A Small Bitcoin Investment: Worth The Risk?

Bitcoin is a decentralised form of currency, existing entirely online, that uses cryptography for security. Unlike traditional currencies, it is not controlled by central banks but operates on a decentralised network of computers spread worldwide. This means no single institution controls the Bitcoin network.

Investing in Bitcoin can be done through direct and indirect methods. Direct methods include purchasing and holding Bitcoin via exchanges and Bitcoin ATMs, and trading Bitcoin on exchanges. Indirect methods include Bitcoin Exchange-Traded Funds (ETFs), and investing in Bitcoin-related companies.

Dollar-cost averaging (DCA) is a popular investment strategy for Bitcoin. This involves committing to buying a fixed dollar amount of Bitcoin at regular intervals, regardless of short-term price volatility. This strategy is suitable for investors with a medium to long-term investment horizon.

Some people invest as little as $20 per month in Bitcoin, while others invest much larger sums. The actual amount depends on individual factors such as income, life situation, and risk appetite.

Dollar-cost averaging: a long-term strategy

Dollar-cost averaging (DCA) is a long-term investment strategy that involves investing a fixed amount of money in an asset, such as Bitcoin, at regular intervals, regardless of the price. This strategy is particularly effective for volatile assets like Bitcoin, as it helps to reduce the impact of short-term market volatility.

With DCA, you commit to buying a specific dollar amount of Bitcoin at regular intervals, such as once a week or once a month. This approach has several benefits. Firstly, it eliminates the stress and emotional ups and downs associated with trying to time the market. Instead of constantly checking price movements, you can set it and forget it, knowing that you are investing at a regular pace.

Secondly, DCA allows you to benefit from long-term price appreciation. By investing a small amount regularly, you are essentially buying the dip over and over again. This means that you accumulate more Bitcoin during bear markets and scale back during bullish markets, which is the opposite of what many casual investors do. As a result, you are reducing your average purchase price of Bitcoin over time.

Additionally, DCA helps you to see the big picture and distinguish the signal from the noise. By committing to this long-term strategy, you can make better investment decisions and become a more disciplined investor overall, not just in the crypto market.

It's important to note that DCA has its drawbacks. One con is that you won't get the absolute best price for Bitcoin at any given time. Instead, you'll get a "blended" price since you're not trying to time the market. Another potential downside is the risk of the Bitcoin price dropping to zero, which would render your investment worthless. Therefore, it's crucial to do your research and consult a financial professional before committing to any investment strategy.

Bitcoin's value and 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 its value can substantially increase or decrease on any given day. Volatility means that an asset is risky to hold.

Bitcoin's volatility is influenced by several factors, including supply and demand, investor and user sentiments, government regulations, and media hype. As a relatively new asset, Bitcoin is still in the price discovery phase, and its value is yet to stabilise.

The limited supply of Bitcoin and the lack of a central bank to control that supply are also factors in its volatility. Bitcoin's value is derived from its decentralised network, and no central authority can intervene in the Bitcoin market.

The varying belief in Bitcoin's utility as a store of value and method of value transfer also contributes to its volatile nature. Many investors believe that Bitcoin will retain its value and continue to grow, using it as a hedge against inflation. However, others speculate about price movements, creating investor concerns that lead to price fluctuations.

Despite the volatility, some people suggest investing a small amount of money, such as $20, in Bitcoin every month. This strategy, known as dollar-cost averaging (DCA), can help mitigate the emotional ups and downs of investing in a volatile cryptocurrency. It involves committing to buying the same dollar amount of Bitcoin at regular intervals, regardless of short-term price volatility. This method can help investors accumulate Bitcoin over time and transform them from short-term to long-term investors.

Risks and benefits of investing in Bitcoin

Bitcoin is a cryptocurrency, a virtual currency designed to act as a medium of exchange outside the control of any one person, group, or entity. It is the most well-known and largest cryptocurrency globally, and its popularity has inspired the development of many other cryptocurrencies.

Benefits

Bitcoin has several advantages over traditional currencies and investment vehicles.

• Decentralization and Accessibility: Bitcoin was designed to be decentralized, without the control of a single government or central bank. This means a user can have unrestricted access to their coins and full responsibility for keeping them safe. This accessibility is available to everyone, even those without access to traditional banking, as long as they have an internet connection and a crypto wallet.
• Lower Fees and Faster Transactions: Crypto transactions can have lower fees and faster transfer times than traditional bank transactions. For example, crypto can avoid the high fees associated with global wires and be accessible within minutes, compared to the standard 24-48 hour bank wire.
• High Return Potential: Bitcoin has yielded high returns in the past, depending on when it was purchased. For instance, if you had invested $100 every month in Bitcoin for the past three years, you would have turned $3,600 into $8,570. Even investing a smaller amount of $10 per month over the same period would have turned $360 into $857.
• Blockchain Technology: Cryptocurrencies operate on blockchain technology, which is fully public and immutable, meaning it cannot be changed, manipulated, or deleted, and every transaction can be seen or tracked at any time. This adds a layer of security and transparency to transactions.

Risks

However, investing in Bitcoin also carries several risks that potential investors should be aware of.

• Volatility: The price of Bitcoin is extremely volatile, with high highs and low lows. This makes it difficult to predict if you will get a return on your investment.
• Regulatory Uncertainty: Government regulations around crypto are constantly evolving and may differ based on your location. These regulations could impact how you use or access your crypto and cause volatility in the market.
• Security and Fraud: As a technology-based investment, Bitcoin is susceptible to cyberattacks and fraud. Hacking and online fraud are serious risks, and there is currently no way to retrieve lost or stolen bitcoins. Additionally, there is a lack of insurance or protection for lost or stolen cryptocurrencies.
• Lack of Wide Acceptance: While Bitcoin is accepted by some online stores and travel companies, many companies do not recognize it as a legitimate form of currency.
• No Physical Collateral: Unlike investments like gold, real estate, or bonds, Bitcoin has no physical collateral backing it up. This means that if Bitcoin becomes useless in the future, investors could lose everything they have invested.
• Market Risk: As with any investment, Bitcoin values can fluctuate, and the market is highly sensitive to news and current events.

In conclusion, investing in Bitcoin carries both potential benefits and significant risks. It is crucial to educate yourself on these risks and carefully consider if Bitcoin is the right investment for your financial goals and risk tolerance.

How to invest in Bitcoin

Cryptocurrency Exchanges

You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges carry a variety of different fees and consumer protections, so it is important to do your research before choosing one.

Traditional Stockbrokers

A small number of traditional brokers, including Robinhood, Webull, TradeStation, and Fidelity, offer customers a way to buy and sell Bitcoin. Like its stock-trading platform, Robinhood charges no fees for Bitcoin trades.

Bitcoin ATMs

Bitcoin ATMs operate like normal ATMs. You can use them to buy and sell Bitcoin and they are often placed in locations where you might find normal ATMs, such as convenience stores.

Bitcoin Exchange-Traded Funds (ETFs)

On January 10, 2024, the Securities and Exchange Commission opened the door for spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This approval is expected to make it even easier for traditional investors to access Bitcoin.

Peer-to-Peer Money Transfer Apps

Cash transfer services like PayPal, Venmo, or Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps, which is convenient for those already familiar with these interfaces.

Crypto Wallets

With a hot wallet, Bitcoin is stored by a trusted exchange or provider in the cloud and accessed through an app or computer browser on the internet. A cold wallet, on the other hand, is a small, encrypted portable device that allows you to download and carry your Bitcoin. Cold wallets are considered much more secure than hot wallets but take longer for transactions.

Dollar-Cost Averaging

Dollar-cost averaging is a long-term investment strategy in which you commit to buying the same dollar amount of a specific crypto at regular intervals, regardless of short-term price volatility. This strategy can help mitigate the emotional ups and downs of investing in a volatile crypto such as Bitcoin.

Other Ways to Invest in Crypto

• Buying crypto ETPs or crypto-related ETFs on a brokerage platform: Exchange-traded products (ETPs) give you direct exposure to a cryptocurrency's value without needing to buy the coin yourself.
• Buying cryptocurrency stocks: You can invest in individual stocks of companies in the crypto industry, such as crypto exchanges, bitcoin mining companies, and banks that provide solutions for crypto companies.
• Investing in a cryptocurrency Roth IRA: Using the services of a crypto IRA provider can facilitate more secure storage for your cryptocurrency holdings.
• Becoming a crypto miner or validator: By mining cryptocurrency or acting as a validator in a crypto network, you can earn rewards in crypto, which can be held as investments or exchanged for another currency.
• Investing in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency, such as cryptocurrency mining companies, mining hardware makers, and companies that support cryptocurrency.

Things to Keep in Mind

• Understand the risks: Investing in cryptocurrency is risky. The prices of cryptocurrencies are highly volatile and can be affected by regulatory changes. It is important to only invest money you can afford to lose.
• Do your research: Carefully research any digital coin before buying it and pay attention to transaction fees, as these can vary widely among currencies.
• Stay informed: The cryptocurrency space is evolving rapidly, so it is important to stay up to date with new developments that may affect your crypto holdings.
• Consider tax consequences: Cryptocurrency investors need to understand the tax implications of using crypto, especially if they purchase something or sell their crypto investments.
• Review your portfolio regularly: A best practice among investors is to periodically review your entire portfolio to assess the need to rebalance your holdings.
• Don't take on credit card debt: Avoid taking on high-interest debt to invest in a risky asset like Bitcoin. If the value of Bitcoin sinks, you could be left with big losses.
• Understand investor protections: Bitcoin and other cryptocurrency investments are not insured by the Securities Investor Protection Corporation for exchange failures or theft. While some exchanges provide private insurance, this doesn't protect against individual online breaches such as password theft.
• Use a secure, private internet connection: When making financial transactions online, including buying Bitcoin, use a secure, private internet connection. Avoid using public internet connections such as those in coffee shops or hotels.

Bitcoin's future

Short-term outlook

Bitcoin has experienced a turbulent 2023 and 2024 so far, with its price fluctuating wildly. In March 2024, it reached a new all-time high of around $73,000, but it has since dropped to around $60,000. The recent downturn has been caused by various factors, including the Bank of Japan's interest rate hikes, which led to a global market sell-off, and fears of massive sell-offs in the community.

Long-term outlook

Despite the recent turbulence, Bitcoin's long-term prospects remain positive, with many analysts and experts forecasting significant growth in the coming years. By 2025, some sources predict the price of Bitcoin to be around $140,000, while others give a more conservative estimate of $95,000. These predictions are based on the assumption that Bitcoin will continue to gain mainstream adoption and that more financial services related to Bitcoin will be launched.

Looking even further ahead, the price of Bitcoin is expected to continue rising. By 2026, the average price is projected to be around $150,000, and by 2027, it could reach as high as $250,000. These predictions are based on the assumption that Bitcoin will continue to increase in value over time as it becomes more widely adopted and its supply decreases due to Bitcoin halving events.

Investing a small amount monthly

Given the volatile nature of Bitcoin and other cryptocurrencies, investing a small amount each month can be a good strategy. This approach, known as dollar-cost averaging, can help to reduce the impact of price volatility and allow investors to benefit from the potential long-term growth of Bitcoin.

For example, if you had invested $10 per month in Bitcoin over the past three years, you would have turned $360 into $857. This strategy can be beneficial, especially for those looking to invest for the long term, as it removes the stress of trying to time the market and allows you to focus on the bigger picture.

Risks and considerations

While Bitcoin's future looks bright according to many analysts and experts, it is important to remember that it is a highly speculative and volatile asset. There are risks associated with investing in Bitcoin, and its price could drop significantly or even go to zero. Therefore, it is crucial to do your own research and only invest what you can afford to lose.

Additionally, it is worth noting that Bitcoin and other cryptocurrencies are not widely accepted as a means of payment, and their regulatory status can vary across different countries. These factors can impact the price and liquidity of Bitcoin, so investors should stay informed about any relevant news and developments.

Frequently asked questions