Investing In Bitcoin: Is It Worth Putting $1000 In Crypto?

Bitcoin is a highly volatile and speculative cryptocurrency, making it a risky investment. However, its high volatility also means that it can offer the possibility of high returns. If you had invested $1000 in bitcoin five years ago, your investment would have grown by 1352% and be worth around $14,524 as of February 14, 2024. On the other hand, if you had invested $1000 in bitcoin a year ago, your investment would have grown by 133% and be worth around $2331 as of the same date.

Some people argue that investing a small amount like $1000 is not worth it, while others disagree, stating that even a small amount can bring significant returns over time. Ultimately, the decision to invest in bitcoin depends on your financial situation, risk tolerance, and investment goals. It is always recommended to do your research and consult with a financial advisor before making any investment decisions.

Bitcoin's volatility

Bitcoin is a highly volatile asset. Volatility is a measure of how much the price of a financial asset varies over time. The volatility of Bitcoin is measured by how much Bitcoin's price fluctuates relative to the average price in a given period.

While Bitcoin is a volatile asset, investors have historically been well compensated for this volatility. Bitcoin has exhibited high volatility or high measures of standard deviation, but its returns have been disproportionately skewed towards the positive side. This is evident 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 compared to the S&P 500's Sharpe ratio of 0.65 over the same period.

Additionally, Bitcoin's Sortino ratio of 1.86 is nearly double its Sharpe ratio, revealing that much of the volatility was on the upside. Bitcoin's monthly price returns further illustrate this, with a positive monthly return mean of 7.8% from 2016 to 2024, compared to the S&P 500's mean of 1.1%.

In summary, while Bitcoin is a volatile asset, its volatility has been declining, and investors have historically been rewarded for taking on this risk.

Pros and cons of investing in Bitcoin

Pros of Investing in Bitcoin

• High returns: Bitcoin has the potential for high returns, with some investors believing in its bright future and potential growth.
• Protection from payment fraud: Bitcoin enables buyers to complete transactions without disclosing any confidential financial information, reducing the risk of targeted data breaches.
• Immediate settlement and international transactions: Bitcoin allows for fast and inexpensive transactions to anywhere in the world.
• Decentralized issuance: Bitcoin is not regulated or valued by any government or central bank, and it is created by the people, removing the power that fiat money has over the population.
• Lower fraud risks and transparency: The blockchain technology that Bitcoin is built on ensures high levels of security and transparency.
• Portfolio diversification: Bitcoin can help investors spread their investments and reduce exposure to risks.
• Hedge against inflation: Due to its supply cap and decentralised nature, Bitcoin is believed to be immune to economic turmoil, geopolitical problems, and inflation.
• Valuable business features: Bitcoin has features such as multi-signature authorisation that can improve transparency and security for businesses.
• Return on investment: Figures show that Bitcoin has a significant ROI compared to other assets.
• Backed by major investors: Huge names like Michael Saylor, CEO of MicroStrategy, and Mark Cuban have become major investors in Bitcoin.

Cons of Investing in Bitcoin

• High volatility: As a scarce asset, Bitcoin's value is influenced by demand and supply principles and market sentiment, making it highly unpredictable and risky.
• Slow transactions: Bitcoin transactions can take up to 10 minutes, and busy days can result in even longer processing times and higher transaction costs.
• Limited use: Bitcoin is mostly limited to financial transactions and depends on internet availability.
• Not 100% safe: Bitcoin can be stolen if held on an exchange, and there is a risk of losing Bitcoins due to human or technological errors, such as a hard drive crash or a virus.
• Lack of regulation: The lack of regulatory oversight in Bitcoin investing can lead to fraud and scams, and cryptocurrency laws and taxes vary across the globe and are often ambiguous.
• Misunderstood: Bitcoin is still veiled in misconception, with many associating it with illegal services and crypto scams, making cryptocurrency adoption difficult.
• Not energy-efficient: Bitcoin uses a proof-of-work mechanism to validate transactions, which consumes a large amount of power.
• Dominated by big investors: Bitcoin is now dominated by excessively big investors or 'whales' who can easily influence the price by selling off their holdings.
• Community disagreements: Disagreements within the Bitcoin community have led to splits in the past, and further splits could be discouraging for investors.
• Quantum computer threat: Quantum computers, which are much more powerful than traditional computers, could potentially overpower the Bitcoin network and render it useless.
• Doesn't work as intended: Bitcoin was designed to be a digital way to transfer value, but today, many people just hold it because they believe it will increase in value.

How to invest in Bitcoin

Investing in Bitcoin can be done in several ways, depending on your financial situation, risk tolerance, and investment goals. Here are some steps and considerations to help you get started:

• Understand the Risks: Bitcoin is a highly volatile and risky investment. Its value can fluctuate significantly, and there is a possibility of losing your entire investment. Make sure you understand the risks involved before deciding to invest.
• Determine Your Investment Amount: Decide how much you want to invest in Bitcoin. It is generally recommended to invest only what you can afford to lose. Don't put all your savings into Bitcoin, especially if you are new to investing or cryptocurrency.
• Choose a Crypto Exchange or Brokerage: You need a platform to buy Bitcoin. Crypto exchanges or brokerages allow you to buy, sell, and hold cryptocurrencies. Research reputable and secure platforms that offer Bitcoin trading. Some popular options include Coinbase, Binance, and Kraken.
• Create an Account: Sign up on your chosen crypto exchange or brokerage by providing your personal information and verifying your identity. This process may vary depending on the platform and your location.
• Deposit Funds: Fund your account by linking a payment method, such as a bank account or credit/debit card. Different platforms may offer different options, so choose one that suits your preferences.
• Place a Bitcoin Buy Order: Once your account is funded, you can place a buy order for Bitcoin. Specify the amount you want to invest, taking into consideration the current Bitcoin price and any applicable fees.
• Store Your Bitcoin Securely: It is essential to secure your Bitcoin holdings. You can store your Bitcoin in a crypto wallet, which can be online (hot wallet) or offline (cold wallet). Research secure wallet options, such as hardware wallets, to protect your investment from theft or loss.
• Consider a Long-Term Investment Horizon: Bitcoin's value tends to increase over time, so it is often considered a long-term investment. Be prepared to hold your Bitcoin for several years to potentially see significant returns. Avoid trying to time the market, as short-term price movements can be highly unpredictable.
• Diversify Your Portfolio: As part of a well-diversified portfolio, allocate a small portion of your investments to Bitcoin. This helps minimize risk while still allowing you to benefit from Bitcoin's potential gains.
• Monitor Your Investment: Keep an eye on your Bitcoin investment and the broader cryptocurrency market. Stay informed about news, regulatory changes, and market trends that may impact the value of your investment.

Remember, investing in Bitcoin carries significant risks, and there are no guarantees of profits. Always do your research, invest responsibly, and consider seeking independent financial advice before making any investment decisions.

Bitcoin as a long-term savings mechanism

Bitcoin is a good long-term savings mechanism. Its decentralised nature gives users greater control over their finances and reduces the risk of fraud, theft, and identity theft. Bitcoin is also a good hedge against inflation as it is not subject to the same government monetary policies as traditional savings accounts. Its limited supply and increasing demand can lead to price increases and substantial returns for long-term investors.

However, investing in Bitcoin is not without its risks. Its volatility presents the possibility of significant losses, and the lack of regulation leaves it open to potential market manipulation. There is also the risk of hacking and theft. Investors must carefully consider their risk tolerance and do their research before investing in Bitcoin.

One user on Reddit said:

> "Bitcoin is a powerful long-term savings mechanism. No one would ever tell you not to save $1000 for the future simply because it 'wasn't enough'. If BTC goes to 100k by 2022, your $1k will become $5k. That won't happen in any bank."

Another user said:

> "Bitcoin is great for a long-term savings account. 10 to 50 years. Short term it is bad. Yes, bear markets can last 1-2.5 years. So at minimum 3-4-year horizon in Bitcoin. With stocks, it's typically 10 years and more."

Bitcoin's future as a reserve currency

Firstly, a reserve currency must be stable, widely accepted, and reliable. Bitcoin's price volatility poses a significant challenge to its status as a reserve currency. Its value can fluctuate rapidly within short periods, making it an unstable currency compared to traditional fiat currencies.

Secondly, governments and central banks play a crucial role in determining reserve currencies. They may hesitate to embrace Bitcoin due to concerns related to control, stability, and monetary policy. However, the increasing interest in digital currencies, including central bank digital currencies, could impact the future of cryptocurrencies like Bitcoin and potentially change the global financial landscape.

Thirdly, Bitcoin's limited supply of 21 million, of which 16 million have already been mined, may be a concern for governments that require assets in bulk. On the other hand, its decentralised nature, security, and freedom from international fees and regulatory oversight make it an appealing alternative to traditional currencies.

While Bitcoin's future as a reserve currency remains uncertain, it has gained significant popularity and acceptance since its inception in 2009. Its potential as a reserve currency will depend on factors such as widespread adoption, regulatory clarity, improved scalability, and increased stability.

As for investing 1k in Bitcoin, it is a personal decision that depends on your financial situation and risk tolerance. Some people argue that investing in Bitcoin is wise because of its potential for high returns and its role as a hedge in a diversified portfolio. Others caution that it is a risky investment due to its volatility and recommend having a backup of low-risk assets before investing in Bitcoin. Ultimately, it is essential to understand the risks and do your research before making any investment decisions.

Frequently asked questions