Is Bitcoin a good investment? – introduction
Is bitcoin a good investment?
It is not a novelty that bitcoin, the pioneering cryptocoin on the market, became one of the most popular investments of recent times. In most sources of information about the subject, one can find an increasing number of people interested in learning more about this cryptocurrency.
The major concern, as always happens with popular investments, is that many people get interested in investing in bitcoin without having any prior experience with other forms of investment, or even without ever having invested in anything at all.
They are all attracted by the promise of making easy money and getting rich by “investing money” or finding the golden ticket. The result of this attitude is the naive belief that if you buy bitcoin, then you suddenly become rich.
Afterwards, attracted by the promise of making easy money, the aspiring investor goes after various sources of information and ends up even more confused. And that is where we find another problem about popular investments: the excess of information.
Most of us have already heard some of the well known myths about bitcoin and cryptocurrencies: that they are too volatile and should not be purchased by cautious and conservative investors, that they are too risky and do not fit for long-term investments, among many other myths that we can easily find in investment forums.
But, after all, what does it all mean?
In order to provide you some guidance and help you to reflect a bit more on all this information, in the following text we are going to discuss many myths about cryptocurrencies as a way of highlighting their main advantages.
How cryptocurrencies work?
Bitcoin is a particular kind of cryptocurrency, and maybe the most popular. In the same way that we can find different types of “physical” currencies, we can also find different kinds of digital currencies (also called cryptocurrencies). Other examples of very popular cryptocurrencies are: Ethereum, Ripple XRP, Litecoin, Dogecoin, Iota, and others.
One of the easiest ways of investing in cryptocurrency is a process similar to the one used to invest in any usual product of fixed or variable income, i.e, the person must create an account in a crypto exchange responsible for the intermediation of investment assets. After that, the person is allowed to create its own investment portfolio.
For the cryptocurrencies, the crypto exchange will create (or recommend) a personal digital wallet for every client. The purpose of the digital wallet is to store and protect information about every order of buying or selling cryptocurrencies. The data is protected by password and a specific kind of cryptography.
After effectively buying cryptocurrencies through the crypto exchange company, it is important to transfer your cryptocurrencies to your personal digital wallet, so you can preserve and protect your information.
There are many digital wallets available for the crypto-investor. (If you need more hints on how to choose the best digital wallet for you, we have this text)
Thus, if you would like to start investing in cryptocurrencies, the process is quite simple:
- Start by creating a personal account in a crypto-exchange,
- Set the method of payment or include credits in your account,
- Select the cryptocurrencies you would like to invest in,
- Make the purchase, and
- Transfer all cryptocurrencies to your digital wallet.
The operational process is relatively simple. However, before starting to create your account, you must first understand a fundamental concept of investment, namely, the investor profile. The purpose of an investor profile is to help you with structuring your investment portfolio in a personal way.
The different investor profiles
One of the most common misunderstandings about investments of any kind is the belief that investing money necessarily means making more money. Most people never consider the fact that investing money can actually make you lose a small or big portion of money.
For most people, if you invest, you necessarily win. And that is the biggest mistake. In a nutshell, investing money means allocating a determined amount of money for the possibility of future gains. But for every kind of investment there is some degree of risk attached.
There is no possibility of making more money without a level of risk of losing part (or all) of that money. For this reason, one should be always careful with any type of investment that only promises huge gains and no possibility of loss.
However, even if there is some level of risk, this is not the same as saying that investing in cryptocurrencies or stocks is something similar to gambling. What we would like to highlight is only the fact that every possibility of gain comes attached with some possibility of loss. Not being aware of this fact can lead you into making naive and uninformed investment decisions.
Now that you are aware of that, the relevant question is: How to choose a cryptocurrency to start investing?
It all depends on your investment strategy and on how much risk you are willing to face. After all, an investment that may look good to you, may look bad to another person.
Recall that in the investment world, gains and losses are usually proportional. This means that investment opportunities that promise the biggest returns might also provide the biggest losses.
For this reason, researchers of this field usually distinguish three basic investor profiles:
1) Conservative,
2) Moderate,
3) Aggressive.
The details of each profile are the following:
Conservative investors are those that prefer assets with a lower level of risk. These investors look for assets with values that are stable and do not change frequently. In general, conservative investors aim to create wealth in a long-term strategy, focused on security and small but constant returns.
On the opposite side, there are aggressive investors. Investors of this kind seek assets with a high level of risk and, naturally, the possibility of great return. Therefore, aggressive investors are focused on creating wealth in the short-term by taking advantage of investments with a frequent change of value (in other words, investments with a higher volatility).
In a different manner, moderate investors follow mixed strategies that accept assets with both high and low levels of risk. There is no general rule for building a moderate investment portfolio, but the common standard is to divide the portfolio into 50% of high risk assets and 50% of low risk assets.
There are also moderate investors that prefer a 40%/60% division or even a 30%/70%. Again, it will always depend on your tolerance to risk and what is the best strategy for building your portfolio. The investor profiles may be organized as follows:
- Conservative profile: portfolio structure >80% lower risk assets
- Moderate profile: portfolio structure approx. 50% / 50%
- Agressive profile: portfolio structure >80% higher risk assets
Thus, in order to know which assets to invest, first you must know which investor profile better fits your purpose. The usual path of most investors is to start with conservative investments and gradually evolve to diversify their portfolio with low risk assets.
It is important to remark that there is no right or wrong profile. Moreover, the classification above may change among different authors. Everything is conditional to your personal financial structure and to what you expect to achieve with your investments. In general, moderate and aggressive profiles require a bit more knowledge and experience than conservative ones.
Is Bitcoin an investment of high or low risk?
The usual classification, found in most investment books, is that investments of low risk are those called fixed income assets, like the Treasury bills, Treasury notes, Treasury bonds, and even the 401(k)s.
On the other hand, assets of variable income are so considered due to their higher risk of return, like bonds, derivatives and stocks. Assets of variable income have a higher volatility, i.e., their value might change with higher frequency.
As example, think of a stock that is priced at US 35,00 today, but tomorrow may fall to a value of US 15,00. This kind of variation in price is easier to occur in variable income assets, what explains their name.
Therefore, we may consider that bitcoin (and cryptocurrencies) is an investment of high risk and high volatility. But this is not necessarily bad. An investment of high volatility may lose a big portion of its value, but it can also increase its value at the same ratio.
Along recent years, we have seen the value of bitcoin rise and fall many times until hitting its current immense value. Given that no other asset ever reached this value, there is no other asset with the same potential of return than bitcoin. But this is not the only advantage of bitcoin, there are other unique features that makes bitcoin a very different asset from those of variable income:
– Information transparency;
– Security;
– Lower level of risk because its value is not affected by government decision;
– No value volatility due to factors like inflation;
– No bank fees;
– Electronic transactions;
– Universal value, and many others.
All the advantages above show that, even though bitcoin and cryptocurrencies are considered high risk investments, they have many features that make them attractive kinds of investments.
Recall the following: in the investment world, higher risk does not mean better or worse. In fact, cryptocurrencies enjoy many features that even the investments of low risk can not enjoy! (If you want to know more about the benefits of bitcoin investing, we recommend this text.)
Which investor profile is allowed to invest in Bitcoin?
Investing in bitcoin and other cryptocurrencies may fit any investor profile, not only the aggressive types. High risk investments are allowed for any investor profile, but the percentage of high risk assets allowed will change from one type to another.
Thus, even if you prefer a conservative profile, you can also diversify your assets with cryptocoins. For this, you only need to define an adequate percentage of high risk assets to your profile.
The usual recommendation is to start with low risk assets, so you can understand more of their behavior and prepare for investments of higher risk.
Diversification and crypto
One of the biggest myths about crypto investing says that cryptocurrencies add huge risk to investment portfolios. And therefore there is also great risk of loss. However, in the same way that exist stocks of higher risk than others, there are also cryptocurrencies riskier than others.
Thus, investing in cryptocurrencies will not necessarily increase risk to your investments. Things are not that simple. Again, everything will depend on how you structure your portfolio.
But if you are really worried about this, a very common hint in every book about investing is to control the level of risk of an investment portfolio by the diversification of its assets. The idea is to balance the percentage of high risk and low risk assets in order to limit the possible losses.
If you are too conservative, you may limit the possibility of gains. However, if you are too aggressive, you may not limit your losses. Hence, some level of moderation is always recommended.
Moderate investors diversify their assets of fixed and variable income so they can control possible losses and still guarantee good gains. Moreover, diversification is not only applicable to assets of variable and fixed income, one may have all money invested in stocks, but still keep a conservative strategy of buying only less volatile ones.
The same strategy can be also applied to cryptocurrencies. The crypto investor is free to allocate all the capital in currencies of lower risk. The platform take-profit.org currently ranks cryptocurrencies like Ethereum (ETH) and Stellar (XLM) among the most volatile, while Bitcoin Cash (BCH) and Ripple (XRP) are among the less volatile.
A beginner in crypto-investing is allowed to start its diversification by buying cryptocurrencies of low volatility and gradually increasing assets of greater volatility. This helps us to knockdown another big myth of crypto investing: that cryptocurrencies are not adequate assets for long-term investors.
One may invest in low volatility cryptocurrencies and keep them in a long-term strategy whereas waiting for their increase in value, a strategy very similar to the popular buy and hold.
At last, now we can answer another common question of anyone that ever thought about investing in bitcoin or any other cryptocurrency:
What is the adequate percentage of cryptocurrency to my investment portfolio?
The percentage may vary in accordance with your investor profile. Recall that cryptocurrencies have different levels of volatility, and therefore can be used even in conservative strategies.
Therefore, if you are a conservative investor, and established 20% of your portfolio for cryptocurrencies, you can diversify this amount between cryptocurrencies of higher and lower levels of volatility.
Hence, if you intend to keep a conservative profile even in your diversification into cryptocurrencies, you can still keep a conservative strategy by buying only assets of low volatility.
Is Bitcoin a good investment? – conclusion
Bitcoin is an investment with advantages, disadvantages, and also many interesting possibilities for the long-term investor.
We managed to break some of the biggest myths and objections connected to bitcoin and cryptocurrencies, such as:
1) Bitcoin is a high risk investment and for this reason worse than other kinds of investment;
2) Bitcoin is an asset of variable income as any other;
3) Bitcoin and cryptocurrencies add too much risk to investment portfolios;
4) Investing in bitcoin is a difficult and complicated process;
5) Only aggressive investors must buy bitcoin;
6) Bitcoin and cryptocurrencies are not good assets for long-term strategies.
In order to allocate your money in any kind of investment, the most important requirement is to be well-informed about each asset and to know their exact role in your investment strategy. For this, the first step is to determine which investor profile better fits your goals.
Just to remind us of the highlights that broke each myth mentioned above, it follows a brief summary:
- One of the easiest ways of investing in cryptocurrencies is a process similar to the one used to invest in any other asset. Our recommendation is to learn more about crypto exchanges and the digital wallets that you will use.
- There are three investor profiles based on different levels of risk acceptance in your investment portfolio. The three profiles are: 1) the conservatives, 2) the moderates, and 3) the aggressive. Each of them allows for different percentages of high and low risk assets.
- Bitcoin and cryptocurrencies are kinds of investment adequate to any investor profile. Each profile will have different tolerance towards assets of low and high risk.
- Diversification strategies may be also applied to cryptocurrencies. Even conservative investors may diversify their portfolio by starting with assets of a lower level of volatility.
- The adequate percentage of cryptocurrencies to your portfolio will depend on your investor profile. Whereas conservative investors accept a small percentage of cryptocurrencies, aggressive investors accept a higher percentage.
- The choice of crypto-assets can be based on the levels of volatility of each currency. Thus, it is possible to employ different diversification strategies with cryptocurrencies.
But always remember that these recommendations are only basic elements that you, investor, have to consider. All decisions must be carefully evaluated in connection with your investment strategies. Thus, keep learning and be careful!
If you are interested in learning about cryptocurrencies, keep following our content with easy-to-follow hints for every beginner investor!
