Some people have hesitated to invest in cryptocurrencies, partly out of not understanding them, partly because of their volatility, but more people are investing in Bitcoin. Things to consider to determine if it’s right for you.
Cryptocurrency 101
Cryptocurrency differs from other currencies, and it is not physical but rather a digital or virtual currency secured by cryptography, making it impossible to counterfeit or double-spend. Many are based on blockchain technology, which uses a network of disparate computers.
Also, unlike physical currencies, Cryptocurrencies are generally not issued by any central authority. This, theoretically, renders them immune to government interference or manipulation, according to investopedia. Further, decentralization means they do not collapse from a single point of failure, and money transfers are cheaper and faster.
Bitcoin: the most traded and popular cryptocurrency
Bitcoin was the world’s first cryptocurrency. First introduced in 2008 via a white paper by an anonymous person called Satoshi Nakamoto, or possibly a group of programmers using that pseudonym, it became established in 2009. The world’s second cryptocurrency, Ethereum, was developed in 2015 and remains the second most popular and valuable.
As of March 11, 2022, the crypto market was valued at close to $2 trillion, with Bitcoin accounting for roughly $750 billion in value.
Cons of Bitcoin: Volatility
Volatility is a significant issue for Bitcoin and for all cryptocurrencies and a major reason a lot of big investors were slow to adopt digital coins.
Beginning slow in 2009, Bitcoin permanently crossed the $1000 threshold in 2017, then a roller coaster ride to an all-time high of about $69,000 in November 2021, US News reports.
In January, an analyst from Goldman Sachs predicted bitcoin could go beyond $100,000 in value if it becomes accepted as an alternative to gold.
Risks and rewards of owning Bitcoin and other cryptocurrencies
Higher investment risk: Because of volatility and the large fluctuations in prices of cryptocurrencies, digital coins carry a far greater risk than do stocks.
Hacking: Because it is a digital asset that only exists in the virtual world, another risk is cyber attacks. Due to hacking, billions of dollars of cryptocurrency market cap value have been lost.
Speculative: Because Bitcoin has no intrinsic value, investors can only speculate on its future price compared to gold for example.
Higher rewards: However, on the positive side, in its history, bitcoin has outperformed the S&P 500, which has attempted many investors to accept additional risk in exchange for potentially higher returns.
Diversified portfolio: How much should you invest in Bitcoin?
Some experts see Bitcoin as a small part of a diversified portfolio; those best hold that with strong risk tolerance. Bitcoin has the potential to lose a lot of value in a short amount of time.
With that in mind, some experts say those who want to limit their exposure should limit their bitcoin holdings to 1% to 3% of their portfolio.
Alternative ways to reduce risk
For some investors, any direct investment in Bitcoin may present too much risk. To lower risk, it’s possible to invest in a Bitcoin exchange-traded fund such as the ProShares Bitcoin Strategy Etf (ticker: BITO) or VanEck Bitcoin Strategy ETF (XBTF). Bitcoin stocks are another option.
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