Bitcoin Investment: Risky Business Or Safe Bet?

Investing in Bitcoin is a risky business. While it's possible to make a lot of money, it's also possible to lose it. If you invest all your money in Bitcoin, your portfolio will be extremely volatile, which can be stressful. Bitcoin's value fluctuates wildly, and it's difficult to predict whether it will stand the test of time or fall by the wayside. For example, if you had invested in 1 Bitcoin at the start of 2020, it would have cost you $7,195. By April 14, 2021, it would have been worth $63,577 (up 784%), but by July 21, 2021, it would have dropped to $29,972 (down 53%). On top of that, there are also scams to watch out for, and you need to figure out a safe storage option so you don't lose access to your Bitcoin.

Investing in the wrong cryptocurrency

Investing in cryptocurrency is a trend that has been going on for over a decade. While some people have managed to acquire enormous wealth, others have taken years to see any profit. For those considering investing in cryptocurrency, it is important to be aware of the risks involved and the potential for loss.

• Playing it safe: Investing in cryptocurrencies that are considered more secure because their price remains stable over time is not a sound strategy. Cryptocurrency is not a traditional investment, and playing it safe will likely result in missed opportunities. Instead, it is recommended to experiment with smaller, more dynamic cryptocurrencies to find profitable investments.
• Poor portfolio: A rich portfolio does not necessarily indicate success in cryptocurrency investing. It is important to continuously learn and stay informed about the market to make strategic investment decisions. If your portfolio lacks diversity and is not expanding, it may be a sign that you are dealing with the wrong cryptocurrency.
• Expecting instant success: Investing in new cryptocurrencies that promise quick and huge returns can often be a scam. Be cautious of offers that seem too good to be true, as they may be fraudulent. It is important to do your own research and not fall victim to get-rich-quick schemes.
• Influenced by others: Celebrity endorsements and artificial hype can pressure investors into making impulsive decisions. It is crucial to do your own research and make investment choices based on your personal strategy, rather than following the crowd.
• Lack of diversification: Investing all your resources in a single cryptocurrency can be risky. It is recommended to spread your investments across multiple cryptocurrencies to reduce risk and take advantage of different opportunities.
• Constant losses: Some cryptocurrencies may not experience significant growth, and it is important to recognise when it's time to cut your losses. If you are constantly experiencing losses with a particular cryptocurrency, it may be wise to reconsider your investment strategy.

It is important to remember that investing in cryptocurrency carries risks, and it is possible to lose money. Before investing, ensure you have a good understanding of the market and the specific cryptocurrency you are interested in.

Cryptocurrency scams

There are many types of cryptocurrency scams, and new ones are always emerging. Here are some common types of scams to be aware of:

• Investment scams: An individual is randomly contacted by someone pretending to be an investment manager on social media or a dating app. The scammer will offer to help you invest your money in cryptocurrency but will actually transfer the money into their own account.
• Business, government, or job impersonation scams: The scammer will disguise themselves as a government official or a business that you owe money to. This type of scammer will act like someone you trust to try and get you to send cryptocurrency to them.
• Blackmail scams: The scammer will claim they have personal information about you or sensitive content that they will release unless you send them cryptocurrency.
• Imposter websites: These are one of the most common types of scams reported. The website will have a name that sounds similar to that of a legitimate company or website. Bad actors attempt to profit from unsuspecting consumers by taking advantage of the potential confusion.
• Do your research on the company before you invest or send money.
• Independently contact the organization that is contacting you.
• Do not answer random phone calls or provide personal information such as your social security number, bank account details, or passwords while on the phone with unknown individuals.
• No real business will ask you to send them cryptocurrency.
• Talk to someone you trust before making major financial decisions.
• Report any suspicious activity to law enforcement.

Volatile and stressful portfolio

If you invest in Bitcoin, be prepared for a rollercoaster of emotions. The cryptocurrency market is extremely volatile, and Bitcoin's value can fluctuate wildly, resulting in a stressful investment experience.

For example, let's consider the price movements of 1 Bitcoin between 2020 and 2022:

• April 14, 2021: $63,577 (up 784% from the start of 2020)
• July 21, 2021: $29,972 (down 53% from its peak)
• November 10, 2021: $69,045 (up 130% from July)
• November 9, 2022: $18,562 (down 73% from its peak)

These drastic shifts in value can be exhilarating when prices are rising, but they can also be incredibly stressful when prices plummet. The higher the proportion of your portfolio invested in Bitcoin, the more you'll feel these ups and downs.

When you have a significant portion of your wealth tied to such a volatile asset, it can be challenging to make rational investment decisions. The fear of missing out on potential gains or the panic of seeing your investment lose value can lead to impulsive decisions that may not align with your long-term investment strategy.

Additionally, the constant monitoring and worry that comes with a volatile portfolio can take a toll on your mental health and well-being. It's important to be prepared for these potential downsides and to ensure that you have a robust risk management strategy in place before investing in Bitcoin.

To reduce the stress associated with a volatile portfolio, diversification is key. Instead of putting all your eggs in the Bitcoin basket, allocate a smaller portion of your portfolio to it. This way, you can still benefit from its potential gains without exposing yourself to excessive risk.

Remember, investing in Bitcoin should be a well-thought-out decision, not an impulsive reaction to FOMO (Fear of Missing Out).

Safe storage options

There are several safe storage options for your Bitcoin. Firstly, it is important to understand the different types of wallets available, including exchange, hardware, mobile, and paper wallets, as well as the distinction between hot and cold wallets. Hot wallets are connected to the internet, making it easier to access your Bitcoin but also increasing the risk of hacks. Cold wallets, on the other hand, are offline and considered much safer as they are not susceptible to online hacks.

Hardware Wallets

Hardware wallets are devices similar to USB drives that allow you to store your private keys in cold storage, keeping them safe from hackers. Examples include the Ledger Nano X and Trezor Model T. These wallets can be connected to your device when you need to access your Bitcoin and then stored safely offline when not in use. They offer a high degree of security but may be more confusing for less technical users and typically come with a cost.

Mobile Wallets

Mobile wallets are applications installed on your smartphone, allowing you to easily send, receive, and pay with crypto. These are usually self-custodial, giving you full ownership of your private keys. While mobile wallets are convenient for transactions, they are less secure than cold wallets and not recommended for storing large amounts of Bitcoin.

Paper Wallets

Paper wallets were one of the earliest forms of crypto storage. They involve printing out your private and public keys and storing them in a secure location. While paper wallets are affordable and provide offline storage, there is a high risk of user error or damage to the paper. Additionally, if the paper is stolen or lost, your Bitcoin could be compromised.

Crypto Exchanges

Crypto exchanges, such as Coinbase, Binance, and Kraken, provide free hot wallets when you purchase crypto on their platform. These wallets are convenient and widely supported, but they lack the security of cold storage options as your private keys are managed by a third party. There is also a risk of hacks and theft associated with exchange-based hot wallets.

Cold Storage Devices

Cold storage devices are portable devices with Bluetooth connectivity that allow you to store your Bitcoin offline. You can connect them to your computer or phone to access your crypto and then disconnect them when not in use. It is important to back up your recovery (seed) phrase and keep it in a safe place, as forgetting this phrase could result in losing access to your crypto.

Multi-Signature Wallets

Multi-signature wallets require multiple keys from different people to sign a transaction, adding an extra layer of security. This makes it much more difficult for attackers to access your funds as they would need to compromise multiple keys.

Overall, the safest way to store your Bitcoin is through self-custody cold storage, giving you full control over your private keys and minimizing the risk of online hacks. However, it is important to balance security with usability, and some users may opt for a combination of hot and cold wallets to suit their needs.

Tough decisions after success

Let's say you've decided to take the plunge and invest in Bitcoin. You've done your research, weighed the pros and cons, and allocated a certain amount of money for this purpose. Now, what happens if your investment in Bitcoin is successful?

Firstly, congratulations! You've beaten the odds and made a profit from this highly volatile asset. However, this is where things get tricky. You now have to decide what to do with your newfound gains. Here are some options to consider:

Hold On

The first option is to do nothing and let your investment ride. This is a tempting choice, especially if you believe Bitcoin will continue to increase in value. However, it's important to remember that what goes up can also come down. Bitcoin's value can fluctuate significantly, as evidenced by its price history. Holding on may lead to even more substantial gains, but it also increases the risk of losing those profits if the market takes a turn.

Take Some Profits

A more conservative approach is to take some money off the table. You could sell a portion of your Bitcoin holdings to recoup your initial investment, locking in a risk-free profit. This way, you eliminate the risk of losing what you've put in, and you can let the remaining Bitcoin continue to grow (or decline) in value. This strategy provides a balance between greed and caution.

Sell Everything

The most risk-averse option is to sell all your Bitcoin holdings and take your profits. This ensures that you walk away with a gain and eliminates any further risk of loss. However, it also means you miss out on any potential future gains if Bitcoin's value continues to rise. This option is often chosen by investors who are satisfied with their profits and want to secure their winnings.

Tax Implications

Regardless of the option you choose, it's important to remember that taxes will come into play. If you sell any Bitcoin, you'll likely owe short-term capital gains taxes, which are taxed as ordinary income. Depending on your income level, you could end up paying 30% or more of your profits in taxes. This is a critical consideration when deciding how much, if any, of your Bitcoin to sell.

Diversification

Another important aspect to consider is diversification. While it's great to have a successful investment in Bitcoin, it's generally not advisable to have all your eggs in one basket. Diversifying your portfolio by investing in other assets or cryptocurrencies can help reduce risk and provide a more balanced approach to investing.

In conclusion, while investing in Bitcoin and achieving success is exciting, it also comes with a set of challenging decisions. It's important to carefully consider your options, weigh the risks and rewards, and make choices that align with your financial goals and risk tolerance. Remember, investing is a marathon, not a sprint, and sometimes preserving capital is just as important as chasing gains.

Frequently asked questions