6 minutes reading time (1107 words)

How To Answer Your Friends Asking "Should I Invest In Bitcoin?"

As we near the end of 2019, we are seeing yet another rise in Bitcoin's price, and therefore, more attention once again. Bitcoin went from $3,200 to now $8,400 as of this writing in the last 10 months. For us who have been in the industry since the early days, the questions have always been the same, but this time they are happening more frequently than ever. It is not uncommon for me to receive at least a message per day from dormant friends or ancient casual acquaintances asking:

"Is it too late to invest in Bitcoin? How much do I need to invest in Bitcoin? Should I invest in Bitcoin?"

And I have always answered the same thing:

"If you have to ask these questions, maybe you shouldn't do it."

If you're buying Bitcoins just because someone you know doubled their money recently, then your "investment strategy" is as sophisticated as trying slot machines with warm seats in a casino. High-risk investing yields high rewards, yes, and there is nothing wrong with that, but you really have to evaluate your decision making process to make sure you are not doing the following:

  1. Buying while daydreaming about getting rich without effort.
  2. Buying into the hype and immersing yourself in pro-bitcoin websites and forums and other groups that create an irrational feedback loop that, although seemingly harmless, is the last place on earth to get sound financial advice.
  3. Making decisions based on the Fear Of Missing Out (FOMO), which tends to drive people into irrational territory.
  4. Borrowing money or investing more than you can afford to lose.

Although this advice applies to any kind of financial investment, the Bitcoin and Cryptocurrency world is highly speculative, maybe even more speculative than any other asset class out there today. It would be foolish to put all your money in even a single stable and traditional investment, what more a brand new technology that is still in an experimental stage?

Although the probability of Bitcoin's value dropping to zero is close to never at this point in time, it has shown that it can drop precipitously in the past. 

There are many reasons to justify this recent rising and falling in Bitcoin's price today, and trends show that the price will likely keep rising in the near future, fueling more speculation, creating a self-fulfilling prophecy of sorts. The problem begins when people start to think that the price will keep rising, never stabilizing, never stopping to an incredible 6 or 7-digit dollar value in a year or two.

The entire market capitalization of cryptocurrencies have increased a lot in the last eleven months alone, so to think that "we will never see $5,000 per BTC again" is pure hubris. Big downswings are almost guaranteed in this business. The market is volatile and not for the faint of heart. 


Image from @ChartsBTC on twitter

Some important points to consider:

About four years ago, in December of 2013, the price of one Bitcoin hit $1,242, and then fell slowly and painfully down to $195 by January 2015.That's a drop of 87%. It happened again in 2018: The price dropped sharply from $19,600 to $6,500 and then finally down to a low of $3,150 by the end of the year, another 85% drop. It has since rallied back up in 2019, then dropping another 40% once again in recent months. Be aware of the volatility.

People are free to do what they want to do with their hard earned money. The thing about Bitcoin is that it is all voluntary — no one is being forced to invest in it or to use it. Since people will do it anyway, the best thing to do is to help them be aware of the risks and know how to reduce these risks if possible.

Even though it has been volatile both ways in the short term, Bitcoin has been, at least for the last 10.5 years, the best performing asset, currency, or commodity in the world. It has proven to be a good long term store of value and is increasingly being used a hedge asset to protect investors wealth from inflation or debasement. Understanding this is crucial in your decision to allocate a certain amount of capital into Bitcoin. 

Some Tips:

  • Learn about Dollar-cost averaging. It is a great strategy: Buy in small increments over a fixed period of time, in fixed intervals. This way, you can get an average cost on your purchases and avoid the stress of trying to time the swings of the price.
  • You don't have to buy ONE Bitcoin! You can buy fractions of a Bitcoin.
  • Set aside only a small percentage of your net worth or income in investing, not just in Bitcoins but in any kind of investment for that matter. Start at 1% if you must. Make sure that you are not getting in debt or investing more than you can afford.
  • Inform yourself. Resources on Bitcoin and cryptocurrencies are free and widely available. Learn about what you are getting into, if you have to get into it.
  • Remember that Bitcoin is NOT a get-rich-quick scheme. The technology behind Bitcoin is what makes it valuable, not the exchange rate on Bitcoin exchanges. They have nothing to do with the actual technology that enables Bitcoin and Cryptocurrencies.
  • Avoid scammy businesses like cloud mining or Bitcoin investment clubs that ask you for minimum investments, make you recruit others, and guarantee earnings.
  • Although Bitcoin and Blockchain technologies are here to stay and have much more room to grow, nothing rises in value to infinity. Have realistic expectations about your financial investments.

Finally, this piece is not intended to convince anyone to invest or not to invest in Bitcoins or cryptocurrencies. It's a public service announcement to everyone out there who is curious about what is going on in the Bitcoin world and want to be informed about the risks and rewards of participating in this technological experiment.

If nothing can stop you and you've done enough research to know exactly what you are getting into, use legitimate exchanges (each country or territory usually has a local exchange or brokerage business) with a good track record and proper consumer protection practices.

The next couple years will be crucial in the growth of this industry. Reckless investments from the public will only serve to hamper the last nine years of steady growth and innovation. Let's all help one another by working together and watching each other's backs as we blaze the trail for the next generation of financial technology, connecting the five-plus billion people that are currently excluded from today's financial systems.


 

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