Smart Bitcoin Investments: Making Money With Crypto

Bitcoin is a highly volatile and risky investment. It is important to understand the risks and do your research before investing in Bitcoin. If you are investing in Bitcoin, it is recommended to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure. As a rule of thumb, do not invest more than 10% of your portfolio in risky assets like Bitcoin.

There are several ways to invest in Bitcoin, including Bitcoin wallets, centralized cryptocurrency exchanges, traditional brokers, money transfer apps, Bitcoin ATMs, and Bitcoin ETFs.

When deciding how much to invest in Bitcoin, consider your risk tolerance, profit tolerance, and the current market conditions. It is generally recommended to invest somewhere between 5% to 30% of your investment capital in Bitcoin, with 5% being very safe and 30% being pretty risky.

It is also important to consider the fees associated with investing in Bitcoin, such as transaction fees, deposit and withdrawal fees, and taxes.

Remember, the value of Bitcoin can go up or down, and there is a possibility that it could go to zero. So, make sure you are comfortable with the risks before investing.

How volatile is Bitcoin?

Bitcoin is considered a highly volatile asset. Its price can rise or fall by thousands of dollars within a single day. For example, in November 2021, Bitcoin hit an all-time high of just under $69,000, but as of August 2024, its price is around $24,000. This represents a significant loss for anyone who bought at the peak. However, those who bought in January 2021 and sold at the peak would have made a 115% profit.

Volatility is a measure of how much the price of a financial asset varies over time. It is important because it indicates the level of risk associated with holding an asset. The more volatile an asset is, the more likely it is that its price will change substantially on a given day. This can cut both ways, leading to large gains or large losses.

There are several reasons for Bitcoin's volatility. Firstly, like most commodities, its price is heavily influenced by supply and demand. Bitcoin's supply is limited to 21 million coins by design, and as the supply gets closer to this limit, prices are likely to climb. Additionally, the actions of ""Bitcoin whales"—investors with large enough holdings to influence market value—can cause significant price movements. If these investors were to suddenly sell their holdings, it could trigger a panic that would cause prices to plummet.

Media coverage and speculation also play a role in Bitcoin's volatility. News and media outlets often present unverified information and predictions from "experts", which can create investor concerns and lead to price fluctuations. For example, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in October 2021, Bitcoin's price skyrocketed to almost $69,000. However, when investors realised the ETF was linked to Bitcoin through futures contracts, prices dropped back down to around $50,000.

Finally, Bitcoin is still a relatively new asset, and it is still in the price discovery phase. This means that its prices will continue to fluctuate as investors, users, and governments work through the initial growing pains and concerns.

How much should you invest?

Bitcoin is a risky investment with high volatility, so it is generally advised to invest only what you can afford to lose.

It is recommended to invest somewhere between 5% and 30% of your investment capital in Bitcoin. 5% is considered very safe, while 30% is considered pretty risky.

If you are investing for the first time, it is advisable to start with a small amount, such as $10, to get a better understanding of what it is like to be a cryptocurrency investor.

You can also divide your budget and invest it over time (for example, over 1, 3, or 12 months) to prevent costly mistakes and save money. This strategy also allows you to change your mind in the future and adjust your investment amount as needed.

Additionally, it is important to consider your risk tolerance and profit tolerance. The crypto market is very volatile, so you should only invest an amount that you feel comfortable losing entirely. If losing your full investment would affect your judgment or cause severe discomfort, you should lower the amount you plan to invest.

It is also crucial to maintain a diversified portfolio. As a rule of thumb, don't invest more than 10% of your portfolio in risky assets like Bitcoin. Diversification can help reduce the importance of luck and lower your overall risk exposure.

Before investing in Bitcoin or any other cryptocurrency, ask yourself the following questions:

• Why didn't I buy Bitcoin earlier when it was cheaper?
• Why am I buying it—to hold or to make a quick profit?
• If it's the latter, why do I think I will be able to sell it later at a higher price?
• Do I understand what Bitcoin and the crypto market are?
• Am I OK with the risk? Can I afford to lose all the money that I'm going to invest?

Remember, investing in Bitcoin should be done cautiously and with a clear understanding of the risks involved.

What are the risks?

Investing in Bitcoin comes with a number of risks that you should be aware of.

Firstly, the Bitcoin market is extremely volatile. The price of Bitcoin is constantly changing and can be unpredictable, making it difficult to determine if you will make a return on your investment. For example, in 2022, the price of Bitcoin fell more than 75% from its all-time high. It is important to keep a close eye on the market and make small investments to mitigate the risk of significant losses.

Secondly, Bitcoin and other cryptocurrencies are technology-dependent and therefore vulnerable to cyber-attacks and online fraud. Hacking is a serious risk, as there is currently no way to retrieve lost or stolen Bitcoins. Additionally, the lack of central authority backing Bitcoin means that there may be legal complications and a lack of legal recourse if issues arise with transactions or ownership.

Thirdly, there is little to no regulation in the Bitcoin market, and it is not widely accepted as a currency. The government's stance on cryptocurrency is unclear, and the lack of taxation could lead to problems if Bitcoin is seen as competition for government currency. As a result, the future of the Bitcoin market is uncertain, and it may become useless if the bubble bursts.

Furthermore, Bitcoin transactions are irreversible. People have lost access to their Bitcoin wallets or had their credentials stolen, resulting in significant financial losses.

Lastly, there is a risk of fraud and money laundering associated with Bitcoin and cryptocurrency exchanges. Some exchanges have been flagged as fake, and there is a lack of security and consumer protection in this emerging market.

In conclusion, while investing in Bitcoin may offer the potential for high returns, it is important to carefully consider and mitigate these risks before making any investment decisions.

How do you buy Bitcoin?

How to Buy Bitcoin

There are several ways to buy Bitcoin, each with its own pros and cons. Here are some of the most common methods:

• Cryptocurrency Exchanges: You can purchase bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a variety of cryptocurrencies and carry different fees and consumer protections, so it's important to do your research before choosing one.
• Traditional Stockbrokers: A few traditional brokers, such as Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. These platforms may have geographic restrictions, so make sure to check their availability in your region.
• Bitcoin ATMs: These work like normal ATMs, but they allow you to buy and sell Bitcoin. You can often find them in locations where regular ATMs are placed, such as convenience stores. Be sure to check the fees and have a plan for where to send your Bitcoin before carrying out a transaction.
• Bitcoin Exchange-Traded Funds (ETFs): On January 10, 2024, the SEC approved spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This makes it easier for traditional investors to gain access to Bitcoin through their brokerage accounts.
• Peer-to-Peer Money Transfer Apps: Cash transfer services like PayPal, Venmo, or Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps, providing a convenient option for those already familiar with these interfaces.
• In-App Purchases: Some crypto apps, such as games, crypto wallets, or other online services that use blockchain technology, allow users to buy and sell Bitcoin directly within their apps. These purchases may be made through third-party services, which can be more expensive but offer quick and relatively simple transactions.

Once you've purchased Bitcoin, you'll need to store it in a digital wallet. There are two main types: hot wallets and cold wallets. Hot wallets are online wallets provided by exchanges or third-party providers, while cold wallets are offline hardware devices that offer more security but require technical knowledge to set up.

How do you store Bitcoin?

There are several ways to store Bitcoin, each with its own pros and cons. Here are some of the most common methods:

Hardware Wallets

Hardware wallets are physical devices, similar to a USB drive, that store your private keys offline. They are considered one of the safest options for holding Bitcoin because they are not accessible via the internet. When you need to make a transaction, you can connect the hardware wallet to your device. Examples of commercial hardware wallets include the Ledger Nano X and Trezor Model T.

Pros:

High degree of security

Cons:

• Can be confusing for less technical users
• May cost around $100 on average

Mobile Wallets

Mobile wallets are applications that you can download on your smartphone, allowing you to store and manage your Bitcoin on the go. These are usually self-custodial, meaning you have full ownership of your private keys.

Pros:

• Quick, convenient, and easy to use
• Good for transactions and sending/receiving Bitcoin

Cons:

• Less secure than cold wallets
• Not suitable for storing large amounts of Bitcoin

Paper Wallets

Paper wallets are one of the earliest forms of cold storage. They involve printing out your private and public keys, usually in the form of QR codes, and storing them in a safe place. While this method is affordable and secure, there is a high risk of user error or wallet damage.

Pros:

Affordable cold storage option

Cons:

• High risk of user error or wallet damage
• Inconvenient and time-consuming

Custodial Wallets

Custodial wallets are managed by a third party, such as a cryptocurrency exchange like Coinbase. The third party stores your private keys for you and may provide insurance for your holdings. While this option is convenient, it comes with the risk of hacks and theft since your keys are stored online.

Pros:

• Convenient
• Wide array of assets supported

Cons:

• Lack of total control over private keys
• Risk of hacks and theft

Hot Wallets

Hot wallets are software applications that store your Bitcoin online. They are typically available as desktop or mobile apps, or web-based wallets. Hot wallets are convenient for making transactions but carry a higher risk of being hacked since they are always connected to the internet.

Pros:

• Easy to use
• Almost always free
• Provide quick access to Bitcoin

Cons:

• Risk of being hacked
• Inconvenience and risk of losing the wallet

In conclusion, the best way to store Bitcoin depends on your individual needs and preferences. For maximum security, a combination of hot and cold wallets can be used, with the bulk of your Bitcoin stored in a cold wallet and a small amount kept in a hot wallet for easy access and transactions.

Frequently asked questions