Bitcoin has been luring some investors with potentially huge rewards—and scaring others away with equally big risks. Should it be on your investment shopping list ?
Still, it’s hard to argue with the short-term results.
Bitcoin, the cryptocurrency, continues to smash through price barriers, with one Bitcoin this week breaking through the $19,500 mark (then back to $13,000, then who knows what by the time you read this).
Some early adopters have made millions and Facebook is now full of adverts to tempt the public to invest their hard-squirrelled cash in it.
Taken together, the market capitalizations of all the world’s cryptocurrencies, including other prominent players like Ethereum and Ripple, have risen even faster this year.
Here are the 13 things you should know before investing in Bitcoin
1. Cryptocurrencies trade like volatile commodities
Cryptocurrencies don’t really trade like currencies at all. One of the primary reasons for that is that there’s a cap on the number of coins that any given currency will ever have in circulation.
Central banks like the Federal Reserve can and do print more money to manage inflation and support their countries’ economic policies.
Bitcoin, on the other hand, will eventually have a maximum of 21 million coins in circulation, based on the algorithm that controls distribution.
This makes many cryptocurrencies much more like commodities, since there’s a finite supply, like with gold or oil. “It’s difficult to look at Bitcoin as a currency,” because of this supply issue. And the limited supply is one reason for Bitcoin’s volatility.
Volatility is also increased by the fact that the overall cyrptocurrency market is still tiny. All this trading and speculation is happening in a field where the total market cap is currently only about $260 billion. (Apple alone has a market cap of about $900 billion.)
The simple answer is if you don’t understand Bitcoin you should not be investing in it.
That doesn’t mean you must understand the nitty-gritty of the tech behind it, but you need to understand what you’re getting into – how it works as an investment, how liquid it is (ie, can you get out when you want to), the level of risk and what can drive the price up and down.
So if you’re going to invest, you need to start doing research and reading. The mere fact that a friend has told you it’s a good idea, doesn’t mean it’s right for you.
3. Don’t fall for Bitcoin seller scams
People often ask me if Bitcoin is a scam. No, it’s not. Yet that doesn’t mean there aren’t a lot of scams involved with Bitcoin. Just like buying shares isn’t a scam, but there are a lot of boiler room share scam cons.
Avoid pyramid schemes, cloud mining, MLM, “earn interests” schemes, and ponzi schemes such as Bitconnect. Please keep Googling.
Bitcoin isn’t the easiest thing to invest in – you need to buy it and store it safely – and that opens up room for many dodgy people to try to take advantage.
4. The demand for Bitcoin right now is likely from speculators more than users
Bitcoin is a currency and there are now a few places allowing you to spend it. Yet most asking me about it as an investment for the future, or as a place to store value, not as a convenient way to shop.
The fact it’s a scarce resource leads to the assumption that if demand rises so will the price.
Of course this does lead people to ask questions such as…
That’s very difficult to answer – almost philosophical! What is value? Well, food has it, because we can eat it.
Yet the primary use of gold, which has been a store of value for centuries, is just for jewellery. Its value comes from its scarcity, uniformity, and the fact many recognise it as a medium of exchange.
And then look at our paper money – it has no intrinsic value, but Government validates it so we recognise it as having such.
So does Bitcoin have value? Yes, but only because if people choose to accept it as a form of payment.
5. Bitcoin is a highly speculative investment
Bitcoin was invented in 2009, but hasn’t taken off as more mainstream until the last year or so.
It’s an investment – just like stocks and shares – though it’s currently unregulated (the Govt is looking at regulation to minimise money-laundering, but the whole basis of cryptocurrency means this will be very difficult to do). Or if I want to be more controversial, putting money in it is a form of gambling.
That means if it does well, you could make serious amounts – 10, 20, 30 times or more what you put in; or just as possible, if it goes badly wrong, you can lose everything.
Therefore you need to be prepared and think about your attitude to risk before you consider investing.
Its price has risen hugely over the last few years and since the beginning of the year the price has rocketed.
Graphs like these can be read as “I need to get in there, the price is rocketing” or “It’s overvalued, I’ve missed the boat”. We’ll only know with hindsight – you have to accept the uncertainty – though there is a decent chance this is a bubble.
So while the upward curve looks appealing, remember what counts with any asset (especially if, like this, it doesn’t pay dividends) is the price you buy at, and the price you sell at. Buying then viewing a price rise only makes you rich on paper; deciding when to sell is as important as when to buy.
Bitcoin is now at a point where the mainstream public are becoming much more aware of it – rather than the tech and financial aficionados who were in at the start.
That means we may be at the point where the ‘greater fool theory’ is coming into play. That is when many people are buying, not because they think the valuation is realistic, but because they believe a greater fool than them will be willing to pay even more for it in future. The key then is not to be the final fool.
6. Invest 1-2% of your net worth
Madhur Todi, Ahmedabad based financial planner and bitcoin investor believes an investor should not put away 1-2 % of his net worth in bitcoin. “You should be ready to lose it”.
Invest 3-4 % of your income after tax in crypto (since most of you, don’t know what “invest what you can afford to lose” means).
Some people have brought up that 10–20% is usually what is left from their paychecks after they have paid their bills. If that’s the case, then I don’t think you can afford to invest at all.
Mark Cuban said:
“If you are feeling adventurous, invest 10% into Bitcoin or Ethereum.”
7. Do not quit your day job
Keep your day job despite reaching your financial goal in crypto, so you are not emotionally dependent on your crypto profits as a source of income.
This way you won’t make emotional decisions about selling your crypto because you’re hurting for cash. Slowly take out small profits to pay your debts.
8. Read and read, every day
Do not underestimate the power of reading. Learn something new about blockchain and cryptocurrencies every day.
Staying up to date is crucial in this space. How fast do you think this space moves? Think about generating $100 billion market cap in less than 5 months. Yes, this happened this year (11/10/2017).
Feb ’17 $20 Bn
May ’17 $40 Bn
May ’17 $80 Bn
Oct 10, 2017 $160 Bn
Nov 10, 2017 $200 Billion
9. Surround yourself with crypto people
Do not recruit your friends into investing in crypto. Do not tell your family about your involvement in crypto unless you are truly comfortable doing so. Why? Because crypto is too volatile and there are many uncertainties.
If you really want to share to people what you’ve discovered, then just be neutral about it. Refuse to give them recommendations about which coins to buy.
Encourage them to read and research about the coins they’re buying, then add your input if you are comfortable doing so. If you really want to pitch them Bitcoins, then tell them the pros and cons of hodling Bitcoins.
10. Always do your own research
Manipulation, hype, pump and dump, fraud, scam, hacking, and stealing, are common here in this space, and can sometimes lead people to financial loss.
Here’s an example: On November 7, 2017, it was announced that any funds deposited after July 20th, 2017 are currently stuck or frozen in the Parity wallet.
Meaning no one is able to withdraw from it. Not even the ICOs who used the Parity wallet multi-sig. There is an estimate of $280M USD stuck in the wallet, equivalent to 980,000 ETH, almost 1M supply of ETH.
11. Think long-term profits, not short-term gains
If you are here to trade that’s fine. Trade no more than 30% of your crypto net worth, and 70% in long term. I’ve made more money hodling long term than trading daily/weekly.
Why? because the early stage of blockchain and crypto is obviously not priced in yet, Crypto market just jumped from $100 billion to $200 billion market cap in less than 5 months, if you held then you’d probably have made more. Unless you really know what you’re doing, then trade away in this volatile market.
Just know this, there are professional traders looking to do some damage in this market at the expense of newbies.
12. Diversify your portfolio
If you are unsure of what you’re doing, then narrow down your portfolio if you know what you’re doing.
13. Be responsible with your newfound wealth, don’t be reckless, you may experience a state of euphoria when your portfolio reached triple gains.
And it’s tempting to go on a shopping spree. It’s not cash until that money is in your bank, if your portfolio reaches $10,000 in crypto, don’t go out spending your cash just because your crypto in your cold storage are worth $10k.
Anything can happen, it can crash the minute you start your shopping spree, lose your private keys, or get hacked.
And one last thing…
“Be scared when everyone’s feeling greedy, be greedy when everyone is scared”. -Warren Buffett
It’s important to understand how Bitcoin works before investing any money.
Bitcoin is still new and it can take months to understand the true impact Bitcoin can have on the world.
The above information should not be taken as investment advice. It is for general knowledge purposes only. You should do your own research before buying any bitcoins.
So please forgive the fact that I probably haven’t given you the firm “Buy or not?” answer you want.
If you want to invest in cryptocurrency, Mark Cuban said, then “pretend you’ve already lost your money.”
If you’re going to buy, do your research and go to what is hopefully a legitimate Bitcoin seller.
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