Bitcoin Investment: Can You Make Money?

Bitcoin is a risky investment with high volatility, and it is generally recommended that you only invest if you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment. There are many ways to invest in Bitcoin, including through cryptocurrency exchanges, traditional stockbrokers, money transfer apps, and Bitcoin ATMs. It is important to remember that there is no guaranteed return on investment, and the value of Bitcoin is highly dependent on market demand.

Dollar-cost averaging

Set a budget

First, determine how much you are comfortable investing regularly. Some Bitcoin savings apps allow you to start with as little as $10, but you can invest as much as you want in the digital currency every week or month.

Decide on the intervals

You can choose to invest at intervals that suit you, such as every week, bi-weekly, or once a month.

Find a good platform

You need a place to buy your Bitcoin. Look for a reputable Bitcoin exchange or app that allows you to save in Bitcoin using recurring payments. Examples of popular Bitcoin DCA apps include Swan (US), Relai (Europe), and Bitnob (Africa).

Start investing

Once you have registered for a Bitcoin DCA platform, set up regular bank transfers, and the app will purchase Bitcoin for you automatically at regular intervals based on your predetermined settings.

Keep your Bitcoin secure

As your Bitcoin savings app regularly buys Bitcoin for you, make sure the Bitcoin wallet you use is a secure, non-custodial wallet (a wallet where only you have access to the private keys) to ensure you can safely hold your Bitcoin investment for the long term.

Volatility risks

Bitcoin is a highly volatile asset, and its price doesn't always go up. In fact, it has been the worst-performing asset in three of the last ten years. Its price can drop significantly in a very short space of time. For example, in 2022, it fell more than 75% from its all-time high.

Bitcoin's volatility is driven by several factors, including supply and demand, investor actions, media hype, and government regulations. As a relatively new asset, Bitcoin is still in the price discovery phase, and its volatility is expected to continue to decline as it matures.

Supply and Demand

The price of Bitcoin, like most commodities, is heavily influenced by supply and demand. With a limited supply of 21 million coins, the closer the circulating supply gets to this limit, the higher the prices are likely to climb. As big financial players compete for ownership amid a dwindling supply, Bitcoin's price will likely fluctuate in response to their actions.

Investor Actions

Bitcoin's volatility is also driven by investor actions, especially those of large investors known as "Bitcoin whales." These investors hold a significant amount of BTC, and their actions can influence market value. If whales were to suddenly sell their holdings, it could trigger a panic among other investors, leading to a rapid decline in prices.

Media Hype and Government Regulations

Media outlets, influencers, and industry moguls can create investor concerns or hype, leading to price fluctuations. Additionally, government regulations and views on cryptocurrency can also impact Bitcoin's price. For example, China's ban on cryptocurrency transactions in 2021 led to a drop in Bitcoin's price.

Price Discovery and Market Maturity

Bitcoin is still a relatively young asset, and its volatility is partly due to the market's price discovery phase. As Bitcoin continues to mature and its market cap grows, the impact of new capital inflows on price is expected to diminish. This maturation process is similar to what gold experienced when the U.S. dollar was de-pegged from it.

Investor Sentiment and Fear of Missing Out

Investor sentiment plays a crucial role in Bitcoin's volatility. The fear of missing out on big price swings often leads to panic buying or selling, influencing demand and prices. This fear is particularly prominent due to Bitcoin's well-known volatility.

Comparison to Other Investments

While Bitcoin's volatility is high, it is not uncommon when compared to certain mega-cap stocks. In fact, Bitcoin has been less volatile than some prominent individual securities, such as Netflix stock, and its volatility has been declining over time. However, it is still more volatile than traditional asset classes like equities and bonds.

Impact on Portfolio Volatility

Bitcoin's standalone volatility can have a significant impact on a portfolio's overall risk, especially with large allocations. However, at modest sizes, Bitcoin's low correlation with traditional assets can provide modest diversifying effects while tapping into a novel source of return.

Managing Volatility

Investors considering Bitcoin should be aware of its risks and volatility and take a measured approach. This includes making small allocations, regularly rebalancing their portfolio, and using dollar cost averaging to smooth out the ride. Additionally, investors should understand their time horizon, risk tolerance, and investment objectives before investing in Bitcoin.

High-risk, high-reward

Bitcoin is a risky investment with high volatility. It is recommended that you only invest in Bitcoin if you have a high-risk tolerance, are in a strong financial position, and can afford to lose some or all of your investment.

Potential Rewards

Bitcoin historically has offered the potential for high returns. Its value has increased significantly since its creation in 2008, and it reached a new record high in March 2024, rising above $70,000 for the first time.

Bitcoin has the potential to be a non-correlated asset, similar to gold. This means that its value may not follow the trends of other assets, like stocks.

Potential Risks

The price of Bitcoin can be extremely volatile and subject to significant downturns. In 2022, it fell more than 75% from its all-time high.

Transactions in Bitcoin are irreversible. People have lost millions of dollars due to losing or forgetting their wallet credentials.

Crypto exchanges, such as Bitcoin exchanges, lack basic consumer protections found in traditional financial products. For example, they do not offer insurance protection from the Securities Investor Protection Corporation (SIPC) or the Federal Deposit Insurance Corporation (FDIC).

Tips for Investing in Bitcoin

• Only invest what you can afford to lose.
• Diversify your portfolio and do not invest more than 10% in risky assets like Bitcoin.
• Use dollar-cost averaging by making small, recurring purchases on a set schedule.
• Understand the technology behind Bitcoin and the blockchain.
• Be patient and avoid trying to time the market.
• Store your Bitcoin in a secure hot or cold wallet.
• Be cautious of scams and only use trusted exchanges and platforms.
• Do your research and understand the risks and potential rewards before investing.
• Consult with a financial advisor to determine if Bitcoin is suitable for your investment portfolio and financial goals.

Bitcoin's value

Scarcity

Bitcoin's scarcity is an important factor in its value. The total number of Bitcoins that can exist is limited to 21 million, and this artificial scarcity is coded into the Bitcoin algorithm. This scarcity is similar to that of precious metals like gold, and it helps to preserve the value of Bitcoin.

Potential for High Returns

Bitcoin has historically offered the potential for high returns. Its value has seen high levels of volatility, with significant increases and decreases over time. This volatility creates the potential for high returns but also increases risk.

Liquidity

Bitcoin is known for its high liquidity, with trading occurring 24/7 on various cryptocurrency exchanges. This provides investors with the ability to trade at any time and easily convert their Bitcoin into cash or other assets if needed.

Digital Currency Evolution

Bitcoin is often considered to be at the forefront of digital currency evolution. As the first and most well-known cryptocurrency, it has driven interest and adoption of digital currencies and blockchain technology. This position as a leader in the space contributes to its value.

Other Factors

Other factors that contribute to Bitcoin's value include its decentralisation, utility, anonymity, and privacy. Bitcoin is not governed by a central authority, so its value can't be manipulated by governments or financial institutions. It also allows for fast, low-fee transactions between parties without the need for a middleman, such as a bank. Additionally, while all transactions can be traced using blockchain technology, the identities of the people involved remain undisclosed, providing a level of anonymity and privacy.

How to buy Bitcoin

There are several ways to buy Bitcoin, each with its own advantages and disadvantages. Here are some of the most common methods:

Cryptocurrency Exchanges:

You can purchase bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a variety of cryptocurrencies and carry different fees and consumer protections, so it is important to do your research before choosing one.

Traditional Stockbrokers:

A few traditional brokers, like Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. These platforms often charge no fees for Bitcoin trades.

Bitcoin ATMs:

Bitcoin ATMs function like normal ATMs but allow you to buy and sell Bitcoin. They are often placed in locations such as convenience stores. Be sure to check the fees and have a plan for where to send your Bitcoin before using one of these ATMs.

Bitcoin Exchange-Traded Funds (ETFs):

As of January 2024, the Securities and Exchange Commission has approved spot Bitcoin ETFs, which track the price of Bitcoin and can be traded over major exchanges. This makes it easier for traditional investors to gain access to Bitcoin.

Peer-to-Peer Money Transfer Apps:

Cash transfer services like PayPal, Venmo, and Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps, providing a convenient option for those already familiar with these interfaces.

Bitcoin Wallets:

You can buy Bitcoin through a Bitcoin wallet app, such as the Bitcoin.com Wallet app.

Other Options:

Some crypto apps, games, and online services that use blockchain technology may also allow users to buy and sell Bitcoin directly within their platforms. Additionally, you can use a brokerage service or a peer-to-peer trading platform.

Storing Your Bitcoin:

Once you've purchased Bitcoin, you'll need to store it in a digital wallet. There are two types of digital wallets: hot wallets and cold wallets.

• Hot Wallets: Hot wallets are connected to the internet and provided by trusted exchanges or third-party providers. Transactions are generally faster with hot wallets, but they are more attractive targets for hackers.
• Cold Wallets: Cold wallets are small, encrypted portable devices that are not connected to the internet. They are considered much more secure than hot wallets but require technical knowledge to set up.

Frequently asked questions