Investing In Bitcoin: Is $100 A Good Starting Point?

Bitcoin is a very risky asset type. It is extremely volatile, and even the most solid Bitcoin investment should be treated as a high-risk investment. For example, in the past, Bitcoin's price fell over 80% in several months. Bitcoin is not a company or a stock; it's a currency. If you're looking to invest $100 in Bitcoin, you can buy fractions of a Bitcoin. However, it's important to keep in mind that Bitcoin is highly speculative and lacks many of the regulations and consumer protections that legal tender currencies have. Due to the high level of risk, investors should view Bitcoin as a purely speculative instrument and only invest money they can afford to lose.

Bitcoin's extreme volatility

Bitcoin is a highly volatile asset. Volatility in financial markets refers to changes in the price of an asset. While volatility can be healthy, with steady increases or decreases in price within a general range, it can also be extreme, with sudden price movements in either direction. Extreme volatility is often associated with market chaos, uncertainty, and loss.

Bitcoin's volatility remains elevated at 3.9 and 4.6 times that of gold and global equities, respectively. However, it is important to note that bitcoin's volatility has consistently declined alongside the industry's maturation in recent years. While bitcoin is still much more volatile than other major asset classes, like equities and bonds, its volatility is not unusual when compared to certain mega-cap tech stocks, such as Nvidia, Tesla, and Meta.

The extreme volatility of bitcoin can have implications for its effectiveness as a hedge against risk in a portfolio. A study by Baur, Hoang, and Hossain (2022) found that for extreme levels of volatility, bitcoin does not reduce the risk if added to a benchmark equity portfolio. This is due to the higher volatility of bitcoin compared to stocks, which results in lower weights of bitcoin in a portfolio.

The cryptocurrency market as a whole is extremely volatile, and bitcoin is no exception. In 2016, the price of bitcoin rose by 125%, and in 2017, it rose again by more than 2,000%. Bitcoin has experienced four drawdowns in excess of 50% since 2014, with the three largest drawdowns averaging an approximately 80% decline. While patient investors were ultimately rewarded, it took nearly three years for bitcoin's price to recover in three out of the four major corrections.

When considering investing in bitcoin, it is important to understand the risks associated with its extreme volatility. Small allocations, regular rebalancing, dollar-cost averaging, and maintaining a long-term investment horizon can help smooth out the ride.

The risks of owning Bitcoin

Bitcoin is a cryptocurrency, a virtual currency designed to act as money and a form of payment outside the control of any one person, group, or entity. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It has since become the most well-known and largest cryptocurrency in the world. Its popularity has inspired the development of many other cryptocurrencies.

Volatile and Fluctuating Market

The price of bitcoin is constantly changing. As of November 2018, one bitcoin was worth $6,461.01. If you happened to purchase a bitcoin on December 17, 2017, the price topped $20,000. Days later, on the 24th, buyers could not sell their investment for more than $14,626. The bitcoin market is constantly rippling back and forth, and with such an unpredictable market, there’s no telling if you will get a return on your investment.

Cyberattacks and Hacking

Cryptocurrency is technology-based, which leaves this investment open to cyberattacks. Hacking is a serious risk, as there is no way to retrieve your lost or stolen bitcoins. Many reports suggest that many buyers lose their investments on exchanges and mining losses. Exchanges are more likely to be hacked, even if you have the protection of a smart wallet. Additionally, if you do have a wallet and you forget or misplace your key, there is rarely a way to retrieve your coins.

Fraud

In addition to hacking, there is a fair amount of fraud in the bitcoin market. Buyers and sellers are looking to trade bitcoins online, but since their rise in popularity, some of these exchanges can be fake. The Consumer Finance Protection Bureau and the Securities and Exchange Commission have warned against these transactions, where unsuspecting investors are duped out of their bitcoins in fraudulent exchanges.

Little or No Regulation

Currently, the bitcoin market is operating without any major regulations. The government doesn’t have a clear stance on cryptocurrency; the market is just too new. It is not taxed, which can make it enticing as an investment opportunity. However, a lack of taxation could lead to problems should bitcoin pose competition for government currency. As of now, cryptocurrency is not a widely accepted currency, but the future is ever-changing. There’s no telling what the state of the bitcoin market could be in a few years.

Technology Reliance

Bitcoin is an online exchange that is reliant on technology. Coins are digitally mined, exchanged via smart wallet, and kept in check using various systems. Without that technology, cryptocurrency is worth nothing. Unlike other forms of currency or investment, there is no physical collateral to back it up. With gold, real estate, bonds, or mutual funds, you own something that can be exchanged. With a currency that is 100% technology-based, bitcoin owners are more vulnerable to cyber threats, online fraud, and a system that can be shut down.

How to invest in Bitcoin

Investing in Bitcoin and other cryptocurrencies is risky, so it's important not to invest more money than you can afford to lose. If you are new to crypto, remember that buying cryptocurrency involves inherent risks just like any investment. It’s important to conduct thorough research and understand how each type of cryptocurrency functions before making any investment decisions.

• Pick a Broker or Cryptocurrency Exchange: You can buy cryptocurrencies through crypto exchanges, such as Coinbase, Kraken, Binance, or Gemini. Alternatively, you can use a broker like Robinhood or SoFi, which may offer more security.
• Set Up an Account: After selecting your platform, you will need to create an account. This typically involves providing personal information and verifying your identity, such as through a driver's license or passport.
• Add Funds to Invest: Before investing, you must fund your account. You can do this by connecting your bank account, initiating a wire transfer, or using a debit or credit card for payment. Credit card deposits, however, often incur higher interest rates and extra fees.
• Initiate Your Cryptocurrency Transaction: Once your account is funded, decide on the amount of Bitcoin you wish to purchase. Many exchanges allow you to buy fractional shares, so you don't need to buy a whole Bitcoin.
• Store Your Bitcoin in a Digital Wallet: After purchasing Bitcoin, you can store it in a digital wallet, either hosted by the cryptocurrency exchange or an independent wallet provider. Online wallets are convenient but more susceptible to hacking. Offline, or "cold," wallets, such as USBs or hard drives, offer top-tier security but carry the risk of device failure or loss of access codes.

Remember, investing in Bitcoin is highly speculative due to its volatile nature. It's crucial to carefully research any digital coin before buying it and to be aware of the transaction fees involved.

The future of Bitcoin

Bitcoin is a highly volatile and risky investment. Its value can increase or decrease by thousands of dollars in a matter of days, or even minutes.

Bitcoin's future is uncertain, and there are a variety of factors that could influence whether its value increases or decreases over time. Here are some potential outcomes and influences:

The Bull Case for Bitcoin

Bitcoin's value could increase dramatically if it continues to gain mainstream adoption and legitimacy. For example, in 2023, the world's largest asset manager, BlackRock, filed plans to start a Bitcoin exchange-traded fund (ETF). Multiple other institutions, like ARK Invest, followed suit, and in January 2024, 11 Bitcoin ETFs were approved for trade in the US, pushing Bitcoin to an all-time high of over $73,000. Since then, these ETFs have seen some of the largest inflows of any ETF in history, marking them as one of the most successful ETF launches ever. This increased demand from institutional investors could drive Bitcoin's price up even further.

Another potential driver of Bitcoin's price is its role as a hedge against fiat currency debasement. As central banks, like the Reserve Bank of Australia, print more money, Bitcoin becomes an attractive investment option due to its decentralised, borderless, secure, and scarce nature. This is especially true if governments continue to face banking crises and growing debt obligations, which could lead to further devaluation of fiat currencies.

The Bear Case for Bitcoin

On the other hand, there are several factors that could cause Bitcoin's price to decrease. One of the main concerns is regulatory risk. If governments continue to introduce stricter regulations and reporting requirements for cryptocurrencies, it could cripple the crypto industry and decrease demand for Bitcoin. For example, if the US expands the Bank Secrecy Act to include more stringent reporting requirements for digital currency transactions, it would make it much more difficult for individuals and businesses to use cryptocurrencies, reducing demand.

Another potential issue is Bitcoin's long-term security. As the block reward continues to decrease, there may be lacklustre adoption and demand for Bitcoin, which could lead to decreased security and threaten the network. Additionally, there are concerns about the environmental impact of Bitcoin mining, with the White House proposing a tax of up to 30% on Bitcoin miners in the US. If Bitcoin mining continues to face pressure from governments globally, it could drive up costs and reduce demand, causing Bitcoin's price to fall.

The Bottom Line

The positives of investing in Bitcoin

Bitcoin has been one of the best investments in the world since its creation in 2009. In a little over a decade, Bitcoin's value skyrocketed from $1 in April 2011 to a peak of $68,789 in November 2021. As of September 2022, it was valued at around $19,000, making it the world's most popular and most valuable cryptocurrency, with a market cap of more than $360 billion.

Bitcoin has a relatively loose correlation with other asset classes, making it a potentially attractive tool for portfolio diversification. Its fixed supply of 21 million Bitcoins means investors will not be negatively impacted by dilution. Its decentralised nature also means it is independent from central authority, so it cannot be controlled or regulated by a single government or central bank.

Bitcoin's long-term track record speaks for itself, and its value is expected to increase as it becomes more widely adopted. As more people hold Bitcoin, there will be less power for big single holders (aka whales) to cause price fluctuations. If Bitcoin ultimately becomes the world's universal digital currency, its demand will grow exponentially, and so will its price.

Bitcoin can also be used to purchase goods and services from the growing list of places that accept it, which may make exchanging currencies when spending money in another country easier, with no foreign transaction fees.

Finally, Bitcoin can serve as a way for people around the world living in underbanked regions or countries with unstable financial systems to protect their wealth and gain access to critical financial services.

Frequently asked questions