Bitcoin For Everyone? Exploring Average Joe's Investment

Bitcoin is a cryptocurrency that has gained a lot of attention in recent years due to its significant price fluctuations and increasing mainstream adoption. As a result, many people are wondering if they should invest in it. In this article, we will explore the risks and potential benefits of investing in Bitcoin for the average person. We will also discuss some of the key considerations and strategies for those who decide to enter the Bitcoin market.

Bitcoin's volatility

Bitcoin is well-known for its volatility, and this is a key consideration for any average person thinking about investing.

Bitcoin's value can fluctuate wildly, and this is off-putting for many potential investors. For example, in 2018, a single coin was worth $16,000, but soon after, its value had dropped to nearly half of that. This volatility is one reason why experts are generally wary about investing in Bitcoin.

The dramatic price changes are due to several factors. One is that Bitcoin is a relatively new currency, and so its value is unstable. Another reason is that Bitcoin is a decentralised currency, meaning that its value is not backed up by any government or central bank. Its value is therefore determined solely by market demand, which can be unpredictable.

The volatility of Bitcoin is also fuelled by the actions of "Bitcoin whales", individuals who hold large amounts of Bitcoin and therefore have a significant influence on the market. If a whale moves their Bitcoin from cold storage to an exchange, it's a sign that they plan to sell, which will result in price fluctuations.

The volatile nature of Bitcoin means that it is a risky investment, and it is often compared to gambling. However, some people view the volatility as an opportunity to make large profits.

For the average person, it is generally recommended to only invest a small amount that you can afford to lose. It is also advisable to take a long-term approach, as short-term price changes can be unpredictable and dramatic.

Bitcoin trading vs investing

Bitcoin trading and investing are two distinct concepts that are often confused. Here is a detailed comparison between the two:

Investment Period

Bitcoin traders typically have a short-term horizon, focusing on hourly and daily price movements. They aim to buy coins at a low price and sell them quickly, sometimes within seconds, minutes or hours, to make a small profit on each trade. On the other hand, Bitcoin investors are geared towards the long term, betting on the coin's long-term potential. They are willing to hold their investments for several years, unconcerned with short-term price fluctuations.

Trade Frequency

Traders execute a high volume of trades as they constantly seek profitable market opportunities. This approach can be risky and requires active monitoring of market conditions. In contrast, investors have a low trade frequency, holding onto their coins for extended periods without frequently selling.

Risk Profile

Traders are "risk-takers", embracing frequent trading and short-term price volatility. They often engage in margin trading, borrowing funds to increase potential profits and losses. Investors, on the other hand, are more "risk-averse", comfortable with leaving their investments alone and less concerned about daily price changes. Over time, the volatility of an asset tends to smoothen out, making it less risky for investors.

Type of Analysis

Traders focus on predicting price movements and market positioning, relying primarily on technical analysis of historical price data and price indicators. Investors, however, take a long-term view and emphasize fundamental analysis. They evaluate the viability and potential of a coin by considering factors such as merchant adoption rates, cryptocurrency usage rates, and community developments.

Profit Methodology

Traders aim to profit from price movements and market opportunities, including hard forks and airdrops. They seek to buy low and sell high, taking advantage of short-term price fluctuations. Investors, on the other hand, have a more passive approach, aiming for long-term price appreciation. They may also receive dividends, coin burns, or airdrops, which are unique to the cryptocurrency market.

In conclusion, Bitcoin trading is a fast-paced, high-risk endeavour that requires active monitoring and a strong understanding of market analysis. It suits those seeking short-term profits and frequent trading. Bitcoin investing, on the other hand, is a long-term strategy, focusing on the coin's fundamental value and potential for growth over time. Investors are willing to hold their investments through price fluctuations, expecting significant returns in the future.

Pros and cons of different trading strategies

There are several trading strategies that can be employed when investing in Bitcoin or other financial instruments. Each strategy has its own set of advantages and disadvantages, and the choice depends on the trader's goals, risk tolerance, and trading style. Here are some of the most common trading strategies and their pros and cons:

• Day Trading: Day traders conduct multiple trades within a day, based on short-term price predictions. This strategy requires a combination of technical and fundamental market analysis to reduce risk exposure. Day trading offers a high number of trading opportunities but demands significant time investment and a strong understanding of technical analysis.
• Scalping: Scalpers make numerous trades throughout the day, capitalising on micro price fluctuations. This strategy aims to leverage profits while reducing risk exposure. Scalping requires a significant time investment and a deep understanding of technical analysis.
• Swing Trading: Swing traders take a more patient approach, monitoring long-term patterns in the market. They aim to enter at the lowest point and sell at the highest. This strategy provides a more flexible approach but requires a strong understanding of technical analysis and market trends.
• Range Trading: Range traders identify support and resistance points and place trades around these levels. This strategy works well in a stable market without significant volatility. Range trading requires a strong technical analysis foundation and risk management strategies to handle potential breakouts.
• Trend Trading: Trend traders aim to exploit a market's directional momentum. This strategy generally operates over medium to long-term time horizons. Trend trading requires time investment and a solid understanding of technical analysis and market trends.
• Carry Trade: Carry traders borrow one currency at a lower rate and invest in another currency with a higher yield. This strategy depends on interest rate fluctuations and is typically employed over the medium to long term. Carry trades require an understanding of the forex market and interest rate risks.

When choosing a trading strategy, it is essential to consider the time investment required, the risk-reward ratio, and the frequency of trading opportunities. Additionally, traders should assess their personal attributes, goals, and risk tolerance to determine the most suitable strategy for their needs.

Bitcoin's reputation

Bitcoin has had a bad reputation for several reasons. Firstly, there is the myth that Bitcoin is primarily used for illegal activities such as money laundering, arms dealing, and drug transactions. Secondly, Bitcoin has been associated with tax evasion, as it offers pseudonymous privacy and blockchain analysis firms can determine who is behind an account. Thirdly, get-rich-quick schemes, such as the ICO craze of 2017, have burned many investors, who lost money investing in things they didn't fully understand. Scams and Ponzi schemes also prey on people's poor financial and technical knowledge, making ridiculous promises. Lastly, Bitcoin's reputation has been damaged by its high volatility and association with risky investments.

Despite these concerns, Bitcoin has gained widespread acceptance and is here to stay. Major companies like MicroStrategy and Tesla have invested billions in Bitcoin, and investors like Ray Dalio and Carl Icahn have expressed interest. Additionally, Bitcoin's reputation as a safe haven has grown due to its hard cap on the total amount issued, in contrast to the ungodly amounts of dollars printed by the US Federal Reserve and pumped into traditional financial markets.

In conclusion, while Bitcoin's reputation has been marred by myths, scams, and volatility, its growing acceptance by major companies and investors, as well as its recognition by European countries, indicates that it is gaining legitimacy and is an increasingly important component of the international financial system.

Bitcoin's legality

The legality of Bitcoin varies from country to country. While it is welcomed in many parts of the world, several countries are wary of its volatility, illicit uses, and decentralised nature. As of March 2024, Bitcoin was legal in the US, Japan, the UK, and most other developed countries. However, in emerging markets and other areas, its legal status has varied dramatically.

Countries Where Bitcoin Is Legal

Bitcoin can be used anonymously to conduct transactions between any account holders worldwide. While some legislators and officials may not support its use because of the lack of control and illicit ties, many have introduced regulations to reduce its use for criminal purposes.

The US Department of Treasury's Financial Crimes Enforcement Network (FinCEN) has issued guidance on Bitcoin since 2013, defining it as a convertible currency with an equivalent value in real currency or one that can act as a substitute. The Internal Revenue Service (IRS) has also categorised Bitcoin as property for taxation purposes.

The UK has allowed cryptocurrency use since it was first introduced, using existing policies and growing experiences to develop a framework for cryptoasset regulation. The Financial Services and Markets Act was updated in 2023 to guide the regulation of digital assets.

Canada maintains a generally bitcoin-friendly stance. The Canadian Revenue Agency defines Bitcoin as a crypto-asset that is taxed based on the circumstances in which it was used. Cryptocurrency exchanges are considered money service businesses and must register with the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

Australia also considers Bitcoin a financial asset, which can be taxed when specific events occur, such as trading, exchanging, selling, gifting, or using it to make purchases.

Other countries where Bitcoin is legal include Mexico, El Salvador, Jamaica, Mauritius, and Kyrgyzstan.

Countries Where Bitcoin Is Illegal

In several countries, including China and Saudi Arabia, it is illegal to use Bitcoin. While Bitcoin is not recognised as a currency in Saudi Arabia, the Saudi Central Bank (SAMA) has warned against using it due to the high risk.

In 2017, the Central Bank of Nigeria (CBN) banned bank transactions in Bitcoin and other virtual currencies. A similar banking ban was implemented in Qatar.

India banned banks from dealing in Bitcoin, and while the overall legal status of cryptocurrencies remains unclear, there have been arrests related to Bitcoin mining under money-laundering charges.

Bitcoin is also generally banned in Nepal, and while not officially outlawed in Pakistan, there have been arrests related to Bitcoin mining and trading.

In 2013, the People's Bank of China prohibited financial institutions from handling Bitcoin transactions, and in 2017, cryptocurrency exchanges were effectively banned.

Countries With Mixed Bitcoin Stances

In some countries, Bitcoin is not illegal, but it is discouraged. The South African Reserve Bank, for example, issued a statement in 2014 that virtual currency had "no legal status or regulatory framework". Bitcoin is also discouraged in Lebanon and Jordan.

In other countries, Bitcoin is legal to hold but illegal as a payment method. This is the case in Ecuador, Egypt, Indonesia, Iraq, Qatar, and Vietnam.

Future of Bitcoin Regulation

Regulations for cryptocurrency are still evolving worldwide as its use and acceptance continue to grow. Many countries are expected to introduce new or updated legislation as the market matures.

Frequently asked questions