Bitcoin, and any other cryptocurrency, is wildly volatile so it's wise to feel nervous if you're thinking of investing some of your money into it. However, if you've taken sensible steps with regards to your personal finance - meaning you're in control of your debt, you have an emergency fund, and you have the majority of your investments in something more traditional such as a diversified index fund, then you can feel more confident in taking a small portion of your money and investing it into Bitcoin to see what happens. As long as you're not overexposing yourself by putting too much of your money into the relatively new and unknown asset, you should be reasonably safe to explore it.
This article has been updated on 15th May 2021 where the current price of Bitcoin is at around $50,000.
Bitcoin is volatile
Just a few days ago, on the 16th December 2020, Bitcoin's price in USD rose above the $20,000 mark, the first time it has done so ever. Today on the 19th December its price currently sits around $23,000.
Let's rewind the clock three years back to the 17th December 2017, the price of Bitcoin had just made a new all time high of $19,497. But in the few months that followed the price would crash rapidly down to around $8,000 in February 2018, and by December 2018 you'd have been able to buy a Bitcoin for around $3,300.
This kind of drop would be like the stock market crashing and losing about 85% of its value, something that is only surpassed by the Great Depression of 1929 (89.2%).
Needless to say, Bitcoin and cryptocurrency in general is extremely volatile and it would be wise if you were nervous about "investing" your money into it. That being said, the rapid rise in price since its bottom in December 2018 has meant that Bitcoin has seen a return of around 700% in just two years; it's not difficult to see why there is some level of allure and captivation in the idea of gaining a large amount of money in a really short amount of time.
So should you invest in Bitcoin?
According to a lot of experts, and many well known members of the financial independence community, who are far more qualified than myself in analysing the markets and investment products, Bitcoin has no intrinsic value and the price rise is purely fuelled by hype and the fear of missing out (FOMO). Essentially you would be relying on the greater fool theory where the only way you'd make a profit is if someone else out there is willing to pay you more than what you paid for a Bitcoin.
But doesn't fiat money (normal money) also have no intrinsic value since it isn't backed by a commodity such as gold?
I won't dive into the deep economic theory here since I'll only make a mess of it, but on the most basic of levels I question if the argument of there being no intrinsic value is even a good one. However, the fact that Bitcoin is highly volatile and risky cannot be ignored and there certainly is some element of the price being due to a level of FOMO.
With that said, I personally do have some part of my investment portfolio in Bitcoin (and a few other cryptocurrencies) and I do believe it makes a little sense that you explore the option for yourself too.
As time has gone on, more and more credible organisations and high net worth individuals have started exploring Bitcoin as a possible store of wealth and as a hedge against inflation. With the global pandemic in the past year causing the US Federal Reserve to take action by basically printing more money to stimulate the economy, such concerns with inflation have only become exacerbated.
In effect, these organisations and individuals who are starting to explore or get into Bitcoin, as well as myself, are essentially taking action to protect our future wealth as opposed to trying to make a quick buck. The massive printing of money cannot be ignored and the case of cryptocurrencies becoming a more and more legitimate medium to store and transfer wealth grows as large companies and even governments explore their own options of some form of digital currency.
When and how do I get in?
If you've decided to take the route of buying some Bitcoin you might ask the question of "when and how?" next.
Now, at the price of $23,000? Wait for it to dip? Maybe if it goes back down to $20,000, or $17,000, or even all the way back down to $3,300?
You already know the answer but I'll say it anyway - nobody knows which price to get in.
If you're looking for a particular price to buy Bitcoin, don't trust the analysis of anyone because there's no way they know what it will do in the future. It would be the same as asking what the stock market will do tomorrow, and the greatest investors to have ever lived will all say "I don't know".
We all understand this answer for the stock market, so we should understand it in the same way for the price of Bitcoin.
Instead, there is another way to answer the question of "when and how" and that is to determine if you are personally ready to put some of your money into Bitcoin by having a stable foundation in place for your wealth.
Here's what you should think about:
Are you on top of your debt?
If you are currently paying off debts then you should focus on clearing these before thinking about investing in a high risk and volatile product such as Bitcoin. You normally wouldn't invest your money into the stock market until you had your debts under control, so the same rule goes for Bitcoin. The last thing you want is to be stuck with increasing debt interest payments while some of your investments are potentially down 85%.
Have you got your emergency fund in place?
There's a reason why the "basics" are always brought up and that's because they work the best.
If you can't handle a financial emergency in your life then there's no way you're ready to invest into Bitcoin. A 700% increase in value is certainly attractive but don't get ahead of yourself and don't rush your own preparations.
700% returns in 2 years time cannot help you with an emergency tomorrow, so make sure you've got your safety measures in place to avoid a panic sell.
Do you have steady and stable investments already?
Bitcoin should only be a small portion of your overall investment portfolio, so it makes sense that you have your regular investments in place already. If you don't already have some of your wealth invested into a globally diversified fund that tracks the index then start with this first, and build it up to something sizeable.
Obviously what is "sizeable" really comes down to your own judgement but the point is that this larger portion of your investment will give you peace of mind that your future wealth is in good hands.
Only use the money you have after "everything else"
"Everything else" means the things in your budget that are important. Anything that is considered essential spend such as rent, groceries, bills, debt and so forth always take the precedence when it comes to your money. After these are sorted you then start to put money towards building your wealth steadily, such as investing into an index fund. Only after you've done all that should you then start to invest into Bitcoin.
In my opinion you shouldn't decrease your regular investments or compromise on your essential spend just to invest into Bitcoin. You should either make adjustments to your non-essential spending, such as reduce the amount of junk you buy to free up some money, or find ways to make some extra income and that's where your Bitcoin investment money should come from.
Have a balanced input into Bitcoin, don't go all in
It's common knowledge that diversifying your investment portfolio not only means picking different companies, but making sure your holdings are spread across different regions, sectors, industries and asset classes.
Sure, focusing all of your money into Tesla, or into the US technology sector would've netted you massive returns in recent times but let's face it - nobody knew that was going to happen. We also don't know if it'll be stocks, bonds, real estate, commodities, or Bitcoin that'll win out in the next 10 years. So you should invest into each of these accordingly to ensure you have a reasonable balance.
Personally I keep my overall investment into Bitcoin at around 5% so for every £100 I invest, £5 is going into Bitcoin. I also only look at this from an input level, meaning that if that 5% grows rapidly after I've invested it then I'm not too concerned about re-balancing my portfolio too quickly.
Keep your inputs reasonable so you're not over-extending yourself when "getting in", but let your investments do its thing for you so that you allow yourself the chance to maximise potential profits.
Dollar Cost Average
Treat your investments into Bitcoin the same as your index fund whenever you buy - accept that you'll never know the future and that the only way is to buy consistently and regularly over an extended period.
Everyone wishes they bought in at $3,300 nowadays, but back in December 2018 most people were probably thinking they could get something even lower. But if you buy regularly and consistently then you would've had a 2 year timeframe to build up a reasonable position which would be doing very well at this moment in time.
Be patient, and be consistent. Sound familiar?
Don't buy random cryptocurrencies
It's nice to think that some obscure cryptocurrency you buy for $0.10 will surge up to $20,000 just like Bitcoin but let's be honest, that's probably not going to happen. Chances are that the coin you bought will just linger around that price, maybe even rise up a nice amount, but eventually stagnate or die as that particular project runs out of steam.
In such cases it would've been better to simply have your money in Bitcoin, as it would've been "safer", and you would've probably seen better returns.
There is a case to somewhat have a basket of different cryptocurrencies as there are various projects behind these that are quite compelling, such as with Ethereum and XRP. But be selective and take a look at the "top 10 cryptocurrencies by market cap" in previous years to understand that the lifespan of a cryptocurrency at the top can be very short.
Stay with the names that have demonstrated resilience and consistency of being at the top of the table.
At the end of the day, the when to invest into Bitcoin doesn't come down to what price you should get in at because nobody knows how the market is going to behave tomorrow, next month or a few years from now, just like with the stock market.
However the biggest concern is that unlike the stock market we cannot say that cryptocurrency will consistently trend upwards in the long term; there simply isn't enough of a history and evidence in this particular asset for anyone to make that claim.
So the question of when cannot be answered in this manner, but it can be answered when considering where are you at in your own personal finance journey.
If you have all of your financial ducks lined up, meaning you're on top of your debt and you are consistent with your budget, and you have built a stable foundation for your existing wealth in the form of a well diversified investment portfolio that tracks the index, then why not introduce a little bit of Bitcoin into your portfolio.
There's no getting away from the fact that Bitcoin, or whichever cryptocurrency you choose, is going to be (very) high risk, but think of this as simply an alternative investment and don't treat it as your entire portfolio.
You would face similar risks by investing into a start up company that doesn't have an actual product or any customers, just an idea or concept. Or the rare wines and whiskey you buy could turn sour, rendering the product valueless. You could even take the money and try to put it into starting your own business which could fail.
All of these options carry high levels of risk yet it's how high net worth individuals, the truly wealthy people in the world, invest their money. They just do it in a smart way by making sure that if this individual investment doesn't go well, it doesn't wipe them out.
Think of Bitcoin in the same manner - over expose yourself and you could become yet another victim, but play it smart and you could find yourself getting spectacular returns that don't often come around.
And one last thing - You have to be "in" with the wine or whiskey crowd, or have connections with art dealers to get your hands on these types of investments. There's a long waiting list for the coveted new Rolex unless you're well known to the watch dealer. The beauty of Bitcoin is that it's available for anyone who takes a bit of time to learn about it and learns how to safely participate.
You don't need to be part of the elite and if you think about it, isn't that why there's been so much push back from well established institutions in the first place?