Bitcoin Investment: Keep Or Quit?

Bitcoin is a risky investment with high volatility, and investors should make sure they understand the risks. It is recommended that investors should not invest more than 10% of their portfolio in risky assets like Bitcoin.

Bitcoin is a decentralised currency with a finite supply, and its value comes from its store of value and payment system. It is also highly volatile, experiencing large price movements over short periods.

There are several ways to invest in Bitcoin, including cryptocurrency exchanges, traditional brokers, money transfer apps, Bitcoin ATMs, and Bitcoin exchange-traded funds (ETFs).

Before investing in Bitcoin, it is important to consider the risks and ensure that you understand what you are investing in. It is also recommended to diversify your portfolio and not invest more than you can afford to lose.

Bitcoin's value and volatility

Bitcoin is considered a volatile asset, and its value fluctuates for several reasons. Firstly, it is still a relatively new asset, having been publicly available only since 2009. This means that it is still in the price discovery phase, and its value will continue to change as investors, users, and governments become more familiar with it.

Secondly, Bitcoin has a limited supply by design, and its value is influenced by speculation and investor concerns. With a maximum threshold of 21 million bitcoins, the closer the circulating supply gets to this limit, the higher the prices are likely to climb due to increasing demand and limited supply.

Thirdly, media outlets, influencers, and industry leaders play a role in creating investor concerns, which lead to price fluctuations. Positive or negative news and publicity can influence Bitcoin's price, often benefiting those who hold large numbers of coins. For example, when Proshares introduced its Bitcoin Strategy ETF in October 2021, Bitcoin's price skyrocketed, but then dropped when investors realized the ETF was linked to Bitcoin through futures contracts.

Additionally, government regulations and views can also impact Bitcoin's price. For instance, China's crackdown on cryptocurrency transactions in 2021 caused a significant drop in Bitcoin's price.

Lastly, Bitcoin's value is derived from its decentralized network, and there is no central authority to intervene in the market, which can lead to dramatic price swings without the ability to artificially stabilize the market.

Overall, Bitcoin's volatility means that it is a risky asset to hold, and investors should be prepared for big downturns and the possibility that it could lose all value.

How to buy Bitcoin

There are several ways to buy Bitcoin, each with its own pros and cons. Here are some of the most common methods:

Cryptocurrency Exchanges:

You can purchase bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These platforms offer a range of cryptocurrencies and carry different fees and consumer protections, so it's important to research them before choosing one.

Traditional Stockbrokers:

Robinhood was one of the first mainstream investment brokers to offer Bitcoin trading, and it doesn't charge any fees for Bitcoin trades. Other options include Webull, TradeStation, and Fidelity. However, the choices among traditional brokers that offer Bitcoin are still limited.

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 if you're already familiar with these platforms.

Bitcoin ATMs:

Bitcoin ATMs act like in-person bitcoin exchanges, where individuals can insert cash to purchase bitcoin, which is then transferred to their online wallets. However, these transactions typically come with higher fees than other options.

Bitcoin Wallet Apps:

You can buy Bitcoin through a dedicated Bitcoin wallet app, such as the Bitcoin.com Wallet app.

Brokerages:

You can also buy Bitcoin through brokerages like eToro.

Centralized Cryptocurrency Exchanges (CEXs):

Centralized exchanges, such as those listed on the Bitcoin.com website, allow you to buy Bitcoin and other cryptocurrencies.

Regardless of the method you choose, it's important to understand the risks involved in investing in Bitcoin. It's a volatile asset, and you should only invest what you can afford to lose. Additionally, make sure to research the fees, consumer protections, and regulatory environment associated with each platform before making a purchase.

Bitcoin's performance against the S&P 500

Bitcoin's performance is based on a shorter, more volatile history, which could change significantly over an extended period. The S&P 500, on the other hand, is considered a stalwart index representing the largest publicly traded companies in the U.S. and is known for its stability and historical significance.

Bitcoin's market capitalization is also much smaller than that of the S&P 500, making investing in bitcoin similar to investing in a single stock, while investing in the S&P 500 offers diversification across 500 companies.

While bitcoin has offered higher returns than the S&P 500 in recent years, it is important to consider the risks associated with investing in cryptocurrencies, such as volatility, regulatory uncertainty, and a lack of consumer protections.

Bitcoin's legality and tax status

Legality

As of March 2024, Bitcoin was legal in the US, Japan, the UK, Canada, Australia, and most other developed countries. However, in emerging markets and other areas, its legal status has varied dramatically. China heavily restricted Bitcoin in 2019, and India banned banks from dealing in Bitcoin, leaving the overall legal status of cryptocurrencies unclear.

Tax Status

Bitcoin's tax status varies by country. Here is a breakdown of some countries' tax treatments of Bitcoin:

• US: The Internal Revenue Service (IRS) considers Bitcoin property, and has issued tax treatment guidelines for taxpayers.
• UK: The government regulates crypto assets and has updated its Financial Services and Markets Act to guide the regulation of digital assets.
• Canada: The Canadian Revenue Agency defines Bitcoin as a crypto-asset that is taxed based on the circumstances in which it was used. Any income from a Bitcoin transaction is considered either business income or a capital gain and must be reported as such.
• Australia: The Australian Taxation Office considers Bitcoin a financial asset with value that can be taxed when specific events occur. For example, if you trade, exchange, sell, gift, convert it to fiat currency, or use Bitcoin for purchases, you trigger a capital gains tax.
• India: The Finance Act 2022 introduced a 30% tax on income earned from trading in Bitcoin, Virtual Digital Assets, and cryptocurrencies.

How to store Bitcoin

There are several ways to store Bitcoin, each with its own pros and cons. Here are some of the most common methods:

Hot Wallets

Hot wallets are software applications that store your Bitcoin online. They are typically available as mobile or desktop apps, or web-based wallets. Hot wallets are convenient and easy to use, allowing you to access and send Bitcoin quickly. However, they are more vulnerable to hacking and theft since they are always connected to the internet. Examples of hot wallets include applications like Coinbase, PayPal, and Robinhood.

Cold Wallets

Cold wallets, on the other hand, store your Bitcoin offline, making them a much more secure option. They are not connected to the internet, so they cannot be hacked. Common types of cold wallets include:

• Hardware Wallets: These are physical devices, often similar to USB drives, that store your private keys securely offline. Examples include the Ledger Nano X and Trezor Model T.
• Paper Wallets: This involves printing out your public and private keys, usually as QR codes, and storing them in a safe place. While this method is affordable and secure, it has a high risk of user error and is not very convenient.

When choosing a storage method, it's important to consider your needs and the amount of Bitcoin you plan to store. For large amounts, a cold wallet is generally recommended for its enhanced security. For smaller amounts that you plan to use for transactions, a hot wallet may be more suitable due to its convenience and ease of access. Additionally, you may want to use a combination of hot and cold wallets to balance security and usability.

Frequently asked questions