Smart Strategies For Bitcoin Investment: How Much To Invest?

Bitcoin is a decentralised digital currency that operates without the oversight of banks and governments. It is the first and largest cryptocurrency by market cap, and has seen meteoric growth in recent years. In May 2016, 1 Bitcoin was worth about $500; in January 2024, it was hovering around $40,000.

However, Bitcoin is a risky investment. It is highly volatile, and while it has the potential to be a lucrative investment, it is not recommended that a large percentage of your portfolio be allocated to this risky asset class. Most financial experts recommend limiting crypto exposure to less than 5% of your total portfolio.

If you are considering investing in Bitcoin, it is important to do your research and understand the risks.

How much to invest in Bitcoin at once vs. over time

Investing in Bitcoin can be a complicated process, and it's important to carefully assess the pros and cons of the relevant service. Here are some things to consider when deciding how much to invest in Bitcoin at once versus over time:

Investing in Bitcoin at Once

Investing a lump sum in Bitcoin can have advantages if the market is favourable. For example, if you had invested $1,000 in Bitcoin in July 2011, two years after it was created, it would have been worth $2,785,737.50 in July 2021, representing growth of 278,476.56%. However, this approach can also be risky due to the volatile nature of the cryptocurrency market. Bitcoin is known for its plunges as well as its rallies, and its value can plummet on several occasions. Therefore, investing a large sum of money in Bitcoin at once can be risky if you are not prepared to lose it.

Investing in Bitcoin Over Time

Dollar-cost averaging is a strategy that involves making small, recurring purchases of Bitcoin on a set schedule, such as weekly or monthly. This approach can help to reduce the impact of market volatility as you will buy more when prices drop and less when they rise. It also takes the pressure off trying to time the market perfectly. Additionally, by investing smaller amounts over time, you can get a better grasp of how the process works and build your investment gradually. However, this method may result in higher transaction fees overall.

How Much to Invest in Bitcoin

Most financial experts recommend limiting your crypto exposure to less than 5% of your total portfolio. Cryptocurrencies are considered high-risk assets, and allocating a small portion of your portfolio to them can help manage overall volatility and risk. If you are new to crypto investing, starting with 1% to 2% of your portfolio is a more conservative approach. It's important to only invest an amount of money that you are comfortable losing, as the cryptocurrency market can be extremely volatile.

Risks of investing in Bitcoin

Bitcoin is the most successful currency today, but with any new frontier, there are bound to be some obstacles. Here are some of the risks of investing in Bitcoin:

Volatile and Fluctuating Market

The price of bitcoin is constantly changing. With such an unpredictable market, there’s no telling if you will get a return on your investment. To avoid a massive loss, keep a vigilant eye on the market and make small investments.

Susceptibility to Cyberattacks

Bitcoin is a technology-based investment, which makes it susceptible to cyberattacks and hacking. There is no way to retrieve your lost or stolen bitcoins. Many reports suggest that many buyers lose their investments on exchanges and mining losses. Carefully research your cryptocurrency wallets to ensure you have the most reliable option.

Fraud

In addition to hacking, there is a fair amount of fraud in the bitcoin market. As bitcoin has risen in popularity, some exchanges have turned out to be fake. This lack of security creates a big risk for investors. While systems have been created to deal with these problems, security remains a significant issue.

Little or No Regulation

Currently, the bitcoin market operates with little to no major regulations. The government doesn’t have a clear stance on cryptocurrency as the market is too new. It is not taxed, which can make it enticing as an investment opportunity. However, a lack of taxation could lead to problems should bitcoin pose competition for government currency. There’s no telling what the state of the bitcoin market could be in a few years’ time.

Technology Reliance

Bitcoin is an online exchange that relies on technology. Without technology, cryptocurrency is worthless. Unlike other forms of currency or investment, there is no physical collateral to back it up. With a currency that is 100% technology-based, bitcoin owners are more vulnerable to cyberthreats, online fraud, and system shutdowns.

Block Withholding

New bitcoins are created by solving mathematical equations called “blocks”. A mining pool can use computational power to mine a block and hide it from honest miners instead of reporting the new block to the network. This allows a select few to reap the benefits, while others are left with nothing.

Legal and Tax Implications

The regulation of cryptocurrencies remains in an unsettled state. The wise cryptocurrency investor should consider reporting their holdings as foreign assets, although the requirements remain unclear. In the U.S., the IRS has defined cryptocurrencies as property rather than currencies, which means that investors are subject to capital gains tax laws. The lack of a centralized authority can be a legal and financial risk to cryptocurrency owners.

Best places to buy and store Bitcoin

Before investing in Bitcoin, it is important to understand the risks involved. Cryptocurrencies are highly volatile and present unique prospects and challenges not encountered in traditional markets. Extreme volatility, technical complexity, and regulatory uncertainty can overwhelm new investors.

The most important rule to follow when investing in crypto is to never invest more than you can afford to lose. It is recommended to limit your crypto exposure to less than 5% of your total portfolio.

Now, here are some of the best places to buy and store Bitcoin:

EToro:

EToro is a well-established and regulated platform with over 20 million users. It offers a wide range of deposit methods, low fees, and a selection of 27 coins available for purchase and trading. eToro also has social trading integration, allowing you to copy experienced traders' strategies. Additionally, cash holdings for US residents are FDIC-insured up to $250,000. However, eToro does charge withdrawal and inactivity fees, and accounts must be in USD, with conversions subject to fees.

Coinbase:

Coinbase is considered one of the best places to buy Bitcoin and is available in over 100 countries. It offers an easy-to-use interface, high security, and insurance on holdings, providing peace of mind. Coinbase supports more than 100 cryptocurrencies and regularly adds more. However, high off-platform transaction fees and limited features for non-US, UK, or EU residents are some drawbacks.

BitBuy:

BitBuy is a great option for Canadian residents, offering reasonable fees, a user-friendly platform, and high security. They store most funds in cold storage and have successfully passed regulatory and financial audits. However, BitBuy only accepts CAD as fiat currency and has a limited selection of nine cryptocurrencies.

Kraken:

Kraken is one of the most secure crypto exchanges globally and is the only crypto company with a US banking license. They offer a world-class exchange available in most countries, multiple trading interfaces, and "Earn & Staking" features that allow you to earn interest on your digital assets. Kraken has a great selection of tokens and markets and has degressive fee structures, meaning you pay less in fees as you trade more. However, US citizens cannot trade fiat/fiat pairs or use futures products due to regulatory restrictions.

Binance:

Binance is one of the biggest crypto exchanges globally and is an excellent option if you want to buy more cryptocurrencies beyond Bitcoin. It offers over 100 altcoins, low fees, and constant innovation. Basic accounts do not require ID verification, preserving anonymity. However, Binance has been criticized for its customer service, and some users may find the platform overwhelming for beginners.

When choosing a platform, consider factors such as regulatory compliance, security features, withdrawal limits, trading volume, transaction speed, insurance, reputation, and customer service. Additionally, some platforms may not be fully available in your country, so be sure to check their availability in your region.

Bitcoin as a long-term investment

Bitcoin is a highly volatile asset, and its value can fluctuate drastically in a single day. However, its long-term trend has been bullish, and it has become a good long-term investment option. Here are some things to consider when thinking about investing in Bitcoin for the long term:

Dollar-Cost Averaging

Dollar-cost averaging involves making small, recurring Bitcoin purchases on a set schedule, such as weekly or monthly. This strategy helps to reduce the impact of volatility by buying relatively more when prices drop and less when they rise. It also removes the psychology of trying to time the market.

Research and Fundamentals

It is essential to research and understand the fundamentals of Bitcoin and the cryptocurrency market. This includes assessing real-world adoption potential, reviewing technical specifications, studying the founders and developers, scanning community engagement, and evaluating competitors. It is generally safer to favour well-established cryptocurrencies like Bitcoin and avoid speculative meme coins or hype cycles.

Major Cryptocurrencies

Large, established cryptocurrencies like Bitcoin and Ethereum have several benefits, including first-mover and adoption advantages, large market capitalisation, and a series of financial products built on top of them. They have also weathered significant market cycles and downturns, demonstrating their resilience compared to newer or smaller coins.

Secure Storage

It is crucial to store your Bitcoin securely in a trusted hot wallet or a cold wallet. Hot wallets are typically cloud-based and offer faster transactions, while cold wallets are offline devices that provide extra security steps to keep your assets safe.

Portfolio Diversification

It is recommended to limit your exposure to high-risk assets like Bitcoin to less than 5% of your total portfolio. For new investors, starting with 1% to 2% is a more conservative introduction. Diversifying your portfolio across multiple asset classes and consulting fee-based financial advisors can help manage risk.

Regulatory Environment

The regulatory environment for Bitcoin and cryptocurrencies is constantly evolving. It is important to stay informed about relevant legal cases, regulatory developments, and legislative proposals, as these can significantly impact prices and adoption. Increased regulations can also improve the safety of Bitcoin investments.

Long-Term Outlook

Bitcoin's price volatility can be challenging to navigate, and it is difficult to time the market accurately. Maintaining a long-term outlook and avoiding short-term speculation can help manage risk. Bitcoin has matured and is now considered a significant long-term value proposition by many investors.

How to decide how much Bitcoin to buy

Bitcoin is a decentralised digital currency that operates without the oversight of banks and governments. It is the first-ever cryptocurrency, launched in 2009.

Bitcoin is a risky investment with high volatility and should be considered only if you have a high-risk tolerance, are in a strong financial position already, and can afford to lose some or all of your investment.

• Risk tolerance: Bitcoin is a risky and volatile investment. Consider your risk tolerance and financial situation before investing. Only invest what you can afford to lose.
• Diversification: Bitcoin should be part of a diversified portfolio. It is generally recommended that cryptocurrencies make up no more than 5% of your total portfolio.
• Investment goals: Think about your investment goals and strategy. Are you investing for the long term or looking for short-term gains?
• Financial situation: Assess your financial situation and how much you can afford to invest. Make sure you have enough emergency savings and don't take on debt to invest in Bitcoin.
• Dollar-cost averaging: Consider using dollar-cost averaging, which involves making small, regular purchases of Bitcoin on a set schedule. This can help reduce the impact of volatility.
• Expert recommendations: Some experts recommend investing no more than 10% of your portfolio in individual stocks or risky assets like Bitcoin.
• Minimum purchases: Many crypto exchanges have minimum purchases of $10 or less, so you can start small and get a grasp of how the process works.
• Transaction fees: Consider the transaction fees charged by different exchanges and platforms when buying Bitcoin.
• Storage: Decide how you will store your Bitcoin, such as in a hot wallet or cold wallet, and factor any associated costs into your decision.

Frequently asked questions