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26 October 2021

Thinking About Investing in Bitcoin? Here Are Facts Before You Start

Should you invest in Bitcoin? Or other cryptocurrencies for that matter? You should get the facts about trading Bitcoin before you start; and also decide on an appropriate investment strategy, conduct your own crypto market research, and have an objective source of crypto news and updates.

A cryptocurrency (or crypto, for short) is a type of digital or virtual currency that doesn’t need to exist in a physical form to have value. These days cryptocurrencies have become extremely popular due to their decentralized exchange system between peers, making it one of the most sought-after asset class. But should you really invest in them, or in Bitcoin for that matter? This article looks at things to consider.


Investing in Bitcoin: What to consider before you buy Bitcoin

Bitcoin (BTC) is the first cryptocurrency in the world, launched in 2009. It is also the first wide-scale, real-world application of blockchain technology. Bitcoin is a decentralised network which uses a public ledger to approve transactions, eliminating the need for third party approval (such as a bank). It also operates free of a governing body, such as a central bank, and all changes in the network require consensus from its members. While initially BTC value was extremely low, priced at fractions of cents, it picked up steam over the years, reaching price levels in the thousands of dollars for a single Bitcoin token and a market cap in the hundreds of billions.

The Bitcoin chart often displays extreme volatility, having short-term price spikes and tumbles. Sometimes, when the Bitcoin price is on the rise, more people are inclined to buy Bitcoin, fueling its positive run further. On the other hand, when the Bitcoin value is on the decline, it can prompt existing investors to sell off their Bitcoin and push prices down. Moreover, Bitcoin is considered the bellwether of the cryptocurrency space, so it can often generate industry-wide trends.

Who should include Bitcoin in their portfolios?

Those with an interest in Bitcoin cut across several spectrum. Do you fall into one of them?

Cryptocurrency traders: Bitcoin is the most well-known cryptocurrency, and therefore, many crypto traders buy it as part of their cryptocurrency portfolio. To trade, you will need to have an account with a cryptocurrency exchange, such as Binance. See the separate article: Binance: Buy, Sell, Earn and Grow Crypto on the World's Largest Crypto Exchange Platform.

Long-term investors: While still considered an extremely volatile and risky market, Bitcoin has shown tremendous price increases over time. Therefore, those who believe the overall trend will continue to be positive could consider a Bitcoin investment.

Day traders: BTC prices can often have significant price swings over the course of a few hours. Traders can try to take advantage of these movements in an attempt to generate short-term profits.

Blockchain enthusiasts: Since Bitcoin is the first major application of blockchain technology, those who have faith in the technology and its potential impact on the tech and financial industries, could consider buying Bitcoin.

How should you invest in Bitcoin?

Bitcoin prices depend mostly on speculation about its adoption and use. While the increase in institutional adoption has helped drive Bitcoin’s price higher, it still lacks the traditional economic rationale that allows investors to expect Bitcoin to continue to generate positive real returns over time.

Perhaps that will change over time. Or, perhaps you don’t care. But then, there is nothing traditional about Bitcoin. And many will argue it is the asset of the future.

If you are a traditional investor and really want to add Bitcoin to your portfolio, consider the relative market weight of that asset class compared to the relative weights of your other portfolio assets, that is if you have other portfolio assets.

For example, the global stock and bond markets have market capitalizations of roughly $70 trillion and $130 trillion, respectively. As of right now, Bitcoin’s market value is just over $1 trillion. An asset allocator’s starting point might be giving about 0.5% of their portfolio to Bitcoin ($1 trillion divided by $201 trillion).

If you are not a traditional investor, this probably does not apply to you.

There are other reasons to keep your exposure relatively small, at least for now. For starters, 20% or larger price swings are not uncommon. Two years ago, Bitcoin lost half its value in two days and months later, fell by 20% in a day. Bitcoin has also had several, much more significant crashes, losing up to 85% of its value in hours or days.

On the flip side however, just last week, Bitcoin surged to more than $66,000 in a matter of hours, giving its investors huge profits to take home.

And of course, there is also the non-zero probability that Bitcoin’s value falls to zero, even though this is far-fetched. Bitcoin is still a relatively new asset that may be at risk of future regulation or restrictions by governments.

If you have a thoughtfully-crafted financial plan, it’s unlikely you will require an asset to go absolutely bonkers in order to meet your goals. The most strategic plans focus on minimizing investment mistakes instead of earning outsized returns, so speculative investments such as Bitcoin should be allocated accordingly.

Having said the above, I personally have used strategies to minimise this risk to a bare minimum. I find that using a trading bot like Royal Q on any of the world's large crypto trading platforms like Binance or Huobi, helps me maximize returns no matter how low Bitcoin or other cryptos crash down to. This is because these platforms allow APIs which this bot can plug into for quantitative crypto trading. Thus, it buys at that low price to get an average price and monitors the market continuously to sell off immediately there is a rise. Quantitative trading is a mathematical process and a bit more complex, but so far, the bot has handled it well and it has worked even when there have been significant crashes.

On the other hand, you can also use such strategies manually without the need for a quantitative trading bot if you are registered to trade on a smaller trading platform, such as Luno or Blockchain Exchange platforms.

We all have different appetites for risk. So, if you are not a natural risk taker, but wish to invest in Bitcoin, then start small and gradually build up as you educate yourself further. I will soon be doing an article on The Best Strategy to Make Money Daily from Cryptocurrency: My Personal Experience.

Getting objective news and doing your own research

Coin Gecko and Coin Desk are probably the best sites to get objective crypto news and updates from. There may be other sites, but I find these two most useful for my research, news and updates on anything crypto, starting with Bitcoin down to the least known cryptocurrency.

CoinDesk is a US-based news site specializing in bitcoin and digital currencies news across the world, and began publishing in May 2013. Coin Gecko allows you to assess any crypto's price, charts, information, and many other useful stuff. It would be worth your while checking them out.

What drives Bitcoin’s price?

Bitcoin is a highly volatile instrument that has experienced tremendous price movements over the years, sometimes gaining hundreds of percentage points or crashing significantly over a relatively short period of time. While it is less affected by happenings in mainstream markets, it can be affected by a variety of factors relating to the crypto space, the blockchain industry and by regulatory issues. Here are a few examples:
  1. General crypto trends: In late 2017, cryptocurrencies were heavily debated in the media. People, who previously hadn’t heard of the crypto, started asking how to buy Bitcoin. This sparked a massive crypto bull run, which peaked in December of 2017 when nearly all the major cryptos reached record highs.
  2. Mainstream market volatility: Bitcoin and the rest of the crypto industry operate separately from other markets. Therefore, when mainstream markets are on the decline or become too volatile, some traders and investors turn to the crypto market as an alternative.
  3. Traditional financial institutions: Over the years, there have been several attempts to introduce Bitcoin into mainstream markets in the form of ETFs, futures contracts and other financial instruments. Since many of these instruments require regulatory approval, traditional regulatory bodies, such as the US Securities and Exchange Commission (SEC), could have a major impact on the market, whether they approve or deny such instruments. This is demonstrated recently when the US SEC approved Bitcoin Futures ETF, thus opening up Bitcoin, and potentially other cryptos, to a wider investor base, and resulting in a massive bull run that saw Bitcoin surge to over $66,000 per BTC coin.
  4. The blockchain industry: Some experts believe that blockchain has the potential to revolutionise many areas of the technology and financial industries. Bitcoin is the first and one of the largest blockchain networks in the world, and as the technology becomes more widespread, more people might be inclined to buy BTC.

Bitcoin: Miners and Forks

The way Bitcoin works as a decentralised network relies on its members, some of which are miners. Miners allocate computing power to carry out transactions and are rewarded a small fee for each transaction. Since these processes require computing power and electricity, Bitcoin miners are usually those who invested significant sums of money to build mining computers. What is crypto mining?

However, miners have another key role. When the Bitcoin blockchain network needs to undergo a change or an upgrade, it needs the approval of its members, which can signal whether or not they approve the change. If the change is significant and makes the platform backward compatible, it is known as a hard fork. When not enough participants approve the change, a hard fork results in a parallel blockchain network being created.

Such was the case with the Bitcoin Cash hard fork in August 2017. With this hard fork, a group of developers intentionally rolled out a protocol they knew would be rejected by some members of the network, hence creating a hard fork and a new cryptocurrency. Bitcoin Cash became incredibly successful, reaching a market cap in the billions and becoming a top 5 crypto.

History of Bitcoin

Bitcoin was founded in 2008 and launched the next year by an unknown person or persons using the pseudonym Satoshi Nakamoto. While initially it was only adopted by blockchain enthusiasts, the fact that it enabled users to carry out transactions quickly and while maintaining their anonymity, made its popularity grow exponentially over time. The first purchase of physical goods using Bitcoin ever made was 10,000 BTC for two pizzas, in 2010. The same pizzas would be worth $190,000,000 in January 2018.

As Bitcoin became more popular, numerous other cryptocurrencies were created. Some were built on the same technology, while others created blockchain protocols of their own. However, despite growing competition in the crypto space, Bitcoin has maintained its place as the world’s largest crypto by market capitalization for many years. See this on Coin Gecko.

Conclusion: Can Bitcoin remain the king of cryptos?

Much has happened in the crypto industry since Bitcoin was the only cryptocurrency in the world. Growing rapidly in number, there are thousands of other cryptos today, many with significant market caps and trading volumes. However, Bitcoin remains at the forefront of the industry, if only due to its sheer, massive size. As the industry progresses and diversifies, there is a possibility Bitcoin may lose its place as the largest crypto. However, such a scenario seems very unlikely in the near future, and Bitcoin could very well maintain its spot as the world’s top crypto for years to come.

IMPORTANT NOTES:
*Cryptocurrencies can fluctuate widely in price and are therefore not appropriate for all investors. At the moment, trading cryptocurrencies is not supervised by any government regulatory framework.

*This content is for information and educational purposes only and should not be considered investment advice or investment recommendation.

*Past performance is not an indication of future results. Investing in cryptocurrency can be very protitable, but also risky. Your capital could be at risk.
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