtually through solving complex computer encryptions, and its supply is limited to 21 million bitcoins. Bitcoin transactions are instant, irreversible, and transparent, and its supply level is fixed, eliminating inflationary pressures.

When comparing the two, gold has the advantage of being a well-established, trusted, and reliable store of value. It has a long history of being valued by human civilisations and has proven to be immune to technological disruption. Additionally, gold is not dependent on the internet or any other technology to retain its value, making it less vulnerable to heavy-handed regimes or internet shutdowns.

On the other hand, Bitcoin has built-in scarcity and usefulness that some argue surpasses that of gold. Bitcoin's network processing power and blockchain technology provide a public ledger that is easily used for accounting and prevents counterfeiting. Bitcoin also cannot be manipulated, as it is controlled by consensus and is not subject to the decisions of a small group of individuals.

In terms of investment, gold is considered a lower-risk option due to its long history and intrinsic value. Bitcoin, however, is subject to more volatility and uncertainty, making it a riskier investment. Its value is highly dependent on consumer preferences, technological advancements, and government regulations.

In conclusion, both gold and Bitcoin have their advantages and disadvantages as stores of value and investment options. Gold has a longer history and more intrinsic value, while Bitcoin offers improved functionality, transparency, and scarcity. The decision to invest in either gold or Bitcoin depends on the investor's risk profile and preferences.

Frequently asked questions