Bitcoin is a relatively new type of currency that is only now gaining popularity and recognition around the world. Many people are interested in Bitcoin because of its recent explosive rise in value, in the hopes of reaping big profits in the future.
We’ll go over the fundamentals of using bitcoin as an investment strategy in this guide. It’s important to note that we’re talking about long-term investment here, not short-term benefit trading.
For certain people, investing in the extremely volatile cryptocurrency market might not sound like a good idea. In an ideal world, you’d have steel nerves, the discipline and concentration to disregard short-term profits, and the patience to wait for the right time to invest.
If you’re serious about owning a piece of the crypto-market, you should at the very least be aware of the best methods for maximizing your investment.
Methods of Bitcoin Investing
Method of Dollar Cost Averaging
This approach is ideal for newcomers to investing because you won’t have to think about timing your entry into the market.
You don’t have to wait for bitcoin’s price to drop; instead, you simply buy at regular intervals to spread the risk and hold/store your bitcoins in a cold, safe wallet (like a paper wallet or hardware wallet).
For instance, if you have an extra $100 available each week, you can buy bitcoins. Some weeks, $100 will buy you more bitcoin, while other weeks, it will buy you less.
This approach gives you peace of mind because you don’t have to be concerned about bitcoin price fluctuations.
You simply need to be patient enough to stick to your daily routine and buy when you need to buy, rather than staring at bitcoin price charts. You don’t wait for the price to fall simply because the charts show a downward trend; you buy bitcoins right away.
If you use the dollar cost averaging approach to sell your bitcoins, your earnings will also average out. If you invest in the lump sum process, you won’t come close to making a profit, but if you sell at the right time (when the price is high), you’ll still make a healthy profit.
Investing a lump sum
Since you will purchase bitcoins at a single price point, the lump sum option is a much riskier way to invest bitcoins.
If you have $100,000 to spend, you’ll want to purchase as many bitcoins as possible, so you’ll wait for the price to drop.
To get the most out of your money, you’ll have to wait for the lowest price possible before purchasing bitcoins.
This strategy requires you to ‘time’ the market in order to buy at the optimal time. Of course, with a volatile asset like bitcoin, this is easier said than done. Since the market fluctuates so much, predicting when the next price drop will occur and allowing you to purchase at that price is extremely difficult.
Trying to time the market will give an inexperienced investor a lot of headaches and stress. It just makes me think of so many “what ifs,” like “What if I waited a few more hours, the price would fall, and I’d be able to buy more bitcoins? “Or, if the price never drops to the level at which I want to buy bitcoins, I’ll never be able to do so.
When it comes to selling your lump sum investment in the future, you will have a difficult time doing so because you’ll be waiting to sell at the right time to maximize your profit.
You’ll try to anticipate the highest price point, and you’ll berate yourself if you sell too fast and miss out on a far larger profit.
The advantage of using the lump sum investment strategy is that if you can buy at the lowest possible price and sell at the highest possible price, you can make a much larger profit than if you used the dollar cost averaging method to invest bitcoins.
Investing in Crypto Hedge Funds
You could be better off investing in a cryptocurrency hedge fund if you don’t want to bother learning the fundamentals of investing using either the dollar cost averaging approach or the lump sum method. This choice, on the other hand, is better for those who can afford to pay the high management and performance fees.
The management fee is charged up front; some funds charge a 2% management fee, which ensures that if you spend $100,000, $2,000 will go to the management fee, leaving just $98,000 to invest in cryptocurrencies.
Your hedge fund manager will also get a cut of your gains. Some managers demand a 20% performance fee, which means that if you make a $50,000 profit on your investment, $10,000 would be charged as an incentive fee.
While the hedge fund strategy might not be for everyone, it does offer a hands-off approach to investing that may prove to be very lucrative for both you and your hedge fund manager if you look beyond the fees.
How to Make Money Investing in Bitcoin
Investing in bitcoin is equivalent to stock market investing. Both are high-risk, high-reward investments that aren’t suitable for all.
Bitcoin is far more unpredictable than stocks, so if you want to invest in it, or any other cryptocurrency for that matter, you’ll need to master the following techniques.
Have a well-thought-out strategy in place.
Don’t invest haphazardly and don’t invest simply because anyone you know has. When it comes to investing, you need a nice, solid strategy in a place where you can draw your entry and exit points.
Your strategy must be in line with the investment approach you chose. If you prefer the dollar cost averaging process, you must have a solid plan in place, including how often and how often you will purchase bitcoins.
If you’re investing in bitcoins as a lump sum, you can know ahead of time what price you’ll be paying and purchase at that price (don’t wait for it to drop even further). When investing in hedge funds, you must understand the expenses that must be paid as well as the best time to invest.
Be Prepared For Unpredictability
This is the most important technique to learn. Bitcoin is well-known for being a highly volatile investment, with values fluctuating by hundreds of dollars in a matter of minutes. You will believe that since you’ve seen the charts and graphs and practiced with a fake bitcoin exchange account, you already know it’ll be unpredictable.
You reassure yourself that you can handle the risk. When thousands of dollars are on the table, however, the situation changes dramatically. Especially if you put in a lot of effort to earn those dollars! You could have worked for months or years for it, but there’s a good chance you could lose it all in a matter of minutes.
The only thing you can do is avoid the dips altogether. Simply do anything to relax and divert your attention away from bitcoins, because if you don’t, you’ll go insane. Bitcoin investing is similar to riding a roller coaster; all you have to do is hang on tight before the trip comes to an end!
Don’t Panic And Remain Calm
It’s easy to say this to panicked investors, but it’s a different feeling when you’re the one who’s panicked. The prospect of thousands of dollars going down the drain is enough to send everyone into a tailspin, leading to unreasonable decisions.
If you don’t think clearly, you might consider cutting your losses right away without considering what would happen in the long run. Your bitcoins will be worth a lot more now than they were when you bought them if you played your cards correctly. However, if you panic and sell too soon, you will never have the opportunity.
Maintain a sense of perspective
Bitcoin investment is a long-term financial endeavor. It’s not like day-to-day trading, which needs a lot of technical work in order for a trader to make a profit. You must zoom out of the bitcoin price charts to look at the big picture while investing in bitcoin. You shouldn’t bother looking at the regular, weekly, or monthly charts because they will just cause you stress.
Take a look at how far bitcoin prices have progressed. It has grown from a few cents to thousands of dollars since its inception. And analysts predict that this upward trend will continue for several more years, so if you stick it out through the peaks and lows of bitcoin, you’ll have a very nice investment portfolio in a few years.
Don’t spend money you can’t afford to lose.
This is probably the most valuable piece of advice you can remember. You’re probably aware that investing in highly volatile cryptocurrencies will make you extremely wealthy or bankrupt. However, it does not have to be this way.
You do not need to put your whole fortune or life savings into bitcoin or any other cryptocurrency!
The best course of action is to spend just what you can afford to lose. This means you shouldn’t waste any money you can’t afford to lose.
Investing in a crypto hedge fund, whether using the dollar cost averaging process, lump sum investing, or even investing in a crypto hedge fund, should not be done with money that needs to be used elsewhere.
If you have money set aside for your retirement, a wellness fund, an emergency fund, or even even your children’s college funds, don’t touch them. Too many families have disintegrated as a result of poor financial choices and the risky investments with which they were entrusted.
If you’ve done something similar in the past and gotten away with it, i.e. made some money, don’t get too confident and believe you can do the same with cryptocurrency. It’s a different species, to put it that way. Right now, investing is like the Wild West, and you don’t want to risk your hard-earned cash.
The Keys To Success Are Patience And Discipline
Bitcoin is a long-term investment. When the price of bitcoin drops, and your investment drops with it, you must be careful.
If you look at bitcoin trends, you’ll notice that it’s been on an upward trajectory since 2009, so all you have to do now is ride out the troughs before you reach the right crest, where you’ll be able to sell your bitcoins.
There will be many troughs and crests in the world of Bitcoin investing. What you need is the patience to stick with your savings and not panic when rates drop too much.
Similarly, don’t get too excited if the price rises. Bitcoin investment success can be achieved with a well-thought-out strategy, persistence, and discipline.
It’s still 20/20 in hindsight.
Don’t beat yourself up if you purchased bitcoin at a far higher price than it is now. And it’s pointless to be mad at yourself if you sell your bitcoins too soon and the price has since risen.
Nobody can tell what will happen in the future. But the safest thing for you to do is just focus on making a decent profit and not on the “what ifs,” because that won’t benefit you at all.
Hindsight is still 20/20, as they claim. To put it in perspective, if we could see the future, we would have all bought bitcoins when Satoshi Nakamoto, the inventor of Bitcoin, first announced them.
What to know before investing in bitcoin
Despite being over a decade old, bitcoin remains a relatively immature asset. There’s less trading volume on its markets, which means it’s less liquid , and the price changes can be volatile. It’s therefore hard to predict how it will behave from one month to the next.
Here are some tips for reducing your exposure to risk while also increasing your exposure to potential gain.
Keep it safe and secure: Crypto-exchanges still continue to suffer the occasional hack even today.
Since bitcoins do not exist in physical form, seasoned bitcoin investors store them in digital wallets. A hardware wallet is a handheld, offline device that securely stores the private key necessary to transfer your bitcoin holdings from one place to another. Ledger and Trezor are two reputable brands.
“If the amount you store is going to be a lot, you may also want to add a seed backup,” advises Mow. A “seed backup” is a backup of the phrase (i.e. a set of words) that lets you access your bitcoin wallet. Many investors holding large quantities of bitcoin engrave their seed phrases onto metal plates and then store these plates somewhere safe (such as a bank deposit vault).
Likewise, you should plan on doing all of your investing from a secure internet connection. In general, trading or buying bitcoin on a public WiFi network makes you more susceptible to attacks from hackers.
Start small, rather than big: Given its short history and still highly unpredictable behavior, it’s usually wise to keep your initial investment in Bitcoin relatively limited. Even experienced investors (e.g. hedge fund manager Paul Tudor Jones ) have allocated just a single-digit percentage of their capital to bitcoin while keeping the rest in less volatile assets. And, despite the hype and forecasts, maintain your investment discipline, buying only what you can afford to potentially lose and not getting swept up by promises of gigantic upswings.
Bear taxes in mind: Even though it’s a currency, the IRS considers bitcoin to be property rather than money, so it’s subject to the same tax treatment as other investment assets. Bitcoin taxes can be triggered by trading, exchanging, or simply spending the cryptocurrency (if it’s increased in value since you bought it). So documenting every transaction is essential. The good news is that bitcoin profits are taxed at the special capital gains tax rate, which is often less than ordinary income rates.
Have a buy-and-hold mentality: Unless you’re prepared to watch the market daily and move at a moment’s notice, investing in bitcoin should really be undertaken for the long term. “Bitcoin’s heightened day-to-day volatility makes this especially true,” says Ari Wald.
In other words, it’s not really advisable to buy bitcoin expecting to sell it a day, week, or month later, as investors found when the cryptocurrency tanked by 50% in two days in March . However, the fact that bitcoin recovered following this crash to hit a new all-time high in November and then December shows the virtue of patience.
Best Way To Invest In Cryptocurrency
There is no single “right” cryptocurrency investment strategy – rather, the right strategy for someone varies from person to person. When trying to formulate your investment plan and developing your investment strategy, a key consideration is how much time you want to dedicate to your investments.
Furthermore, you will need to consider the amount you’d like to invest, and whether this is as a lump sum or series of periodic investments. Below, we’ve explained some of the most common crypto trading strategies. Use this as a guide to find the best investment strategy to suit your goals and risk appetite.