Bitcoin Investment: What's In It For You?

Bitcoin is a very high-risk investment. It's a volatile asset, meaning its value can rise or fall dramatically in a short space of time. It's not backed by any physical asset, like gold or silver, and there's no central regulator to ensure the value remains stable. Its value is dependent on market demand.

However, some people believe that Bitcoin is the future of currency and investing. Its value has increased by more than 763% in just one year, and high-profile individuals and businesses such as Elon Musk and SpaceX have embraced it.

If you're considering investing in Bitcoin, it's important to do your research and carefully assess the pros and cons.

Bitcoin's high volatility

Bitcoin is a highly volatile investment. Its price fluctuations can be extreme, and it is not uncommon to see daily movements of 5% or more. In May 2021, for example, its value plunged by nearly 30% in a single day. This volatility is driven by several factors, including Google trends, total circulation, consumer confidence, and the S&P500 index.

The upside of Bitcoin's volatility is the potential for high returns. An investment of just 10 cents in 2010 would be worth a substantial amount today. However, this volatility cuts both ways, and investors need to be prepared for significant downturns. For example, someone who bought Bitcoin in 2013 would have seen their investment lose 80% of its value, only recovering three years later. More recently, in 2022, the price of Bitcoin fell by over 75% from its all-time high.

The extreme volatility of Bitcoin means that it should only be considered by investors with a high-risk tolerance and who are prepared to lose some or all of their investment. As a general rule, investors are advised not to allocate more than 10% of their portfolio to risky assets like Bitcoin.

The volatility of Bitcoin also has implications for its use as a currency. Critics argue that it is too volatile to be a reliable medium of exchange, with its value fluctuating too much for it to be practical for daily use. For example, if you bought something with Bitcoin, by the time you got home, the value of the Bitcoin you spent could have dropped by 5% or more, making you feel like you overpaid.

However, advocates of Bitcoin argue that the volatility is understandable given that it is still in the early stages of adoption. As the market grows and matures, they expect volatility to decrease. They also point out that Bitcoin has the potential to be a non-correlated asset, similar to gold, meaning that it may not follow the trends of other assets like stocks.

The pros and cons of Bitcoin

Bitcoin is the largest cryptocurrency by market cap and has been making headlines for its eye-popping returns. However, as with any investment, there are pros and cons to investing in Bitcoin.

Pros

• Bitcoin is decentralised, meaning it's not regulated by a single government or central bank.
• It is an accessible and versatile currency, which can be used to purchase goods and services from a growing list of places that accept it.
• It can make spending money in another country and exchanging for other currencies easier, with no foreign transaction fees.
• It has the potential to be a non-correlated asset, similar to gold, meaning it may not follow the trends of other assets, like stocks.
• It has historically offered the potential for high returns.
• It can be bought via crypto exchanges, payment services like PayPal, and mainstream brokerage firms.
• It is easy to transfer money without the involvement of banks and other financial institutions.
• It offers protection against inflation.
• Transactions are relatively secure.

Cons

• Bitcoin is highly volatile, with large dips and spikes in price.
• It is not widely accepted or used, which limits where you can spend your money.
• It is not regulated, meaning transactions are not protected and are typically not reversible.
• Transactions are irreversible and final, so if you send the wrong amount or to the wrong recipient, there is little recourse.
• It is susceptible to scams and security breaches.
• It has high energy consumption, which has raised environmental concerns.
• It is not insured by the Federal Deposit Insurance Corporation or the Securities Investor Protection Corporation.
• It is too inefficient to work as a means of payment, with transactions taking around 10 minutes on average to process.
• It is too volatile to be a reliable currency.
• It is not backed by any meaningful value, so its price is susceptible to hype.

How to buy Bitcoin

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase bitcoin from cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs, or Bitcoin exchange-traded funds (ETFs). When choosing a service or venue, consider factors such as fees, consumer protections, and the range of cryptocurrencies offered. Popular exchanges in the U.S. include Coinbase, Kraken, Gemini, and Binance.

Step 2: Set up an Account and Connect a Payment Option

To set up an account on a cryptocurrency exchange, you will typically need to provide personal identification information and set up a secure password with two-factor authentication. You will also need to connect a payment method, such as your bank account, debit card, or credit card. Note that using a credit card to purchase cryptocurrency can incur additional fees and interest charges.

Step 3: Place an Order

Once your account is set up, you can place an order to buy Bitcoin. You can choose from various order types, such as market orders, limit orders, or stop-loss orders, depending on the exchange. You can also set up recurring investments to dollar-cost average into Bitcoin.

Step 4: Safe Storage

After purchasing Bitcoin, it is important to store it securely. You can use a hot wallet or a cold wallet. Hot wallets are online wallets that are connected to the internet and are convenient for small amounts of cryptocurrency or active trading. Cold wallets, on the other hand, are offline wallets that are more secure but require technical knowledge to set up. Examples of cold wallets include paper wallets and hardware wallets.

Additionally, when buying Bitcoin, it is essential to consider the legal, regulatory, and tax implications in your jurisdiction. It is also crucial to prioritize privacy and security to protect your investments.

Bitcoin's value and demand

Bitcoin's value comes from its finite supply, its store of value and payment system, and its increasing demand.

Finite Supply

Bitcoin's supply is limited. There will only ever be 21 million bitcoins, and the final coins are projected to be mined in 2140. This restricted supply is a key source of its value.

Store of Value and Payment System

Bitcoin can function as a store of value and a unit of exchange. It demonstrates the attributes of a currency: scarcity, divisibility, acceptability, portability, durability, and uniformity.

Increasing Demand

Bitcoin has attracted the attention of retail and institutional investors, increasing demand. It has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is used for transferring large sums of money for illicit and illegal activities.

Impact of Supply and Demand

The combination of Bitcoin's restricted supply and increasing demand has fuelled its rise in price. However, its price still fluctuates, and it remains a volatile investment.

Other Factors Influencing Value

Other factors that can influence Bitcoin's value include:

• Media coverage: Positive or negative news coverage can impact investor sentiment and, therefore, Bitcoin's price.
• Regulatory changes: Bitcoin is responsive to regulatory developments, and its price can be affected by rulings from bodies such as the Securities and Exchange Commission (SEC).
• Competition: The emergence of alternative cryptocurrencies, such as Ethereum, has increased competition and reduced Bitcoin's market dominance.
• Investor sentiment: Factors such as greed and the fear of missing out on large returns can impact investor sentiment and, consequently, Bitcoin's price.

Bitcoin's value is primarily driven by its restricted supply and increasing demand. However, its price is also influenced by various other factors, including media coverage, regulatory changes, competition, and investor sentiment. As a result, Bitcoin remains a volatile investment.

Risks of investing in Bitcoin

Investing in Bitcoin and other cryptocurrencies can be risky due to the volatility of the market. The price of Bitcoin is constantly changing, and there is no way to predict whether you will make a return on your investment. The market is influenced by sentiment, speculation, and market manipulation, and investors may struggle to build confidence and secure gains.

Another risk is the lack of regulation in the cryptocurrency market. Currently, there are no major regulations in place, and the government doesn't have a clear stance on cryptocurrency. This lack of regulation could lead to future restrictions on cryptocurrency, or it could even be banned altogether. The lack of regulation also creates opportunities for fraud and cyberattacks, as there is no way to retrieve lost or stolen Bitcoins. Investors are advised to carefully research their cryptocurrency wallets to ensure they have a reliable and secure option.

The digital nature of Bitcoin also presents risks. As Bitcoin is 100% technology-based, investors are vulnerable to cyber threats and online fraud. Additionally, the lack of a physical presence for Bitcoin means that it is not backed by a central authority, which could result in legal complications if issues with transactions or ownership arise.

Finally, there is a risk of losing access to your Bitcoins if you lose your private key. If you forget or misplace your key, you may not be able to retrieve your coins, and if a third party acquires your private key, they could gain access to your Bitcoins.

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