Small Steps, Big Rewards: Bitcoin Investing On A Budget

Investing a small amount of money, such as $5, in Bitcoin can be a great way to get started in the world of cryptocurrencies. While the returns may not be substantial, the experience gained and the potential for future growth make it an attractive option for those looking to dip their toes into this volatile market. It's a way to learn about market dynamics and gain invaluable knowledge without risking a large sum of money. However, it's important to remember that transaction fees and market volatility can quickly eat into your initial investment, so it's recommended to do your research, stay updated with market trends, and approach Bitcoin with caution as part of a diversified investment portfolio.

Bitcoin divisibility

Bitcoin can be divided into units as small as 0.00000001 BTC, which is known as a "Satoshi", named after its creator, Satoshi Nakamoto. Each bitcoin can be broken down into one hundred million (100,000,000) satoshis. This makes bitcoin perfect for micropayments.

Another common unit is the bit or microbitcoin (μBTC), which corresponds to one-millionth (0.000 001) of a bitcoin. Bits, like most fiat currencies, have a two-decimal precision. Due to the network's limited accuracy, you can send 1.23 bits but not 1.234 bits.

Bitcoin's divisibility is one of its key characteristics, allowing it to absorb huge amounts of capital through transactions across digital borders. This divisibility could be a factor contributing to its adoption, as it will facilitate a wide range of payments that would not be possible with traditional currencies and payment methods. For example, whilst the U.S. dollar can be divided into 1/100 of one USD, one Satoshi is 1/100,000,000 of one BTC. This extreme divisibility makes bitcoin's scarcity possible. If bitcoin continues to gain in price over time, users with tiny fractions of a single bitcoin can still take part in everyday transactions.

The divisibility of bitcoin also means that there is enough room to split it up and get it into the hands of those who need it the most.

Risk management

Market Volatility and Sentiment Risks

The cryptocurrency market, including Bitcoin, is known for its extreme volatility. Prices can fluctuate dramatically within minutes, leading to substantial gains or losses. Market sentiment can also shift quickly, impacting prices. It is important to stay informed about market movements and be prepared for potential losses if you don't closely follow the market.

Storage and Security Risks

Storing your Bitcoin securely is essential. "Not your keys, not your coins" is a common saying in the crypto community. This refers to the risk of storing your assets on a centralized exchange, which can lead to risks such as site crashes, hacks, or even bankruptcy. To mitigate these risks, consider transferring your Bitcoin to a cold storage device, such as a hardware wallet (e.g., Ledger or Trezor). Cold storage devices are not connected to the internet, reducing the risk of hacking or cybercrime.

Regulatory and Legal Risks

The crypto market is less regulated than traditional financial markets, leaving traders vulnerable to fraud and scams. The lack of regulations also means that cryptocurrencies may not offer the same level of investor protection or insurance as other investments. Additionally, changing regulations and taxation policies across different countries can impact the legality and taxation of your crypto holdings.

Liquidity and Market Manipulation Risks

Some cryptocurrencies have low liquidity, making them vulnerable to market manipulation by large traders. Lower liquidity can also affect your entry and exit prices, potentially impacting your profits or losses. It is important to pay attention to the crypto volume and liquidity before investing and be aware of the potential for market manipulation.

Emotional Decision-Making Risks

Emotional trading, such as panic selling during market downturns or FOMO (Fear of Missing Out) buying, can lead to quick financial losses. It is important to have a well-defined trading strategy and stick to it, avoiding impulsive decisions driven by fear or greed.

Knowledge and Understanding Risks

Insufficient knowledge of blockchain technology, cryptocurrencies, and trading strategies can lead to poor investment decisions. It is crucial to educate yourself about the fundamentals of crypto, blockchain technology, and trading techniques before investing.

Market volatility

Bitcoin is considered a volatile financial asset. Volatility is a measure of how much the price of an asset varies over time. The more volatile an asset, the more likely its value will change substantially on any given day. Volatility means that an asset is risky to hold.

There are several reasons why Bitcoin is so volatile. Firstly, like most commodities, Bitcoin's price depends heavily on supply and demand. Bitcoin's market value is affected by how many coins are in circulation and how much people are willing to pay. Bitcoin is limited to 21 million coins by design, and as the circulating supply gets closer to this limit, prices are likely to climb.

Secondly, as the most popular cryptocurrency, Bitcoin demand increases because supply is becoming more limited. Wealthier investors hold their Bitcoins long-term, preventing those with fewer assets from gaining exposure. According to the National Bureau of Economic Research, one-third of all Bitcoins were held by the top 10,000 investors at the end of 2020.

Thirdly, media outlets, influencers, opinionated industry moguls, and well-known cryptocurrency fans create investor concerns, leading to price fluctuations. For example, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in late October 2021, Bitcoin's price skyrocketed over the next few weeks. However, when investors realized the ETF was linked to Bitcoin through futures contracts, prices dropped back down.

Finally, government regulations and views on cryptocurrency can also affect Bitcoin's price. For instance, China's government and central bank announced in 2021 that all cryptocurrency transactions were illegal, causing a massive shutdown of cryptocurrency mining farms in the country and a drop in Bitcoin's price.

Other factors that influence Bitcoin's price volatility include investor and user sentiments, media hype, and regulatory actions. It's important to understand these factors before deciding whether to invest in Bitcoin, especially with its highly volatile nature, where there is no guarantee of returns and investors are just as likely to lose everything as they are to make gains.

Long-term investment strategy

Buy-and-Hold Strategy

The simplest long-term investment strategy for Bitcoin is the buy-and-hold approach. This strategy involves purchasing Bitcoin and holding onto it for an extended period, typically several years. This method is based on the expectation that Bitcoin's value will appreciate significantly over time, despite short-term volatility.

Cathie Wood of ARK Invest suggests that holding Bitcoin for at least five years increases the likelihood of substantial gains. With predictions of Bitcoin's price soaring in the future, this long-term horizon is crucial for potential crypto investors.

Dollar-Cost Averaging

Dollar-cost averaging is a strategy that involves making regular, smaller investments in Bitcoin over time, regardless of market conditions. This approach helps to mitigate the impact of volatility and removes the emotion from investing. Instead of frequent portfolio checks, you can focus on long-term growth.

For example, you could decide to invest a fixed amount, such as $5 or $100, in Bitcoin at regular intervals, such as monthly or quarterly. This strategy allows you to accumulate Bitcoin over time and benefit from its potential long-term upside.

Exchange-Traded Funds (ETFs) for Diversification

ETFs offer a way to gain exposure to Bitcoin and the crypto market without directly purchasing the digital currency. Bitcoin ETFs, such as the iShares Bitcoin Trust or the Fidelity Wise Origin Bitcoin Fund, allow you to invest in Bitcoin similarly to investing in traditional stocks.

By investing in Bitcoin ETFs, you can diversify your portfolio and reduce the risk associated with investing in a single cryptocurrency. Additionally, ETFs provide exposure to the broader crypto market and the potential benefits of its long-term growth.

Core Cryptocurrencies

When building a long-term crypto portfolio, it is essential to consider core cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH). These cryptocurrencies are the pillars of the industry and have a strong market presence and influence.

Bitcoin, with its vast market cap and historical performance, is often the first crypto investment choice for many. Ethereum, on the other hand, serves as the foundation for numerous decentralized applications and exchanges, making it indispensable for long-term crypto investors.

Portfolio Diversification

Diversification is a key aspect of long-term investment strategies. Instead of putting all your eggs in one basket, it is wise to spread your investments across multiple crypto assets. This approach increases the chances of overall portfolio growth as some assets may outperform others at different times.

By investing in several carefully selected cryptocurrencies, you can balance your portfolio and reduce the risk associated with any single asset. This strategy is particularly relevant in the volatile crypto market, where prices can fluctuate significantly.

Long-Term Focus

Lastly, it is crucial to maintain a long-term perspective when investing in Bitcoin and other cryptocurrencies. The crypto market is highly volatile, and short-term price movements can be distracting. By focusing on the long term, you can avoid the temptation of chasing short-term gains and instead build a robust, diversified portfolio that can weather market fluctuations.

Diversifying your portfolio

There are several ways to diversify your crypto portfolio:

• Diversify by coins and tokens: There are many types of crypto coins to choose from, including payment tokens (like Bitcoin and Ethereum), security tokens, utility tokens, governance tokens, basic attention tokens, gaming tokens, and non-fungible tokens (NFTs).
• Diversify by industry focus: Blockchain technology is being applied to a range of sectors, including healthcare, supply chain, transportation, entertainment, and climate change. You can invest in cryptocurrencies that focus on these different industries.
• Diversify by asset class: Crypto investors can diversify across asset classes, including stocks, bonds, and real estate. For example, you can buy stocks of companies focused on the crypto sector or with large cryptocurrency holdings. You can also invest in blockchain-based bonds or real estate tokens.
• Diversify by investment vehicle: You can diversify your crypto holdings across various investment vehicles, such as digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralized financial products.
• Diversify across cryptocurrencies: You can add new tokens to your existing holdings, such as large-cap or small-cap cryptocurrencies, stablecoins, utility tokens, governance tokens, and more.
• Purchase tokenized assets: Tokenized assets represent partial or full ownership of a digital or physical asset. These can include real estate, art, music, collectibles, and precious metals.
• Crypto derivatives (for advanced traders): The cryptocurrency sector has developed a range of derivative financial instruments, such as futures contracts, options contracts, and perpetual swaps.

Frequently asked questions