Risk is an understood part of any type of investment. This is true whether you’re setting your sights on bitcoin, the stock market, or real estate. Yet, the volatility of cryptocurrency has given pause to many would-be investors. Is it worth it to ride out the ebb and flow of the price fluctuations, or should you place your money and attention elsewhere? Checking the numbers and asking, “Should I invest in Bitcoin?”
If so, we’re here to help make the decision a little easier. While the answer isn’t cut and dry, there are many different factors to consider, so let’s get started.
Understanding Bitcoin Volatility
Back in April 2021, the value of Bitcoin hit an all-time high of around $65,000, rising roughly 450% over six months of steady incline. However, while that meteoric rise was undoubtedly impressive, it didn’t take long to burn out.
Following that springtime spike, Bitcoin prices dropped significantly. By May 2021, was valued at nearly half of its peak performance, at around $40,000. Today, the value is down to $33,000.
What’s going on? Why is this particular digital coin so volatile? Should future investors be worried?
In short, most of the blame falls on speculation, created and spread by news reports, industry figureheads, and word of mouth.
This back-and-forth action alone generates a ton of price fluctuation. When deciding whether to sell their Bitcoin holdings, investors often reference what the news outlets are currently reporting about cryptocurrency. Any form of negative press, coupled with the general skepticism that has surrounded digital coins since their inception, can cause even the savviest investor to cash in and get out.
When this happens, it can catalyze what’s known as a selling panic. This can cause asset prices to decrease or destabilize, though it usually isn’t long until the pendulum swings in the other direction. Though they’re nowhere near as mysterious as they were years ago, there’s still a lot of hype around cryptocurrency, and that intrigue alone can raise prices.
Case in Point: Tesla’s Back-and-Forth
Take the two recent Tesla announcements, for instance.
In February 2021, the electric vehicle and clean energy company announced that it has purchased $1.5 billion in Bitcoin and would begin accepting it as a form of payment for its products. That announcement, along with CEO Elon Musk’s tweets about the purchase, are attributed to the spike that came just weeks later.
Then, in June, prices dropped when Musk retracted the commitment, claiming Tesla would no longer accept Bitcoin due to concerns about the environmental impact of Bitcoin mining. While Bitcoin fell by over 6% after the announcement, the comments shouldn’t devalue it in the long term. They did, however, illustrate the power and detriment of public perception.
A Smart Move For Long-Term Growth and Diversification
As a result of this instability, most institutional investors are wary about putting money into Bitcoin or any other type of virtual asset. This includes hedge funds, pension funds, and more. Should you follow suit or invest anyway?
You can but only if you’re adding it to a wider traditional portfolio that also includes other types of investments. In this case, Bitcoin may help you see greater returns with only minimal volatility or drawdowns. If you’re looking to give your current investments a little boost and can afford to take a risk, it can be a smart move.
The key to seeing sustainable growth? You’ll need to be willing to stick with it for the long run.
As most investors will tell you, one of the most solid ways to steadily build wealth is to buy up smart investments and hold them for years. While short-term investing strategies such as day trading can be profitable, they also come with a great amount of risk.
The only caveat? Stocks have a general track record of gaining value over time, even if there are bumps in the road along the way. However, cryptocurrency is a relative newcomer to the investment scene, and it can be difficult to predict what the future holds.
If you plan to approach Bitcoin as a long-term investment, then the currency’s inherent volatility doesn’t factor into the equation as much. You’re prepared to stick with it, no matter how low the value goes or how high it soars. A strong investment grows over time, despite those momentary setbacks.
Gauging Your Risk Tolerance
Before you begin Googling “how to buy Bitcoin”, take a step back and make sure you’re really ready to take this next step. While there are many expert predictions floating around the web, no one knows for sure where the digital asset will be in five or even 10 years from now.
However, if you pay attention to financial forecasts, they can be incredibly reassuring. Some predict that Bitcoin will hit $1 million to $3 million over the next five years. Others are skeptical that it will hold any value at all.
Keeping all of this in mind, investing in the currency is a personal decision. The number one aspect to consider is your tolerance for risk.
If you’re willing to try your hand and hope that the favorable predictions are true, then you can invest tomorrow with minimal worry. However, other, more risk-averse investors may want to wait until 2025 or so to see how it all pans out.
Of course, the benefit to acting now is that your earning potential is understandably higher if the value continues to rise over time. At the same time, you have to be prepared to lose your investment if the market crashes and Bitcoin drops dramatically below its current price level.
Even if you are risk-tolerant, it’s still smart to approach this step with caution and prudence. Rather than putting all of your money into Bitcoin, it makes more sense to dedicate most of your portfolio (around 95%) to the traditional asset allocation of stocks and bonds. Then, you can put 5% in riskier investments, such as cryptocurrency, which means even a detrimental loss won’t affect you as severely.
Considering Real-World Applications
One factor that might play into your decision is how minimal real-world Bitcoin usage is at the moment. Though companies like Tesla, PayPal, and Xbox have announced plans to accept it as a main form of payment, those entities are few and far between.
For the most part, it appears that Bitcoin investors are simply purchasing the assets and keeping them. In fact, research shows that there are around 1,000 individuals who control 40% of the total market. Known as the Bitcoin Wales, this select group has the potential to control and manipulate currency valuations.
If you’re looking to invest in Bitcoin as a medium of exchange, then it might be best to wait until major retailers follow suit. For now, it’s mostly used as a store of value, though that could change in the not-so-distant future.
What About Tax Reporting?
If you’ve pursued any form of investing in the past, then you know that tax season can be a beast. There are myriad documents to gather, numbers to crunch, and fields to complete.
This is especially the case when you invest in a cryptocurrency like Bitcoin. To the IRS, it’s treated as property, where costs and gains matter more than you might expect.
As soon as you purchase Bitcoin, you’ll need to note your initial cost basis. If you decide to eventually sell your investment, you’ll also need to record the gains that you receive at the point of sale. If the value goes up, the IRS requires you to report it as a capital gain.
Similarly, anyone who receives Bitcoin as a payment or earns it as a result of mining has to record its market value and count it as income.
The problem? Not every entity will clearly display cost basis and gain information for a given Bitcoin exchange. That means it will be up to you to calculate the amount that you ultimately made or lost on the transaction.
To make this process easier and more straightforward, the IRS has started including cryptocurrency-specific fields on its tax forms. Still, it’s best to hire a tax expert to help you navigate the data. It’s all too easy to misreport information on your crypto holdings, income, or gains.
For this reason alone, many interested investors often decide to go a different route, citing that Bitcoin and other digital assets are simply too confusing or complex for the average person to understand.
Should I Invest in Bitcoin? The Answer Made Clear
Up one day and down the next, Bitcoin is nothing if not unpredictable.
To some investors, it’s that very ambiguity that makes the cryptocurrency intriguing and thus, worth pursuing. Plus, there’s the potential to earn big if the market swings upward again and the digital coin becomes more widespread.
However, others might see such volatility as a red flag and choose to wait it out a while longer. They may also turn away when considering the tax implications and the current spending limitations.
Whichever path you take, the answer to, “Should I invest in Bitcoin” is one that requires plenty of personal thought and reflection. The decision should also be made in tandem with a financial advisor who can take a look at your current portfolio and see where this investment would fit in.
As you weigh your options, we’re here with the up-to-the-minute crypto news you need. We can also help you find the nearest Bitcoin ATMs in your area! If you have any questions about how to grow your wealth with Bitcoin, feel free to contact our team today.