Exploring Bitcoin: Investing $5000 In Crypto

Bitcoin is a cryptocurrency, a virtual currency that can be used as money and a form of payment outside the control of any one person, group, or entity. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. Bitcoin is highly volatile and prone to illegal activity, and it is not backed by any tangible asset. Due to its high volatility, many people purchase bitcoin for its investment value rather than its ability to act as a medium of exchange. If you invested $1000 in bitcoin five years ago, you would have made a profit. However, there are many risks involved with investing in bitcoin, including volatility, fraud, and theft.

Bitcoin's value is unstable

Billionaire entrepreneur Mark Cuban and investor Warren Buffett have both warned that Bitcoin's value is unstable. Jack Bogle, the founder of Vanguard, went so far as to say, "Avoid bitcoin like the plague." He pointed out that Bitcoin has no underlying rate of return, unlike bonds, stocks, and even gold.

The regulatory environment for cryptocurrency is also uncertain, with various countries making their bids to attract, tax, and control the industry. This adds another layer of complexity to the already volatile nature of Bitcoin's value.

In addition, there are now many alternatives to Bitcoin for digital payments, making its value even more questionable. Apple Cash, Venmo, and similar services offer easy ways to send, receive, and spend money. Countries are also rolling out digital versions of their fiat currencies, such as the Digital Yuan in China.

Bitcoin's promise of anonymity has also been proven false, as governments invest in tools to seize crypto and attribute transactions to individuals. This further diminishes the perceived benefits of Bitcoin and other cryptocurrencies. Overall, the highly unstable nature of Bitcoin's value makes it a risky investment.

It's treated the same as other investments

Investing in Bitcoin is treated the same as investing in stocks or other assets. It requires an account at a service or a cryptocurrency exchange, a way to make payments, and a place to store your purchases safely.

Before investing in Bitcoin, it is important to understand the legal, regulatory, and tax status of purchasing it where you live. In the US, Bitcoin is legal, but some banks may question or even stop deposits to crypto-related sites or exchanges.

To buy Bitcoin, you will need to choose a crypto-trading service or venue, such as an exchange or a brokerage firm, or a payment service like PayPal or a mainstream brokerage firm like Robinhood or Coinbase. Exchanges are a convenient option because they offer a breadth of features and more cryptocurrencies for trading. Exchanges also enable investors to buy, sell, and hold cryptocurrency and allow users to transfer crypto to their online wallet for safekeeping.

When creating a cryptocurrency exchange account, it is important to use two-factor authentication and a long, unique password that includes a variety of letters, special characters, and numbers. Depending on the exchange, personal identification may be required, and you may need to include a picture of a driver's license or Social Security card, as well as information about your employer and source of funds.

At most exchanges, you can connect your bank account directly or link it to a debit or credit card. It is also possible to get bitcoin at specialized ATMs and via peer-to-peer (P2P) exchanges. Fees vary for deposits via a bank account, debit, or credit card, and exchanges also charge fees per transaction.

Once you have set up your account and payment method, you can place an order for Bitcoin. Cryptocurrency exchanges have evolved and now mimic the same features as their stock brokerage counterparts. Crypto exchanges offer several order types and ways to invest, including market and limit orders, and some also provide stop-loss orders.

After purchasing Bitcoin, it is important to ensure safe storage for your purchased cryptocurrency. Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered, but not recommended, for large or long-term cryptocurrency holdings.

There are two main types of wallets: hot wallets and cold wallets. Hot wallets are online wallets, or apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices. Cold wallets, on the other hand, are not connected to the internet and are, therefore, less risky. These offline wallets or hardware wallets store a user's private key on something that isn't connected to the internet and come with software that allows investors to view their portfolio without putting their private key at risk.

It's extremely volatile

Bitcoin is extremely volatile, and there are several factors that contribute to this volatility. Firstly, the value of Bitcoin is not determined by cash flows, unlike most other assets. Its value is based on speculation and how it is used in the global economy, making its price susceptible to slight changes in investors' expectations and perceptions. For example, investors' expectations for the currency can change drastically based on world events, and the Bitcoin market may not be efficient enough to absorb these shocks without significant price impacts.

Secondly, the distribution of Bitcoin plays a role in its price volatility. With a market capitalization of only ~$1 trillion, it is possible for a single entity or wealthy individual to affect the price by buying or selling large amounts of Bitcoin. Large holders of Bitcoin can significantly influence the market by increasing supply and creating sell pressure.

Additionally, the immaturity of the Bitcoin markets and financial products supporting Bitcoin contributes to its volatility. The markets are constantly evolving, and investors are gaining access to new forms of exposure, which may lead to more efficient markets and a reduction in price volatility over time.

Furthermore, the role of Bitcoin is still being established, and sentiments about the currency are regularly redefined. Lawmakers' and financial institutions' actions and statements regarding Bitcoin can cause significant fluctuations in supply and demand, impacting its price.

Lastly, external factors such as Google Trends, total circulation, consumer confidence, and the S&P500 index have also been identified as important drivers of Bitcoin volatility.

While volatility may indicate the potential for above-average returns, it is also a significant risk indicator. Therefore, investors considering Bitcoin should be prepared for a bumpy ride and carefully evaluate their risk tolerance before investing.

It's not a currency

Investing in Bitcoin is a risky business. While it is possible to make a profit, it is also very possible to lose money. In 2018, an article in CNBC highlighted that an investment of $1,000 in bitcoin five years prior would have made a profit. However, if you had bought bitcoin when it was at its peak of $20,000, you would have lost $13,600. Billionaires such as Mark Cuban and Warren Buffett have warned that bitcoin's value is unstable.

Now, onto why bitcoin is not a currency.

A currency is a medium of exchange, a store of value, and a unit of account. Bitcoin fails to satisfy these criteria. It has achieved only a small consumer transaction volume, with an average of less than one daily transaction for the few merchants that accept it. Its volatility is much higher than widely used currencies, which imposes large short-term risks on users. Bitcoin's daily exchange rates have virtually zero correlation with widely-used currencies and with gold, making it useless for risk management and difficult for owners to hedge. Bitcoin's prices require many decimal places with leading zeros, which is off-putting to retail market participants.

Bitcoin also faces daily hacking and theft risks, lacks access to a banking system with deposit insurance, and is not used to denominate consumer credit or loan contracts. It is not a good store of value because of its volatility, and its slow network and high transfer costs make it a poor medium of exchange.

Bitcoin appears to behave more like a speculative investment than a currency. It has no intrinsic value and is not backed by anything. Its value is said to come from its scarcity, but this alone cannot be a source of value.

It's not insured by the FDIC

Investing in Bitcoin and other cryptocurrencies is risky due to the volatile nature of the market. If you're thinking of investing $5000 in Bitcoin, it's important to understand the potential risks and rewards.

One key risk to consider is that Bitcoin is not insured by the FDIC (Federal Deposit Insurance Corporation). This means that, unlike traditional bank deposits, your investment is not protected by the US government if the value of Bitcoin drops or the exchange you're using goes out of business. While some cryptocurrency companies have claimed in the past that their deposits were FDIC-insured, this is not currently the case for any crypto firm.

The lack of FDIC insurance means that your investment is not guaranteed and you could lose some or all of your money. For example, if you had invested $5000 in Bitcoin when it was at its peak of $20,000, your investment would now be worth only around $3,400, a loss of $1,600. On the other hand, if you had invested $1,000 in Bitcoin 5 years ago, you would have made a profit of over $5,000 as of October 2018.

The volatile nature of Bitcoin and other cryptocurrencies has led seasoned investors such as Mark Cuban and Warren Buffett to warn against investing in them. Jack Bogle, the founder of Vanguard, went so far as to say that people should "avoid bitcoin like the plague" due to its lack of underlying value.

However, some people speculate that if the FDIC were to insure deposits at a cryptocurrency platform, it could boost confidence and encourage more people to invest in crypto. While it's not currently possible for crypto firms to obtain FDIC insurance, there is ongoing discussion and efforts by crypto platforms to potentially offer this in the future.

In summary, investing in Bitcoin comes with significant risks, including the lack of FDIC insurance. It's important to carefully consider these risks and only invest what you can afford to lose, as the value of Bitcoin can fluctuate widely and is not guaranteed by any government or financial institution.

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