The Future Of Bitcoin: Predicting Your Investment's Worth

Bitcoin is a highly volatile and risky investment. Its price can go up or down a lot in a short space of time. For example, in 2022, it fell more than 75% from its all-time high. However, it has also seen exponential growth and has historically offered the potential for high returns.

If you're thinking about investing in Bitcoin, you'll want to know how much your investment could be worth.

Bitcoin's volatile nature

Bitcoin is well-known for its volatile nature, with its price fluctuating significantly over the years. In this article, we will explore the reasons behind Bitcoin's volatility and provide insights into the potential risks and opportunities for investors.

Factors Contributing to Bitcoin's Volatility

Market Factors

Bitcoin's volatility is partly due to its relatively young age as a financial asset. Unlike established commodities or currencies, Bitcoin lacks historical data and long-term stability, resulting in more unpredictable price movements. The market is still in the price discovery phase, continuously assessing Bitcoin's true value, which leads to large price swings.

Supply and Demand

Bitcoin's fixed supply cap of 21 million coins introduces a scarcity factor. As the available coins in circulation decrease, the demand for Bitcoin increases, causing price fluctuations. Additionally, the actions of large-scale investors or "whales" can significantly impact supply and demand dynamics, with their large buy or sell orders leading to sharp price changes.

Investor Behaviour

The concentration of Bitcoin holdings among a small group of large investors means their trading decisions can substantially impact the market. For example, if these "whales" were to suddenly divest a significant portion of their holdings, it would increase the available supply, leading to a sharp decrease in Bitcoin's price. Conversely, their decision to hold or accumulate more Bitcoin can limit supply and contribute to price surges.

Media Coverage and Regulatory News

Media attention and regulatory announcements also play a crucial role in influencing Bitcoin's price. Positive media coverage can increase investor interest and demand, while negative news or rumours of stringent regulations can trigger fear-induced sell-offs.

Impact of Market Sentiment

Market sentiment, shaped by news coverage, investor commentary, and economic events, significantly affects Bitcoin's volatility. Announcements from influential entities within the cryptocurrency space can lead to sudden surges or drops in Bitcoin's price as investors react to perceived opportunities or threats. Additionally, broader economic indicators, such as inflation rates or interest rate changes, can affect investor confidence in Bitcoin as a store of value.

Managing Volatility

Understanding the Risks

Diversification and Risk Management

To mitigate risk, investors should maintain a diversified portfolio that includes various types of investments. As a general guideline, it is recommended to not invest more than 10% of your portfolio in risky assets like Bitcoin. Additionally, investors should stay vigilant and utilize tools such as stop-loss and take-profit orders to manage their risk.

How to calculate Bitcoin profit

Calculating your Bitcoin profit depends on the type of investment you've made. If you've invested in Bitcoin futures, the profit or loss is calculated as follows:

For inverse futures:

Profit/Loss in Base Currency = (1 / Futures Entry Price - 1 / Futures Exit Price) * Position Size

For vanilla futures:

Profit/Loss in Base Currency = (Futures Exit Price - Futures Entry Price) * Position Size

If you've simply bought and held Bitcoin, or bought and sold it, the calculation is more straightforward:

• Take the amount of money you spent on Bitcoin.
• Check how much 1 BTC was worth at the time of your purchase.
• Check the current value of 1 BTC.
• Calculate the difference between the old value and the current value as a percentage.
• Your profit/loss as a percentage is the same as the difference in values.

You can also calculate your profit or loss by using an online crypto profit calculator. These tools will ask for the amount of Bitcoin you invested, the price you paid, the price you sold it for, and any fees you incurred. They will then calculate your total gain or loss for you.

How to invest in Bitcoin

Investing in Bitcoin can be a risky endeavour, so it's important to do your research and understand the process before you begin. Here's a step-by-step guide on how to invest in Bitcoin:

Do Your Research

Before investing in Bitcoin, it's crucial to understand the risks involved. The price of Bitcoin is highly volatile, and it has experienced significant fluctuations over the years. There is also the possibility of regulatory changes that could affect the value of your investment. Additionally, investing in Bitcoin does not provide the same regulatory protections as investing in registered securities. Make sure you carefully research any digital coin before purchasing it and stay updated with new developments in the cryptocurrency space.

Choose an Investment Method

There are several ways to invest in Bitcoin:

• Buy Bitcoin Directly: You can purchase Bitcoin directly from cryptocurrency exchanges or through certain broker-dealers. Well-known exchanges include Gemini, Kraken, Coinbase, and Crypto.com.
• Invest in Crypto Companies: You can invest in companies that have a focus on cryptocurrency, such as cryptocurrency mining companies, mining hardware makers, or companies that support cryptocurrency, like Robinhood and PayPal.
• Invest in Crypto Funds: You can choose to invest in cryptocurrency-focused funds, such as exchange-traded funds (ETFs) or cryptocurrency investment trusts. The first Bitcoin Spot ETFs were approved in January 2024.
• Invest in a Crypto IRA: Consider a cryptocurrency Roth IRA if you want to combine your Bitcoin investment with the tax advantages of an individual retirement account.

Open an Account

To buy Bitcoin, you'll need to open an account with a cryptocurrency exchange or broker-dealer. Provide your personal information and verify your identity to complete the registration process.

Fund Your Account

Before purchasing Bitcoin, you'll need to fund your account with fiat money, such as U.S. dollars. You can use various payment methods, including bank transfers, credit cards, or debit cards. However, it's generally not recommended to take on credit card debt to invest in Bitcoin.

Place a Buy Order

Once your account is funded, decide on the amount of Bitcoin you want to purchase and place a buy order through the exchange. Follow the steps provided by the exchange to complete the transaction.

Store Your Bitcoin in a Wallet

After purchasing Bitcoin, you'll need to store it in a digital wallet. This can be a hot wallet, which is hosted by an exchange or an independent wallet provider, or a cold wallet, which is a small, encrypted portable device that allows you to carry your Bitcoin offline. Always use strong passwords and two-factor authentication for added security.

Consider Your Investment Strategy

When investing in Bitcoin, it's important to have a plan. Decide on the amount of your portfolio you want to allocate to Bitcoin and other digital assets. Remember, as a general rule of thumb, it's recommended to invest no more than 10% of your portfolio in risky assets like Bitcoin. Additionally, consider whether you want to be a long-term investor or a day trader. Day trading is a risky strategy that involves frequent buying and selling, so it's not suitable for beginners.

Risks of owning Bitcoin

Owning Bitcoin and other cryptocurrencies comes with a substantial degree of risk. Here are some of the risks associated with investing in Bitcoin:

Volatility and Fluctuations

The price of Bitcoin is constantly changing, and the market is unpredictable. This volatility means there is no guarantee of a return on investment. Bitcoin prices tend to follow stock market trends but are prone to more extreme price movements.

Security and Fraud Risks

Bitcoin is susceptible to hacking, malware, and operational glitches. The lack of security creates a significant risk for investors, and there is no way to retrieve lost or stolen Bitcoins. Fraud is also prevalent in the Bitcoin market, with fake exchanges and fraudulent transactions duping investors out of their Bitcoins.

Regulatory Risk

Bitcoin currently operates without significant regulations, and governments and central banks do not have a clear stance on it. This lack of regulation could change in the future, impacting the longevity and liquidity of Bitcoin.

Insurance Risk

Bitcoin is not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). While some exchanges provide insurance through third parties, it often only covers specific scenarios like system failures or cybersecurity breaches.

Technology Reliance

As a digital currency, Bitcoin is entirely reliant on technology. Without the technology, Bitcoin is worthless. This reliance on technology makes Bitcoin owners more vulnerable to cyber threats and online fraud.

Access and Security Issues

Losing access to your Bitcoin is a significant risk. Forgetting or misplacing your private keys or account passwords can result in losing access to your Bitcoin. Additionally, there is a risk of someone else gaining access to your private keys and stealing your Bitcoin.

Technical Complexity and Human Error

The process of buying, selling, and storing Bitcoin can be technologically complex. Human error, such as inputting the wrong receiving address for a transaction, can also lead to irreversible losses.

Centralization and Governance Risk

While Bitcoin and its underlying blockchain technology are decentralized, the business entities issuing them may not be. This centralization introduces the risk of mismanagement and divergence of interests between the project and its contributors.

Environmental and Political Risk

The energy-intensive process of Bitcoin mining has raised environmental concerns, and its potential to destabilize local currencies has led to pushback from governments. China, for example, has taken aggressive steps to shut down mining and transactions.

Uncertain Future

The future of Bitcoin is uncertain. Central banks are exploring the possibility of establishing their own digital currencies, which could affect or even supplant the cryptocurrency market.

Expensive and Complex

The fees associated with buying and selling Bitcoin can be high, and the technological complexity of the process can be a barrier to entry for many.

In summary, investing in Bitcoin carries significant risks, including volatility, security threats, regulatory uncertainty, access and security issues, and high fees. It is crucial for investors to carefully consider these risks and stay informed about the latest developments in the cryptocurrency market.

Bitcoin's future

Bitcoin's performance in 2024 is expected to depend on various factors, including institutional adoption, regulatory changes, macroeconomic trends, and interest rates. If bitcoin continues to gain institutional adoption and favourable regulatory changes, it could boost its price. However, if governments and central banks become more hostile towards bitcoin and cryptocurrency, it may negatively impact its price.

The halving event, which happens roughly every four years and reduces the rate at which new coins are created, is another factor that may influence bitcoin's future price. Some investors view this event as a significant price catalyst, while others believe its impact may be overstated.

Additionally, bitcoin's future may be affected by environmental concerns and its energy consumption. If bitcoin continues to face criticism and scrutiny over its energy usage, it could lead to increased regulation or even attempts to ban certain validation systems.

Despite the risks and uncertainties, some remain bullish on bitcoin's future, citing the macroeconomic backdrop, the development of the Lightning Network, and the approval of spot bitcoin ETFs as positive factors.

In summary, bitcoin's future is highly speculative, and its price could experience significant volatility. Investors should carefully consider their risk tolerance and conduct thorough research before investing in bitcoin or any other cryptocurrency.

Frequently asked questions