Strategizing Your Bitcoin Investment: A Guide To $100

Investing in Bitcoin is an enticing prospect for many, but it's important to understand the risks and potential gains before committing your money. A $100 investment in Bitcoin may not make you a millionaire, but it's a good starting point for those interested in digital currencies. The volatile nature of the Bitcoin market means that prices can fluctuate wildly, and there is always a risk of losing money. However, with its limited supply and increasing demand, Bitcoin has the potential for long-term gains. This article will explore the key considerations for anyone thinking of investing $100 in Bitcoin, including market volatility, investment strategies, and the potential for future growth.

Bitcoin's volatility and risk

Bitcoins Volatility and Risk

Bitcoin is a financial tool that carries risks, just like any other payment method or currency. However, the risks are slightly different from traditional currencies and payments. One of the main differences is that Bitcoin is highly volatile. Any local currency fluctuates on a daily basis, but Bitcoin's price is rather more volatile.

Sources of Volatility

Bitcoin's volatility is driven by speculation. The hype witnessed in December 2017 was fuelled by frenzied FOMO. When people heard they could make a lot of money on Bitcoin, it turned into a speculative asset. It ceased to be viable as a form of currency and became heavily subject to FUD.

Another source of volatility is the fact that Bitcoin is still a relatively new technology. Blockchain technology is still in its infancy and Bitcoin is still taking its first steps. It hasn't had the chance to overcome many of the factors that lead to its sudden devaluation or appreciation yet.

The lack of regulation is often cited as one of the key drivers of Bitcoin's volatility. However, the most significant decision so far has been that Bitcoin isn't a security. Instead, it is a form of payment or a store of value.

Managing Risk

Despite its volatility, there are ways to manage the risk associated with investing in Bitcoin.

Firstly, it is important to distinguish between uncertainty and volatility. Uncertainty, or "implied volatility", refers to the likelihood that an investment may change in value. Volatility, or "realized volatility", refers to the degree of change investors expect from this asset.

Once you have distinguished between uncertainty and volatility, disregard the uncertainty. Focus on the potential magnitude of any change rather than the risk that the investment will change.

Next, price volatility into your investments. Take a measure of volatility and quantify it. Put a number to how much you think Bitcoin will change. Do you think it will change by 15%, 40% or 75%?

Finally, invest according to your risk assessment. If you anticipate a 15% change in value, for example, then take that same amount of your capital and move it into a short position on the bitcoin futures market. You have now hedged your bets. Alternatively, assess your investment at a 15% total loss and purchase your bitcoin according to that valuation.

In conclusion, Bitcoin is a volatile investment, but that doesn't mean that it doesn't have anything going for it. It has been making waves in the financial world, and many investors feel it is a safer method of storing and transferring value compared to precious metals or traditional payment methods. With the upcoming halving event, the recent launch of Bitcoin ETFs, and its continued dominance in the cryptocurrency market, Bitcoin remains a noteworthy investment option in 2024.

Long-term investment strategies

Investing $100 in Bitcoin today is unlikely to make you a fortune, but it could still offer solid gains in the long run. Here are some long-term investment strategies to consider:

Buy-and-Hold Strategy

The most straightforward approach to crypto investing is to buy and hold. This strategy involves finding one or more cryptocurrencies that you like and holding onto them for the long term, even if they experience high volatility in the short term. Bitcoin (BTC) is often the first crypto that investors buy due to its strong performance over the past decade and its position as the largest cryptocurrency by market cap.

Cathie Wood of ARK Invest predicts that Bitcoin could soar to a price of $1 million by 2030, but cautions that investors need to be willing to hold onto their Bitcoin for at least five years to make substantial gains.

Dollar-Cost Averaging

Dollar-cost averaging is a strategy that involves committing to buying a set dollar amount of a particular cryptocurrency on a regular basis, regardless of market conditions. For example, you might decide to buy $100 worth of Bitcoin every month. This strategy can be particularly effective if you want to take the emotion out of investing, as it blocks out market volatility and avoids the stress of trying to time the volatile crypto market.

ETFs for Diversification

Exchange-traded funds (ETFs) can be used to diversify a long-term cryptocurrency portfolio. ETFs are particularly popular with investors who would prefer not to invest directly in the crypto market. The new spot Bitcoin ETFs, such as the iShares Bitcoin Trust (IBIT) and the Fidelity Wise Origin Bitcoin Fund (FBTC), allow investors to invest in Bitcoin in the same way they would invest in tech stocks.

Additionally, you can use more traditional ETFs to gain exposure to the crypto mining sector or blockchain technology companies. ETFs are a useful tool for diversification because they allow you to invest in a basket of stocks in a particular industry, rather than trying to pick individual winners.

Prioritize Liquidity

As a general rule, the more popular a cryptocurrency is, the more liquidity it has. The largest cryptos like Bitcoin and Ethereum (ETH) tend to have far more liquidity than smaller altcoins. Investing in liquid assets is important because it means that you can easily convert them into cash when needed.

Tax-Loss Harvesting

The crypto market has experienced several "crypto winters", or extended periods of dramatic price drops. One strategy to take advantage of these downturns is tax-loss harvesting. Selling a crypto asset at a loss triggers a taxable event and locks in capital losses that can be used to offset capital gains and reduce your overall tax burden.

Stick to Your Strategy

It's important to stay disciplined with whatever investment strategy you choose. Deviating from your strategy can undermine your original investment goals. If you're uncertain about how to choose the best crypto investing strategy, consider talking to a financial advisor or other financial professional.

Dollar-cost averaging

With DCA, you buy a fixed amount of BTC at regular intervals, no matter the price. This means that the same amount of money will buy more BTC when prices are low and less when prices are high, ultimately averaging out the cost per BTC. This approach helps to reduce the impact of short-term market volatility.

For example, let's say you want to invest $50,000 in Bitcoin, and the price of 1 Bitcoin is currently $50,000. If you invest the entire $50,000 now, you will get 1 Bitcoin at a cost basis of $50,000. However, if you use DCA and spread that $50,000 across five equal investments of $10,000 each, your average cost basis will be lower. If the price of Bitcoin fluctuates to $50,000, $45,000, $25,000, $25,000, and $55,000 for each of your five investments, your average cost basis will be $40,000, and you will end up with 1.4 Bitcoin.

DCA is a long-term investment strategy that takes the emotion out of investing. It helps investors stick to their investment plans, regardless of short-term market fluctuations. It is a straightforward and simple strategy that does not require extensive financial expertise. However, it may not yield the highest returns and can result in higher fees due to the smaller investment amounts.

Bitcoin's potential growth

Bitcoin's potential for growth is a hotly debated topic, with some analysts predicting a bright future and others foreseeing a collapse. Here are some perspectives on Bitcoin's potential growth:

Historical Performance

Bitcoin's performance has been impressive since its creation in 2009. It was worth almost nothing in its early days, but started to gain traction from 2013 to 2015. Bitcoin saw its first boom in 2017, with the price rising to more than $15,000. Subsequent booms occurred in 2019 and 2021, with BTC reaching new all-time highs. In 2021, Bitcoin hit an all-time high of $68,789.63.

Market Capitalization

Bitcoin is the biggest cryptocurrency on the market, with a market capitalization of over $1 trillion as of August 2024. This large market capitalization means that massive multiples are unlikely, and the days of a small investment turning into a fortune are probably over. However, Bitcoin's continued dominance in the cryptocurrency market and its robust and reliable nature as a digital currency suggest it will continue to play a significant role in the future of crypto.

Volatility

Bitcoin's price is extremely volatile, and this is something investors need to be aware of. Drops and gains of 10% to even 20% in a single day are not uncommon. This volatility is driven by various factors, including macroeconomic events, regulatory changes, and the actions of large investors. For example, the invasion of Ukraine by Russia and the collapse of several banks in the US led to spikes in Bitcoin's value in 2022 and 2023.

Bitcoin Halving

The Bitcoin halving event, which occurs roughly every four years, has historically been a positive sign for Bitcoin's price. The next halving is expected to occur in 2024, and if past trends are anything to go by, it could lead to a significant increase in Bitcoin's price.

Regulatory Environment

The regulatory environment surrounding cryptocurrency can also impact Bitcoin's price. Positive regulatory developments, such as the approval of Bitcoin ETFs, have boosted Bitcoin's price in the past. On the other hand, increasing scrutiny and negative regulatory changes can spook investors and lead to price declines.

Analyst Predictions

Analyst predictions for Bitcoin's future price vary widely. Some analysts predict a price of $100,000 or more by 2025, while others see Bitcoin reaching $1 million or more in the coming years. More conservative estimates place the price at around $50,000 in the next few years. However, it's important to note that these are just predictions, and the actual performance may differ significantly.

In summary, Bitcoin has the potential for substantial growth, but it is also subject to high levels of risk and volatility. Investors should carefully consider their financial situation and risk tolerance before investing in Bitcoin or any other cryptocurrency.

Bitcoin's value as a store of value

Proponents of Bitcoin as a store of value highlight its durability, portability, fungibility, divisibility, scarcity, and verifiability. As a digital asset, Bitcoin is not subject to physical wear and tear, ensuring its longevity as long as the supporting network remains operational. It is easily portable, as bitcoins are stored and transferred digitally across the globe, providing convenience and cost savings compared to physical assets like gold. Each bitcoin is interchangeable and divisible up to eight decimal places, known as a satoshi. The supply of Bitcoin is capped at 21 million coins, creating scarcity. Transactions are recorded on a public blockchain, making them transparent and verifiable, with Bitcoin's decentralised nature adding an extra layer of security.

Bitcoin's global accessibility and decentralised nature have contributed to its appeal as a store of value, particularly in regions with unstable fiat currencies or restrictions on foreign currency investments. Its adoption as legal tender in some countries and growing acceptance among businesses worldwide further enhance its potential as a medium of exchange. Additionally, Bitcoin's liquidity and utility have improved significantly in recent years, with global crypto ownership reaching 580 million by the end of 2023. These factors collectively contribute to Bitcoin's potential as a store of value.

However, critics argue that Bitcoin's high volatility undermines its reliability as a store of value. Its price has been subject to significant fluctuations, with drops of over 50% in 2014 and 2018 and a 75% loss from its peak in November 2021 to November 2022. This volatility is often attributed to the speculative nature of cryptocurrency investments, which are influenced by market sentiment and external factors such as macroeconomic events and regulatory changes. The lack of widespread acceptance as a medium of exchange and the risks associated with its irreversible transactions are also cited as challenges.

While Bitcoin has demonstrated impressive growth over the last decade, with an annualised return of 230%, it is important to recognise that past performance does not guarantee future results. The days of small investments in Bitcoin leading to substantial fortunes may be coming to an end as its market capitalisation increases. Nevertheless, Bitcoin's potential growth, driven by factors like halving events and the launch of Bitcoin ETFs, makes it an investment option worth considering, even with a small amount like $100.

Frequently asked questions