If you read the news about Bitcoin and other cryptocurrencies like Ethereum, you get mixed messages. Some tell you that bitcoin is a huge bubble waiting to burst. Other tell you it’s just getting started.
How you invest in Bitcoin and other cryptocurrencies largely comes down to what you believe is true about its future. Below I will outline three simple strategies for investing in bitcoin.
The argument behind Bitcoin being a bubble is that it’s just a big fad with no inherent value. This argument usually comes from those invested in the current financial system. They are right to point out that when you tie your money up in bitcoin, at the moment, it is less useable than a government issued currency. However, the idea that there is no inherent value in bitcoin is probably wrong.
Others argue that Bitcoin is still in its infancy and has lots of room to grow in value. It’s growth will ultimately be by way of the network effect: the more people who have bitcoin and the more businesses that accept bitcoin, the more valuable it becomes. It’s value grows as demand for its use grows. And this growth in value is made possible by the inherent scarcity that is built into the bitcoin protocol.
Why are people moving towards bitcoin? Is it pure fad? Or is there something in our current system that people recognize as partially broken and needing fixed? Bitcoin eliminates the fees of the middle man. It puts a lot of the power of money back in the hands of the individual and takes power away from centralized entities. Many people see value in this idea -> less fees, more freedom.
The key question is whether bitcoin can grow beyond its current state and become a widely accepted form of currency on the Internet outside of black and gray markets? For example, will more online stores follow Overtock.com in accepting cryptocurrencies for the purchase of real goods?
Three Strategies for Investing in Bitcoin
1. Dollar Cost Averaging (safest, lowest risk)
2. Load up and forget
3. Short-term volatility arbitrage
Let’s start with Dollar Cost Averaging. This is the bulk of how I’m getting involved in bitcoin and ethereum because I’m still agnostic about what the future of currency will look like and the protocol it will take, but bitcoin has the early adopter advantage and Ethereum has some great features. With dollar cost averaging you are simply buying Bitcoin at regular intervals no matter what the price is. This strategy helps you avoid buying at a peak and seeing the value wiped out. It removes a lot of the emotional error that people introduce in investing (buying from peak enthusiasm).
For example, if you just dumped $10,000 into bitcoin when bitcoin was at $6,000 and then bitcoin dropped down $4,500, you’d lose $2,500. However, with dollar cost averaging, let’s say you bought $250 per month for 40 months and the average over those 40 months of your purchases was bitcoin $2,000. Maybe one of those purchases was at $6,000 but some of the purchases were as low as $500. The average of all 40 was $2,000. So when bitcoin drops from $6,000 to $4,500 you’re not really losing anything. In fact, your $10,000 is worth $25,000.
Dollar Cost Averaging does a better job of capturing the real market value, rather than an artificial peak. It’s a good solution for most regular people looking to get exposed to bitcoin.
The downside on Dollar Cost Averaging is that you may miss out on growth. So if you’re absolutely convinced that the value of bitcoin is going to go up and not too worried about hitting a local peak before a long term correction, you may want to just dump everything you want exposed to bitcoin in at the same time. If you’re convinced that bitcoin is going to go up to say $100,000 within 24 months, then it makes sense to Load Up on Bitcoin and then sit back and let it grow. This is a riskier move.
Finally, if you’re really into trading bitcoin and doing technical analysis, you may try to take advantage of bitcoins inherent volatility by trying to buy low and sell high. Bitcoins value can vary wildly in any given day and if you have the time to invest, you can make some money doing this, especially if you have tools to automate by triggering buys below certain values and sells above certain values. This method of investing in bitcoin is really only for those who have the time and enjoy the process.