With Bitcoin rising in value steadily over the past several weeks, it’s looking like the currency is here to stay and people are starting to see it as a real investment.
You might be tempted to quickly take all your money and pour it into Bitcoin. That might be tempting. But, let me ask you this:
Raise your hand if you really understand Bitcoin, how it works on an internal level, and all the risks involved with keeping all or part of your wealth in Bitcoin?
I think a lot of you in the room didn’t raise your hand. I didn’t. Therefore, it’s not a great idea to invest all your money all at once in Bitcoin, even if it is going up every single week.
Some risks inherent to Bitcoin and other cryptocurrencies:
- Like the old-style bank robberies of the wild west, rogue hackers will constantly attempt to steal Bitcoin that is stored on your computer or even on an apparently secure online wallet service. Though these companies will do an amazing job defending against these attacks, the hackers will constantly evolve in a Red Queen cycle that will constantly create a certain inherent risk of being hacked.
- Bitcoin can be stored in a secure offline wallet, but this wallet can always be stolen or foolishly lost. Kept in a security deposit box this way, it cannot be invested, except as a currency itself. Currently it is amazing just to have, but that may not always be the case.
- Bitcoin can be lost forever if you lose your password, your computer is destroyed or you are outright robbed. You may not be able to insure Bitcoin like you can normal assets, and this money may be lost forever.
That being said, you should be buying Bitcoin. Anyone who reads this now is what is called an “early adopter.” In other words, you are in a position to profit from Bitcoin simply because you are alive at the right time and understand the implications of this powerful social currency.
Steadily Buying Bitcoin
Bitcoin is always fluctuating in value. Therefore, you may be inclined to wait until it is “low” or “down” to purchase large amounts of it.
This, while a noble sentiment, is inherently flawed, because at the time you purchase it you can never know for sure if it will not go down the instant after you buy it. Maybe it will suddenly double in value, or maybe it will suddenly be cut in half due to a damning edict from the IRS. It could do anything – you do not know. Moreover, thousands of other people are also watching the price of Bitcoin. They also react very quickly to sudden drops in price, making buying and selling Bitcoin in this way even more unpredictable.
Yes, if the price suddenly drops by 25% due to a market scare that you know, due to some piece of technical knowledge or other piece of industry information, is bogus, then it is a good time to buy lots of Bitcoin. But unless you have a special edge that puts you in a good buying position, now is as good a time as any else to buy Bitcoin. You always have the same essential risk.
While you should have money specially set aside to purchase Bitcoin when the price is favorable, you should invest in Bitcoin using a regular strategy.
You may, for example, decide that you want to own $6000 worth of Bitcoin by this time next year. In order to do so, you could buy all your Bitcoin right now. But then you run the risk of the price suddenly dropping to a much more favorable price tomorrow afternoon.
Instead, you can choose to invest $500 / month in Bitcoin each month. This has numerous advantages:
- If the price of Bitcoin suddenly drops, you have not bet the farm. And you have lots of cash on hand to buy extra, if it is really a good deal.
- If the price suddenly shoots up, you still enjoy the benefit of appreciation on all the money that you invested so far. Then, you can re-evaluate if you want to keep buying at the new price (usually, you should, unless you know, due to some piece of knowledge, that it is likely to go right back down.)
- If you are new to owning Bitcoin, you can increase your amount of it in small increments, storing it securely in a number of safe locations as you become more crypto-competent
- In all cases, you significantly lower your risk of losing large amounts of money
This is a strategy that both Peter Lynch and Warren Buffett recommend for buying stocks. Luckily for us, it applies to Bitcoin nicely, and very wealthy, senior investors find Bitcoin prohibitively confusing and have yet to take interest.
Buying Bitcoin in this manner is relatively straightforward. You can get an account on Vircurex, which will allow you to trade USD for Bitcoin.
Surprisingly, very few people have an exit strategy for Bitcoin. Crypto coins are very nice and all, and they sure do appreciate quickly, but what if you don’t want to have Bitcoin forever? What if you need money for a business or a medical procedure, and your banker or surgeon won’t take Bitcoin (or doesn’t have a clue what it is?) Maybe new leaps in hacker super-technology will make you leery about the whole crypto-currency thing in general. You can exit Bitcoin in a number of ways,
- Spend it on various goods and have them shipped to you, or all sorts of random services. This is useful mostly if your ultimate goal with your cash is to buy things.
- You can quickly sell all your Bitcoin, and then have that money deposited in your bank account. However, you may find yourself subject to withholding due to money-laundering regulations. You may need to fill out a lot of paperwork before your vendor can release your funds, and you may not see those funds for a long time, right when you need them most. Worse, if for some reason you’re found to be involved in illegal activity, your money can frozen altogether and seized, even if what you’re doing isn’t illegal in the country or jurisdiction when you live. Moreover, you will probably be required to pay taxes on the capital gains you made on your Bitcoin. Consult your tax specialist for more details about this emerging issue.
Since both these options are fairly unattractive (well, except buying things! New bong!) I recommend a simple reversal of the buying strategy.
When you decide you want out, begin steadily withdrawing the money a set amount at a time. If you now decide you want $6000 in USD out of your Bitcoin, begin selling $500 worth of Bitcoin, a month at a time, and steadily transferring it to local bank accounts in standard currencies.
If you incur any difficulties this way, you will run into them early enough to protect the rest of your coin. If you find your vendor cannot transfer the money to you for legal reasons, you may still be able to buy products instead. Also, you are likely to pay less taxes as your gains per year will be less.
In any case, you run less risk of the entirety of the money being lost for whatever reason.
Investing a sensible amount of money in Bitcoin every month is a very reasonable approach that has a very low risk. If you are trading in USD, you can use Vircurex to start buying and selling. Always verify vendor security and trustworthiness on your own.