Exploring Bitcoin Investment: What's The Real Deal?

Bitcoin is a decentralised virtual currency that is built on blockchain technology. It is prone to price volatility and has been described as a risky investment. If you invest in Bitcoin, you will need to figure out a safe storage option, as crypto exchanges lack basic consumer protections. You will also need to be prepared for big downturns, as there is a possibility that Bitcoin could go to zero.

Bitcoin's value

Supply and Demand

Bitcoin has a finite supply of 21 million, and its rate of release is reduced every four years by halving the reward for Bitcoin mining. This limited supply can lead to increased demand, which can drive up the price.

Media Coverage and Public Interest

As a speculative commodity, Bitcoin is heavily influenced by public opinion and media coverage. For example, in 2021, a tweet from Elon Musk caused Bitcoin's price to drop by 30% in a single day, wiping US$365 billion off its market value.

The Wider Crypto Market

The performance of the wider crypto market can also impact Bitcoin's value. For instance, the collapse of FTX, a major crypto exchange, left a sour taste in the mouths of investors, making them more wary of investing in Bitcoin.

Government Legislation

Government legislation and policies can also affect Bitcoin's value. For example, China's 2021 ban on cryptocurrency caused a sharp drop in Bitcoin's price.

Volatility

Bitcoin is prone to price volatility, with wide swings in value. Its value increased from US$26,000 in September 2023 to an all-time high of US$73,000 in March 2024. However, it is important to note that Bitcoin's value can also drop significantly, as seen in January 2023 when prices sank to US$39,000.

Risks and Drawbacks

Investing in Bitcoin carries risks due to its volatility and the lack of consumer protections in the crypto market. Transactions are irreversible, and there is no insurance protection from entities like the Securities Investor Protection Corp. or the Federal Deposit Insurance Corp.

Safe Storage

Safe storage of Bitcoin is crucial as crypto exchanges and wallets can be compromised. Cold wallets, or hardware wallets, are considered the most secure way to store Bitcoin, as they are not connected to the internet and keep the private keys secure offline.

Diversification

It is generally recommended to maintain a diversified portfolio and not invest more than 10% of your total portfolio in risky assets like Bitcoin.

Long-Term Potential

Some experts believe in Bitcoin's long-term potential as a store of value and an alternative payment system, especially in developing countries. They also see the potential for blockchain technology to become a bigger part of the economic ecosystem.

Safe storage

There are two main types of Bitcoin wallets: hot wallets and cold wallets. Hot wallets are online wallets, such as apps on your computer or phone, and are convenient for small amounts of cryptocurrency or for crypto that is actively being traded. However, they are more susceptible to hacking. Cold wallets, on the other hand, are offline wallets, such as USB drives or paper wallets, and are considered more secure for large or long-term cryptocurrency holdings. They are not connected to the internet, so they are less likely to be compromised.

• Hardware wallet: A hardware wallet is a USB-drive device that stores your private keys securely offline. This option is less susceptible to viruses and malware that could infect your computer. Examples of hardware wallets include TREZOR and Ledger Nano S.
• Paper wallet: A paper wallet is a wallet generated at certain websites that produce both public and private keys, which you can then print out. Many people laminate these paper wallets and store them in safe deposit boxes at banks or in a safe in their homes.
• Air-gapped wallet: An air-gapped wallet is a type of cold storage wallet that uses a clean, air-gapped computer to generate and store private wallet keys. It is safe from online threats like viruses and hackers but is still vulnerable to offline threats like hardware keyloggers or physical theft.
• Multi-signature wallet: A multi-signature wallet requires multiple signatures for transactions, adding an extra layer of security.
• Bitcoin exchange wallet: Some people choose to store their Bitcoin on a cryptocurrency exchange like Coinbase or Binance. However, this option is not recommended for large or long-term holdings as the exchange could be hacked.
• Enable two-factor authentication and use strong, unique passwords for your wallet and exchange accounts.
• Don't give anyone your private key. Keep it secret and store it safely.
• Distribute your Bitcoin across multiple public addresses, keeping significant investments at addresses that are not directly connected to those used for transactions.
• Backup your wallet in multiple secure locations, such as USB drives, CDs, or cloud storage.
• Be cautious when using online devices and connections. Avoid using public Wi-Fi, and be wary of phishing attempts and malware.

Volatility

Bitcoin is prone to price volatility, with wide swings to the upside and downside. For example, in 2020, if you had invested in 1 Bitcoin at the start of the year, it would have cost you $7,195. By April 2021, your investment would have been worth $63,577 (up 784%) but by July 2021, it would have dropped to $29,972 (down 53%). This kind of volatility is much more stressful when crypto is 100% of your portfolio.

The rapid rise in bitcoin's price would be huge for a traditional asset, such as a stock or bond, but is not unusual in the crypto market. Bitcoin's value is influenced by supply and demand, media coverage, public interest, and government legislation. For example, in 2021, a tweet from Tesla's Elon Musk caused Bitcoin's price to drop by 30% in a single day, wiping $365 billion off the cryptocurrency market.

Bitcoin's volatility is due in part to the fact that it is unregulated and lacks a central governing body. It is also not backed by a company's earnings or the strength of a government and rule of law, and there is no interest or dividends paid.

If you invest in Bitcoin, it is recommended that you keep your allocation small. Brian Vendig, president of MJP Wealth Advisors, recommends no more than 5% of your total portfolio.

Demand

Analysts highlight the importance of the $45,000 threshold for Bitcoin, suggesting that staying above this level could allow it to reach new heights. Long-term holders reinforce this optimism by transferring more than 404,000 BTC (worth $23 billion) to long-term storage, indicating their strong confidence in Bitcoin's future.

The growing demand for Bitcoin in the United States is driving its price to new heights. However, caution is still advised due to the inherent volatility of the crypto market. Bitcoin's future will depend on its ability to maintain crucial support levels while capitalizing on the enthusiasm of American investors.

Hedge funds, pensions, and banks have also been investing in Bitcoin, with more traditional investors embracing this asset class. Among the well-known buyers are hedge funds like Millennium Management, which held shares in at least five Bitcoin ETFs, according to a Bloomberg analysis.

Bitcoin's price is renowned for its high volatility, but despite this, it has become the top-performing asset of any class over the past decade, climbing a staggering 9,000,000% between 2010 and 2020.

Public interest

• Regulatory developments: Positive regulatory developments, such as the approval of a spot Bitcoin ETF, can increase public interest and boost demand for Bitcoin.
• Media and influencer hype: Public figures with large platforms, such as Elon Musk, can significantly impact Bitcoin's price with their comments and actions.
• Economic conditions: During harsh economic conditions, such as high inflation and supply shortages, investors may become less willing to invest in risky assets like Bitcoin, leading to decreased demand and price declines.
• Adoption by institutions: Growing institutional demand for Bitcoin as an attractive asset class can increase public interest and drive up prices.
• Crypto exchange failures: The collapse of major crypto exchanges, like FTX, can shake public confidence in Bitcoin and lead to sell-offs.

It's worth noting that public interest in Bitcoin tends to be higher during bull markets, when stories of people making massive returns on their crypto investments circulate more widely.

However, it's important for investors to remember that Bitcoin's value is also influenced by other factors, including supply and demand, the actions of governments and institutions, and the development of blockchain technology.

Additionally, while public interest can impact Bitcoin's price in the short term, it's not the only factor at play, and it's difficult to predict Bitcoin's future price movements with certainty.

Frequently asked questions