The Future Of Bitcoin: Invest Or Avoid?

Bitcoin is a type of cryptocurrency that utilises peer-to-peer transactions, mining, and other technological tools to create a modern-day asset. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto and has since become the most well-known and largest cryptocurrency in the world. Bitcoin can be used by speculators, investors, and consumers for purchases or value exchange. However, there are many risks involved with investing in and using bitcoins, including volatility, fraud, and theft. In this article, we will explore the topic of bitcoin investing, including the benefits and risks, and provide an overview of how to invest in bitcoin.

Bitcoin's investment risks

Bitcoin is a type of digital cryptocurrency that uses peer-to-peer transactions, mining, and other technological processes as a modern-day asset. It is a decentralised peer-to-peer digital currency that is powered by its users with no central authority or middlemen.

While Bitcoin has soared in popularity and appears to be going mainstream, there are several risks associated with investing in Bitcoin. Here are some of the risks involved with investing in Bitcoin:

Market Risk

Bitcoin prices can be extremely volatile. In 2022, the price of Bitcoin dropped from almost $48,000 to lows of around $16,000. In the 12-month period leading up to June 2023, Bitcoin saw declines as steep as 40% and gains as high as 15%. This kind of market volatility can make crypto feel unsafe to new investors.

Regulatory Risk

The continuous battle between cryptocurrency-related projects and regulators makes longevity and liquidity an unknown. As of May 2024, Bitcoin is not considered a security by the authorities, but that stance could change in the future. In 2021, China, the world's second-biggest economy, effectively made it illegal for citizens to mine or hold any cryptocurrency. If other countries follow suit, Bitcoin holders could be in hot water.

Security Risk

Most individuals who own and use Bitcoin have not acquired their tokens through mining operations. Rather, they buy and sell Bitcoin and other digital currencies on popular cryptocurrency exchanges. These exchanges are entirely digital and are at risk from hackers, malware, and operational glitches.

Insurance Risk

Bitcoin and other cryptocurrencies are not insured by the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC). However, some exchanges provide insurance through third parties. For instance, Gemini and Coinbase offer cryptocurrency insurance, but only for failures in their systems or cybersecurity breaches.

Fraud Risk

Even with the security measures inherent within a blockchain, there are still opportunities for fraudulent activity. Crypto scams have become all too familiar, with a Federal Trade Commission report from June 2022 finding that more than 46,000 Americans reported losing over $1 billion to cryptocurrency fraud in the period from January 2021 to March 2022.

Access Risk

Owners can lose access to any cryptocurrency if they lose their account passwords. As there is no middleman to broker your asset, it is up to the investor to secure and manage access to their cryptocurrency.

Environmental Risk

The environmental impact of mining Bitcoin has been questioned by many countries. A large amount of Bitcoin mining is based in China, and the Chinese government has shut mining and transactions down.

Bitcoin's investment advantages

Bitcoin Investment Advantages

Bitcoin is a decentralised, peer-to-peer cryptocurrency that offers several advantages over traditional investment options and other cryptocurrencies. Here are some key benefits of investing in Bitcoin:

Lower Inflation Risk

Bitcoin is a deflationary currency, meaning its value increases with demand. Unlike traditional currencies, which are controlled by governments and subject to inflation, Bitcoin has a finite supply of 21 million coins and is not influenced by monetary policies. As demand increases, the price of Bitcoin will rise, and its value will be maintained over time. This makes it a stable, long-term investment option.

Easy and Low-Cost Transactions

Bitcoin transactions are simple, quick, and secure. They can be completed within seconds, locally or internationally, with minimal transaction fees compared to traditional banks. The absence of third-party involvement and the use of blockchain technology ensure enhanced security and privacy for users. Additionally, the decentralised nature of Bitcoin means that funds are controlled by the user, reducing the risk of loss due to financial institution failures.

Protection from Fraud and Transparency

Bitcoin transactions eliminate the risk of fraud as they do not require the disclosure of confidential financial information. The use of blockchain technology and cryptographic techniques ensures the security of transactions and user data. Bitcoin also offers transparency by recording all transactions on a public ledger, known as the blockchain, while maintaining user anonymity.

Accessibility and Optimism

Bitcoin has made investing more accessible to people worldwide, regardless of their access to traditional investment markets. It has lowered the barriers to entry, allowing individuals to invest as much or as little as they can afford. This has led to growing optimism in the market, with more people recognising its potential and expecting its value to increase further.

Decentralisation and Freedom

Bitcoin is not controlled by any central authority, bank, or government, giving users complete freedom over their money. This decentralisation also ensures that Bitcoin is free from national monetary policies and their fluctuations. Additionally, the absence of third-party involvement means that transactions cannot be intercepted or taxed, and users' funds cannot be seized or frozen.

How to invest in Bitcoin

Bitcoin is a type of digital cryptocurrency that uses peer-to-peer transactions, mining, and other technological tools to create a modern-day asset. It is a decentralised peer-to-peer digital currency that is powered by its users and requires no middlemen or central authority.

How to Get Started

The most common way to buy Bitcoin is through Bitcoin exchanges such as GDAX or BitStamp, or directly from other people via marketplaces and auction sites. You can use a variety of payment methods, from hard cash to credit and debit cards to wire transfers, or even other cryptocurrencies.

A Bitcoin wallet is like a bank account for your cryptocurrency. It allows you to receive, store, and send Bitcoins to others. There are two main types of wallets: software and web. A software wallet is installed on your computer or mobile device, and you have complete control over the security of your coins. However, they can sometimes be tricky to install and maintain. A web wallet is hosted by a third party and is generally easier to use, but you must trust the provider to maintain high levels of security.

How to Invest

Investing in Bitcoin is similar to investing in stocks, except it is far more volatile due to the daily swings in Bitcoin value. Here is a step-by-step guide:

• Open a brokerage account at a firm that allows crypto investments.
• Deposit funds from your bank into the brokerage account.
• Buy Bitcoin or another cryptocurrency.
• Later, sell the cryptocurrency for a gain or loss. The funds will be returned to your cash balance.

Direct Deposit of Bitcoin

If the exchange doesn't allow purchasing Bitcoin by transferring funds or using a credit card, you can deposit Bitcoin from another exchange. Get your wallet address from the target exchange, then enter it on the source exchange along with the amount of Bitcoin to transfer. The transaction should take a few minutes to complete.

Bitcoin's investment history

Bitcoin was created in 2008 by the pseudonymous Satoshi Nakamoto, who posted a white paper outlining their vision for a decentralised, peer-to-peer electronic cash system. In 2009, Nakamoto released the open-source implementation of Bitcoin, and the first block of the Bitcoin blockchain was mined. This block, known as the "genesis block", contained the text: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks".

In its early years, Bitcoin was primarily used by black markets such as the dark web marketplace Silk Road, which transacted 9.9 million bitcoins (worth about $214 million) during its 30 months of existence. The first known commercial transaction using Bitcoin occurred in 2010, when a programmer purchased two pizzas for 10,000 bitcoins—a sum that would be worth hundreds of millions of dollars today.

In 2013, Bitcoin began to gain mainstream attention, with the price of a single bitcoin surpassing $1,000 for the first time. However, the cryptocurrency also faced increased regulatory scrutiny, with the US Financial Crimes Enforcement Network establishing guidelines for "decentralized virtual currencies" and seizing the unregistered exchange Mt. Gox. The price of Bitcoin fluctuated wildly over the next few years, reaching a high of $19,188 in December 2017 before falling to $6,612 by mid-December 2019.

In 2020, the COVID-19 pandemic and subsequent government policies accelerated Bitcoin's rise, as investors feared the impact of the global economic shutdown. The cryptocurrency ended the year with a price of $28,993, a 416% increase from the start of the year.

Bitcoin continued to reach new all-time highs in 2021, surpassing $60,000 in April and briefly reaching $69,000 in November. However, the price crashed in 2022, falling below $20,000 by the end of the year. Bitcoin recovered in 2023, ending the year at a price of $42,258. As of March 2024, Bitcoin reached a new all-time high of $75,830.

Bitcoin's investment strategies

Bitcoin Investment Strategies

Bitcoin is a cryptocurrency, a virtual currency that acts as money and a form of payment outside the control of any one person, group, or entity. It is a decentralised peer-to-peer digital currency that is powered by its users and has no central authority or middlemen.

Bitcoin is a very high-risk and volatile investment. Its value may rise or fall dramatically over a short period, even within a few hours or days. There is no central regulator to ensure the value remains stable, and it is not backed by any physical asset.

Buy and 'Hodl' Bitcoin

'Hodl' is an intentional misspelling of 'hold' and is an investment philosophy that suggests holding onto Bitcoin forever, riding out the ups and downs of its price fluctuations. This strategy requires a strong belief in Bitcoin's prospects and the ability to weather the downs without selling.

Hold Bitcoin Long Term

This strategy is similar to the above but with a view to selling once a satisfactory return is achieved. Long-term holders are convinced that Bitcoin will increase in value over time, perhaps serving as a new store of value like gold.

Trade Bitcoin on Short-Term Volatility

This strategy takes advantage of Bitcoin's volatile nature, riding the ups and downs by selling at the peaks and buying on the dips. This approach is riskier and requires more active trading but may compound gains faster.

Diversification

A well-diversified portfolio is a key strategy to protect against investment losses. Low-risk investments like government bonds or index funds should form the foundation, followed by medium-risk investments like real estate or corporate stocks. High-risk investments like Bitcoin should be a small part of the portfolio.

Timing the Market

This strategy involves buying Bitcoin when the price is low and selling when it is high. It is a challenging and risky approach but can potentially lead to massive returns.

Greyscale's Bitcoin Investment Trust (GBTC)

Greyscale, founded in 2013, has made it easier for investors to access Bitcoin by offering investment vehicles like IRAs and brokerage accounts.

Amplify Transformational Data Sharing ETF (BLOK)

BLOK is an exchange-traded fund that focuses on blockchain technology. By investing in BLOK, you gain exposure to a basket of companies that utilise blockchain and its data-sharing technologies.

Bitwise 10 Private Index Fund (BITW)

Investing in BITW means investing in the Bitwise 10 Large Cap Crypto Index, which tracks the performance of the 10 largest cryptocurrency assets on the market.

Start Small

If you are unsure about investing in Bitcoin, consider starting with a small amount, such as $10 per week. This way, you can test the waters without risking a significant amount of money.

Advanced Strategies

More advanced strategies include Bitcoin futures, decentralised exchanges, and automated trading. Bitcoin futures are derivative products that carry greater risk, while decentralised exchanges like Exodus and Bisq give you more control but can be complex and prone to mistakes. Automated trading uses bots to make trades based on market conditions, which can be risky.

Remember, investing in Bitcoin is risky, and there is a potential for significant losses. It is important to carefully consider your risk tolerance, investment goals, and financial situation before investing.

Frequently asked questions