Is Investing in Bitcoin a Good Idea?

Is Investing in Bitcoin a Good Idea?

With its staggering profits, Bitcoin seems to be a wise investment, especially considering the cryptocurrency's strong performance in 2023 and the first part of 2024. As with any investment, however, you have to be aware of the hazards.

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The most valuable cryptocurrency by market capitalization, Bitcoin, is in the news once again. Following steady increases throughout 2023, the leading cryptocurrency broke new ground in March 2024, surpassing $70,000 for the first time. 

However, determining if Bitcoin belongs in your portfolio means going beyond the news of the day. Given its high volatility and risk profile, bitcoin is typically only a good choice for those with high risk tolerance, sound financial standing, and the ability to lose all or part of their investment. 

To lower your total risk exposure, if you decide to invest, it's critical to have a diversified portfolio with a variety of various investment kinds. Generally speaking, you shouldn't allocate more than 10% of your portfolio to high-risk investments like Bitcoin.

Putting Money Into Bitcoin

Bitcoin advantages

In the past, Bitcoin has provided the possibility of large profits.

It is dispersed. Nevertheless, a lot of individuals decide to trade and keep their Bitcoin on controlled systems.

Like gold, bitcoin has the potential to be an uncorrelated asset. This implies that it may not track the movements of other assets, such as equities. Even if Bitcoin hasn't always correlated with the S&P 500 over the last ten years, it hasn't shown itself to be a completely uncorrelated asset yet. 

Bitcoin drawbacks

As previously said, the price of Bitcoin may increase. It might also drop significantly. It dropped more than 75% from its peak in 2022. Crypto exchanges lack circuit breakers, which immediately halt trading when prices drop too rapidly, in contrast to conventional financial exchanges. Cryptocurrency markets are always in motion, and sudden, sharp declines are possible.

Irreversible transactions occur. Due to misplaced or forgotten wallet credentials, people have lost millions of dollars' worth of Bitcoin.

Basic consumer safeguards offered in conventional financial products—such as insurance protection from the Securities Investor Protection Corp. and the Federal Deposit Insurance Corp.—are absent from cryptocurrency exchanges.

What do experts in finance say about Bitcoin? 

Bitcoin causes division. Praised as the greatest financial innovation in ages, it is also the greatest con ever. These are the opinions of specialists from both camps. 

Buffett, Warren

Warren Buffett, the well-known financier and CEO of Berkshire Hathaway, is adamantly opposed to Bitcoin, and he has a very clear explanation for why: He doesn't think it has any use. Buffett provided a long example of how he would be happy to spend $25 billion for 1% of American farmland or apartment buildings, given that they both serve a function and provide income, during the 2022 Berkshire Hathaway shareholder meeting. However, he would not purchase all of Bitcoin for $25 since he is unsure of what he would do with it [1]. 

He joked, "I'd have to sell it back to you one way or another," to the audience's amusement. "It isn't gonna do anything."

Investing with Integrity

Fidelity is a prominent asset management company in the US and one of the few conventional brokers that allows customers to purchase cryptocurrencies. Fidelity launched Fidelity Crypto in 2023, enabling customers to trade Ethereum and Bitcoin. The asset management is also one of the companies that the U.S. Securities and Exchange Commission (SEC) has approved for a spot Bitcoin ETF.

Researchers at Fidelity published a paper in October 2023, concluding that because Bitcoin is the most "secure, decentralized, sound digital money," it is "fundamentally different beyond any other digital asset" and that other digital assets remain unlikely to surpass it.

"It is not that we think an allocation to bitcoin does not come without risks," the authors of the paper stated, "but that we think some investors are overstating the downside risks of bitcoin particularly compared to other digital assets [2] ."

Novogratz Michael

Among Michael Novogratz's qualifications are his 11 years at Goldman Sachs (where he started as a partner in 1998) and his previous position as president of Fortress Investment Group. In addition, he served on the Investment Advisory Committee on Financial Markets of the New York Federal Reserve. Currently, he serves as the CEO of Galaxy Digital, an investment business focused on cryptocurrency [3]. 

As recently as December 2023, Novogratz, who has long been a proponent of Bitcoin, said in an interview with Bloomberg TV that he believes the cryptocurrency may reach its prior highs and accurately predicted that the SEC will approve a spot Bitcoin ETF. 

"There's a bunch of good things happened to Bitcoin," he said.

What is a Bitcoin investment?

The question of what form of investment Bitcoin is remains unanswered more than 10 years after its launch. Having Bitcoin is not the same as having corporation shares. In contrast to a company, Bitcoin does not make money via the sale of goods or services. It pays out no dividends. It also lacks a CEO, a board of directors, or any other central authority that establishes policies and is answerable for them.

SEC Chair Gary Gensler said on CNBC in June 2022 that although Bitcoin and other cryptocurrencies "are a commodity," others "have the key attributes of a security."

Metal, grain, and milk are examples of raw materials that are related with commodities. The federal agency mainly involved in cryptocurrency regulation is the Commodity Futures trade Commission, which also oversees foreign exchange trade and commodities markets.

Others still claim that it functions as cash that can be used to make purchases of goods and services. Although some companies do take Bitcoin, this is by no means a common practice.

Alternatively, it may be a whole new asset type.

Volatility and Bitcoin

Although Bitcoin has not risen linearly, its exponential growth and capacity to hold the title of most valuable cryptocurrency may conceal this reality. 

The benefits of purchasing Bitcoin in 2010 for only one cent are obvious. However, volatility also has significant drawbacks. If a person had purchased Bitcoin in 2013, their investment would have lost 80% of its value and wouldn't have recovered for another three years. A reduction of 50% or more occurred in 2021 and 2022, whereas a dip in 2018 lasted almost a year. 

While investors in Bitcoin will always hope for the best, they should also be ready for significant declines in value. Even while Bitcoin has often rebounded, there's a chance that it might completely collapse, for instance if many cryptocurrency sites fail and there is a significant sell-off.