Despite being relatively new and untested on a large scale, cryptocurrencies based on a technology called blockchain are touted by many as the future of money. The most popular of these new-fangled digital currencies is definitely bitcoin, which has attracted both attention and controversy for its investment value and risk. But is bitcoin investment a would fit for your portfolio?
Well, it really depends on your risk appetite and level of comfortability with technology. If you can stomach the inherent volatility of these financial assets and navigate the technological maze of digital money markets, then you could stand to reap great returns on bitcoin investments.
Why invest in bitcoin?
The value of bitcoin is largely based on its scarcity and utility. Just as there is a finite amount of gold on earth, there is also a maximum amount of bitcoin to be ‘mined.’ This would normally mean that as more bitcoin is mined (and less become available to claim), the demand and value of these digital assets would increase.
While this may mean that early investors tend to have an advantage, there are still opportunities to profit from market trends, as the value of bitcoin is also affected by several other market forces.
Bitcoin is considered highly transferable and to have multiple applications. Aside from the increasing number of merchants accepting cryptocurrencies as payment, the completely digital and unregulated nature of bitcoin ensures that these assets can be instantly transferred or traded from anywhere in the world without going through the hoops that central banks and other regulators impose on traditional fiat money.
Plus, blockchain technology provides transparency with regard to bitcoin ownership and circulation.
Steps in bitcoin investment
1. Decide how to invest in bitcoin
There are several ways that you can invest in bitcoin that vary in terms of ease of access or resource requirements (among other things), but these are the three of the safest and most common ways through which one can start investing in bitcoin:
- Own the underlying asset by directly buying or trading bitcoin through a cryptocurrency exchange, which usually charges a small percentage of your purchase price.
- Buy bitcoin-linked securities through ETPs or ETFs, which are usually more accessible and are professionally managed by more reputable capital firms or crypto-focused businesses.
- Invest in bitcoin CFDs, which allow you to speculate on bitcoin value movements through a broker without having to actually own the underlying cryptocurrency assets.
2. Think of your bitcoin storage
Once you actually own bitcoin or other cryptocurrency assets, you would want to think of the safest way to store your investments. Crypto wallets serve this purpose and come in several forms that are generally divided into two categories:
- Hot storage provides easy access to your digital funds through cloud-based platforms that you can manage through a computer or phone. It is advised to enable security features like two-factor authentication to further prevent unauthorized access to your funds.
- Cold storage refers to storage often tied to physical “artefacts” like dedicated USB devices or even actual paper. Cold storage is safe from hacks or data breaches, but you run the risk of losing access to your money in case of the loss or malfunction of these devices.
3. Manage your bitcoin investment
If you are familiar with “normal” stock or commodities trading, you may already know that there are generally two approaches to making a profit from your investments: active trading that takes advantage of short-term price fluctuations, or more passive growth investing that assumes an asset’s value will increase over time.
The same approaches can be applied to your bitcoin investments:
- Bitcoin speculation requires practice and patience, as it involves analysing the market and price trends in order to determine the ideal time to make a trade. The basic aim of investors following this hands-on approach is to sell bitcoins at a low price and then profit by selling these at a higher price later on.
- Buying and holding involves investing in bitcoin and then riding out potential ups and downs under the assumption that the long-term trends will invariably result in positive growth of the value of your assets. This more relaxed approach removes the need to constantly update your portfolio or perfectly time the market.
Risks of bitcoin investment
Bitcoin is not regulated
While a number of merchants have started accepting bitcoin and a few other cryptocurrencies for payments and transactions, these so-called “cryptos” remain completely unregulated and traded on markets independent of any government or financial authority.
This just means that despite all the built-in security features of digital monies, investors still bear great risk on their bitcoin investments with little legal recourse when things go wrong.
Bitcoin is a volatile asset
Although the general trend has been positive, the value of bitcoin can fluctuate drastically. In fact, it is by taking advantage of these fluctuations that bitcoin investors seek to profit. Imagine if you had bought some bitcoin at $0.003 when the first exchanges opened in 2010, and sold them when they peaked at $19,783.06 in 2017. You would have realized more than 6.5 million times your initial investment!
Exchanges are not 100% secure
Cryptocurrency exchanges are where you can buy or sell bitcoin, though choosing and trusting exchanges can be tricky. As much as these exchanges try to preserve their integrity, quite a few have fallen victim to security breaches in recent years, with the collapse of Mt Gox a clear example.
One way to add a layer of security to your cryptocurrency assets is to move them off exchanges and into third-party wallets when not actively trading them.
Tips for investing in bitcoin
Before we wrap up this article, here are some additional reminders to help you get off on a good foot when it comes to trading and investing in bitcoin:
- Avoid using credit cards: Despite the convenience, purchasing investments (bitcoin or not) with high-interest loans or other lines of credit is often discourages for its risky nature.
- Have your information ready: Creating an exchange account is easier if you have your Social Security number or bank details on-hand. And remember to keep passwords secure!
- Always use a secure connection: This applies to any financial decisions you make online; coffee shops or other public places do not provide private internet connections.
- Check for added security: A few crypto exchanges offer limited insurance for data breaches, which provides an additional layer of security on trades not regulated by authorities.
Since cryptocurrencies like bitcoin are entirely digital, investing and eventually profiting from these new markets can usually be facilitated with ease online. Bitcoin is still largely recognized as the safest of these digital currencies but adding other “blue chip” currencies like Ethereum into could be potential additions to your crypto portfolio as well.
While there are risks attached to adopting new technologies, the overall perception and outlook for cryptocurrencies is generally positive. Smart investing can be both profitable and secure in the long run, but starting small as you build your knowledge and confidence in the market is what many financial experts will recommend.