Small Bitcoin Investments: Worth The Risk?

Bitcoin is a decentralised digital currency that is not issued or managed by any central authority, such as a government, company or bank. This makes it more resistant to wild inflation and corrupt banks. With Bitcoin, you can be your own bank. But is investing small amounts in Bitcoin worth it?

Some people believe that any amount is worth investing in Bitcoin. However, others argue that it is a risky investment and that you should be prepared to lose the money you put in. One strategy to combat the high volatility of cryptocurrencies is Dollar Cost Averaging, which involves investing a set dollar amount on a set schedule, such as once a week or once a month. This strategy can help to reduce the impact of price swings.

There are a variety of ways to invest in Bitcoin, including cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs and Bitcoin ETFs. When investing in Bitcoin, it is important to consider the fees, security and transaction times involved.

Dollar Cost Averaging

Dollar-cost averaging (DCA) is an investment strategy where you buy a fixed amount of BTC at regular intervals, regardless of the price. This means you invest a set amount of money over given time periods, such as after every paycheck.

DCA is a popular way to invest in Bitcoin, the world's leading digital currency, due to its simplicity and low-stress approach. By removing the need to make decisions based on short-term price movements, you can avoid emotional reactions to market movements while growing your bitcoin investment over time.

Here's how it works:

• Set a budget: Determine how much you're comfortable investing regularly. Some bitcoin savings apps allow you to start with as little as $10, but you decide how much to invest each week or month.
• Decide on the intervals: You can choose to invest weekly, bi-weekly, or monthly, depending on your preference.
• Find a good platform: Look for a reputable bitcoin exchange or app that allows you to save in bitcoin using recurring payments. Examples include Swan (US), Relai (Europe), and Bitnob (Africa).
• Start investing: Once you've set up your Bitcoin DCA platform, set up regular bank transfers, and the app will purchase bitcoin for you automatically based on your predetermined settings.
• Keep your bitcoin secure: Ensure you use a secure, non-custodial wallet, where only you have access to the private keys, to safely store your bitcoin investment for the long term.

DCA is a recommended strategy by experts like Warren Buffett, who says:

> "If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds."

Remember, Bitcoin is a risky and volatile asset, and it's important to do your research and make your own financial decisions. Additionally, always keep in mind the golden rule of investing: never invest money that you cannot afford to lose.

Volatility

Bitcoin's volatility is influenced by the speculative nature of the cryptocurrency industry. Crypto investors bet on Bitcoin's price movements to make a profit, which causes sudden price increases or decreases, leading to volatility.

Bitcoin's volatility has been declining and is expected to continue doing so as the asset class matures. In fact, Bitcoin's volatility is now lower than some prominent individual securities, such as Netflix stock.

Historically, Bitcoin's volatility has been overestimated by investors and market professionals. This may be because Bitcoin is a new asset class, and the market is still undergoing a process of discovery.

While Bitcoin's volatility can be viewed as a risk, it also presents opportunities for investors. Bitcoin has historically exhibited high volatility or high measures of standard deviation, but its returns have been disproportionately skewed towards positive outcomes. This is reflected in Bitcoin's Sharpe ratio of 0.96 from 2020 to early 2024, indicating that investors have been more than compensated for taking on the risk.

To manage the volatility of Bitcoin and other cryptocurrencies, investors can utilise strategies such as Dollar Cost Averaging, which involves investing a set dollar amount on a fixed schedule, helping to smooth out the impact of price fluctuations.

Transaction fees

When considering investing small amounts in Bitcoin, it is important to factor in transaction fees to ensure that they do not eat into your investment. Transaction fees are a crucial component of the Bitcoin network, incentivising miners to validate transactions and maintain network security. These fees are separate from any charges incurred by exchanges or brokerages for buying and selling Bitcoin.

Users who want their transactions confirmed quickly are generally willing to pay higher fees. Miners tend to prioritise transactions with higher fee-to-byte ratios to maximise revenue. During periods of high network congestion, transaction fees can spike as miners process transactions with higher fee rates first. For example, during the 2017 Crypto boom, average transaction fees reached nearly $60.

As of August 12, 2024, the average transaction fee was $1.089, up from $0.6237 the previous day and $0.8073 a year earlier. This represents a daily increase of 74.62% and a year-on-year increase of 34.91%. In April 2024, the transaction fee was $15, a significant decrease from the first wave of public interest in Bitcoin when fees exceeded $50 per transaction.

When investing small amounts, it is essential to consider the impact of transaction fees. For example, if you are investing $10 at a time, a $15 transaction fee would result in a substantial proportion of your investment being lost to fees. Therefore, it may be advisable to invest larger amounts less frequently to minimise the impact of transaction fees.

Tax situation

In the United States, Bitcoin is treated as a property by the IRS for tax purposes. This means that any profits or losses made through Bitcoin transactions must be reported on your tax return. The tax treatment of Bitcoin depends on how you acquired and used it. If you acquired Bitcoin through mining or as payment for goods or services, the value is taxable immediately as earned income. If you disposed of or used Bitcoin by cashing it on an exchange, buying goods and services, or trading it for another cryptocurrency, you will owe taxes if the realized value is greater than the price at which you acquired the crypto.

The tax rate on Bitcoin profits depends on two factors: how long you owned the Bitcoin before selling, and your total income for the year. If you owned the Bitcoin for one year or less before selling, the short-term capital gains tax rates apply, which range from 10% to 37%. If you owned the Bitcoin for more than a year, the long-term capital gains tax rates apply, which range from 0% to 20%.

It is important to keep accurate records of your Bitcoin transactions to ensure you are reporting your gains and losses correctly. The IRS has added a question about crypto activity on tax return forms, and failure to report crypto transactions can result in penalties or financial interest from the IRS. Additionally, willful tax evasion can result in criminal prosecution.

When it comes to gifting or donating Bitcoin, there are also tax implications to consider. If you gift Bitcoin worth more than $15,000 in a single year, you may be required to file a gift tax return. If you donate Bitcoin to a charity or non-profit organization, you may be able to take a charitable contribution deduction.

The taxation of Bitcoin can be complex, and it is recommended to consult with a tax professional experienced in crypto tax compliance to ensure you are complying with the relevant tax laws and regulations.

Investor protections

Investing in Bitcoin and other cryptocurrencies is risky due to the lack of regulatory oversight and investor protections. Cryptocurrencies like Bitcoin exist in a legal and regulatory grey area, escaping the same oversight as traditional holdings like stocks and bonds. This means that federal money is often not available to backstop customers if a company fails or goes bankrupt.

The U.S. Securities and Exchange Commission (SEC) has tried to assert its regulatory oversight in some cases, but the law is unclear, and cryptocurrencies may not be considered securities or investment contracts. As a result, investors in cryptocurrencies may have limited recovery options if they lose money due to fraud or theft. Traditional financial institutions are often not involved with Bitcoin transactions, making it difficult to trace and recover funds.

Additionally, Bitcoin is not legal tender and is not backed by any government. It is also not insured by the Federal Deposit Insurance Corporation (FDIC) or the Securities Investor Protection Corporation (SIPC). Bitcoin also has a history of volatility, with dramatic fluctuations in its exchange rate, and it is susceptible to security concerns, such as hacking and malware.

To protect yourself when investing in Bitcoin, remember the golden rule of investing: never invest money that you cannot afford to lose. Utilize Dollar Cost Averaging, which is the practice of investing a set dollar amount on a set schedule to combat volatility. Save some money for when price corrections occur, and then buy larger chunks. Be aware of the potential for fraud and high-risk investment schemes, and exercise caution when assessing investment opportunities.

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