Bitcoin as an Investment

How much should I invest?

Great question! Just like with traditional investments, this depends on a number of factors including your income, expenditures, age, balance sheet, risk tolerance and many other factors. It’s important to talk to an expert (like us!) before making any big financial decisions.

Bitcoin is still very early in its adoption, and although it has been quite profitable, it’s also been volatile. Check out this chart of Bitcoin’s performance from January 2013 to September 2017.

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Bitcoin should be a small piece of your overall investment plan, which should also include stocks, real estate, and gold.

 

Risks

As a truly world-changing technology, there are a lot of big players in the current financial world that would love to see Bitcoin fail. Bitcoin’s seemingly unlimited potential also leads to speculation and high price volatility. Below is a summary of major risks to Bitcoin’s price, and to Bitcoin users.

Regulatory Risk

We’re not just talking about the SEC here. Being a worldwide currency, every country gets to chime in. The SEC recently ruled that Initial Coin Offerings (think IPO’s but for cryptocurrencies) should be viewed as securities. That helps legitimize digital currencies in the United States, but it also means that more regulation may be on the way.

In September 2017, China put a temporary ban on all new ICO’s. In addition, they halted BTC-Yuan trading. Bitcoin is censorship-resistant. No country can take bitcoin down, but countries have ways to make buying and selling BTC for fiat currency a lot harder.

regulation SEC Bitcoin Censorship

Regulators are determining how to handle Bitcoin

In contrast, Japan has declared Bitcoin a legal currency and some cities in Switzerland even let you pay taxes in Bitcoin!

Finally, there are concerted smear campaigns launched against all forms of value, and bitcoin is not immune. Centralized, embedded entities have a keen interest in seeing alternate currencies fail, do your research before reacting!

Market Risk (Speculation)

Bitcoin is constantly being called a bubble by those who do not understand the underlying technology and philosophy. Heck, Bitcoin has been declared dead a few dozen times a year. Bitcoin markets are extremely turbulent. Expect the volatility of penny stocks. However, since Bitcoin is not a stock, and does not have underlying cash flow or sales, it is very hard to pick a price target. Because of this, swings are wild, even more so as big money hedge funds come into the picture.

Think of it this way, big tech companies like Netflix often lose money or make minuscule returns. So, they’re priced based on growth. Analysts look at the potential markets that the company can penetrate and the odds that this specific company will be the answer. The same is true for Bitcoin. Fore more on analyzing bubbles, check out our blog post on the subject.

Security Risk

If you hold your Bitcoin on third party exchanges, there is some risk that those exchanges could go down, and you’ll lose your money. This was a big deal back in 2014 when only a couple of unregulated exchanges existed. In 2017, there are many reputable exchanges that are KYC and AML compliant. However, if you want complete control of your bitcoin, it is suggested to hold your private keys.

One of the safest ways to hold your Bitcoin is by using a hardware wallet. Hardware wallets never reveal your private key and are not susceptible to hacking. When you buy a hardware wallet, you’ll be given a passphrase that is required in order to use your bitcoin. It’s extremely important that you make backups of this phrase and do not lose it, as you’ll be unable to recover your bitcoin.

Next: What is the potential value of Bitcoin?

 

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