Its unique backing and position has made Bitcoin a popular investment choice. People choose to invest in Bitcoin due to the low barrier of entry and high return rates. However – although as viable today as any other type of currency investment – Bitcoin investment poses several challenges that are unique, or uniquely important, in comparison to other currencies.
Understanding the Nuances of Bitcoin Investment
Many aspiring investors tend to look for inspiration in the Forex and gold markets when formulating a strategy to invest in Bitcoin. The root of this temptation is obvious – this is a currency, so it makes sense to invest in Bitcoin as in other currencies – but Bitcoin poses challenges rarely found among other currencies. Understanding these challenges is vital to formulating a sound Bitcoin investment strategy.
The most important one is that Bitcoin is not regulated, and not underpinned by any national government or any other entity. Like a flat currency, the value of Bitcoin is dictated only by what people perceive it to be; however, there is no nation or powerful institution which depends on this value being high, or at least stable. This makes Bitcoin’s value particularly volatile: we often see the crypto-currency 30-day volatility index around 5%. In comparaison, most other currencies or gold average 1%.
These properties result in great deal of opportunity in exploiting these wild price swings so anyone wishing to invest in Bitcoin will wonder if they should try to take advantage of them by entering and leaving the market often or if they should only Buy Bitcoin and hold on to them expecting their value to rise greatly over a long period of time.
How to Invest in Bitcoin – Choosing the Right Strategy
Formulating a sound investment strategy raises many difficult questions, but most of them can be answered in the framework of an over-arching choice between a passive or an active investment stance. In other words: should your strategy be based on buying Bitcoin and holding onto them for a long time, or on quick buy-sell cycles?
The passive Bitcoin investment strategy.
A passive investment is one where you buy an asset and hold onto it; the mechanism by which it generates value is one which does not require the investor’s intervention (hence the name): a diverse stock portfolio, for instance, generates value through the overall increase in corporate profits over a period of time. Real estate generates cash as its value increases as part of the area’s demographic or urban development. Compared to these more stable investment opportunities, Bitcoin earning potential is far greater and even if it comes with an increased risk , a passive Bitcoin investment strategy is still a very good choice even in 2017.
That said, the most important factor to consider in a long-term Bitcoin buy and hold strategy is the risk of collapse or that it becomes obsolete after one or many of the hundreds of new crypto-currencies would rise as the new leader. This is a real possibility when you know how some of them are using very different technology that gives them clear advantages over Bitcoin. Furthermore, owning Bitcoin in a virtual wallet will make your investment at the mercy of hackers and thieves. Even if it’s a small risk, it should certainly be consired. Several Bitcoin stealing/hacking events have already occurred.
The Active Bitcoin Investment Strategy
With an active approach, the primary mechanism of investment return is based on exploiting short-term price fluctuations. When you look at a Bitcoin chart it can seems that exploiting all the highs and lows will be the right way to go to make money with Bitcoin but it’s easier said than done. Without a good technical analysis or a deep understanding of the fundamentals of what makes the currency move trying to stay in profit using the different Bitcoin exchange or Bitcoin broker will be difficult. The main reason is the spread you need to pay every time you want to enter the market. Nevertheless, after developing a strategy that will give you a clear edge over the market, profit potential will be substantial when applying it over and over and by using the leverage offered by your broker.
One very interesting fact about the active bitcoin investment strategy is that you can mostly cancel the risk of losing all your money due to a sudden Bitcoin collapse, hacking or stealing. That could be achieved by placing your investment with a major Bitcoin broker where your deposit are made using any of the major currencies like USD, EUR or JPY. You then invest in Bitcoin by taking positions (BUY or SELL) on currency pairs like BTCUSD and make sure to have a Stop Loss in place every time you do. By using the active Bitcoin investment strategy and only do day trading, you never keep positions open overnight, so you reduce the risk greatly and it will certainly help you sleep better.
The best Bitcoin investment Strategy: Our conclusion
Since there is no mechanism that inherently results in Bitcoin preserving or increasing its value over long periods of time and the real possibility of the currency collapse, holding on to Bitcoin for long periods of time is risky and even if it comes with the possibility of spectacular ROI (Return on investment), you should not invest the major part of your asset in that way.
On the other end, the mechanisms which cause Bitcoin’s value fluctuations being very subtle and diverse on the short time frames, makes it difficult for an outsider to beat a tightly-woven and highly informal market. Professional day traders will have a clear edge against newcomers here. Newbies will need to start with small position size until they can devise a strategy that provides a steady return and be very careful when using leverage.
Both options have advantages and disadvantages; passive investment creates long-lasting value but appreciates slowly. Active investment can provide higher returns more quickly, but depends on correct predictions and, therefore, on a high level of expertise, requires active and permanent participation. Investors should make a choice between the two based on their requirements and on the object of the investment. The growing potential for active return of Bitcoin trading makes it a good, but challenging investment option in 2017; the currency’s high volatility makes its potential reward remarkable, but it also makes it very risky. Only risk money that you can lose.