Planning to Buy Bitcoin? Answer These Questions First
The class of cryptocurrencies has been rising in popularity over the years, and many wonder if they should purchase digital assets. And considering that Bitcoin is the most popular asset in the sector, most investors wonder if they should start their journey in the crypto ecosystem by investing in Bitcoin. Bitcoin relies on highly decentralized blockchain technology, offers increased freedom compared with traditional money, and boasts of privacy. The untapped potential of Bitcoin and the BTC prediction for the following years make more people turn to this asset when diversifying their portfolios.
However, Bitcoin is a volatile digital asset whose value changes much against fiat money, so it's a risky investment even for a seasoned investor. However, its volatility and the underlying innovative technology make it ideal for those looking for high returns. If you want to join the trend and buy Bitcoin in the bull market, learning more about it is essential.
Here is a series of questions that will help you figure things out.
Do I Know What Bitcoin Is?
If you google Bitcoin, you will find diverse definitions of the concept. Countless online resources provide information about the first cryptocurrency, and you should try to read as many as possible to get a thorough understanding of how it functions.
Bitcoin was designed to function as a digital currency that resides on a decentralized network so no government or central authority can control it. A complex network of computers spread worldwide processes Bitcoin transactions. The blockchain uses a proof-of-work consensus to mine new coins, and miners get recompensation for each block they confirm.
Are There Any Risks Associated with Investing in Bitcoin?
All kinds of investments carry diverse risks, regardless of whether we're speaking about crypto or traditional investments. But when investing in Bitcoin, you should remember that it's a highly volatile asset, and its value fluctuates in the short and long term. If we have a look at past prices, we'll notice that Bitcoin had a $20.000 high at the end of 2017 to drop to $3.000 a year later.
Bitcoin's value is more easily influenced than that of other assets because it's subjected to several factors. For example, when Elon Musk stated that his companies won't accept it as a means of payment, its price went on a downward spiral. 2024 seems to be a good year for the coin because it registered price growth over the first months of the year, and it's expected to follow the same trend, considering it went through another halving.
Why Do I Want to Buy Bitcoin?
It's one thing to buy Bitcoin because everyone purchases it, and it is totally different if you make this decision because the asset aligns with your investment strategy. It's essential to determine your motivation and whether you purchase cryptocurrencies for portfolio diversification or another purpose. Before buying Bitcoin, you must identify the specific reason that made you look towards the crypto sector because considering its volatility, this shouldn't be one of the cases when you plunge into an investment only because other people did it.
Reconsider your decision to buy Bitcoin if you do it for fear of missing out or because you want to get rich quickly. It's quite challenging to predict its price evolution, and you might end up making decisions out of panic.
What Investment Strategy Do I Want to Use?
The investment strategy impacts how you plan to buy and sell Bitcoin, an aspect you should pay attention to. First, you must decide how much you plan to spend on buying Bitcoin and how often you want to do it. Seasoned investors recommend putting smaller portions of money instead of allocating a big chunk of your budget. For example, you could decide to spend $1000 every month to purchase Bitcoin. This strategy allows you to buy coins when the digital currency drops and sell them when it spikes back.
Your investment strategy should also include the conditions when you sell because it will help you manage risk. For example, you can pick a timeframe, such as waiting at least two halving cycles before selling. You can also set the condition to sell when Bitcoin reaches a particular price target.
Am I Prepared for Bitcoin's Price Swings?
It is impossible to overstate the volatility of cryptocurrencies, and Bitcoin makes no exception. In a few weeks, the price of Bitcoin dropped from $50,000 to over $60,000, then down to $30,000.
Consider your response if the price of Bitcoin decreased by 50%, 80%, or 90% before you reach your investment goals. Would you salvage what's left by selling? Would you continue with it, or would you think about purchasing more while the price was reduced?
Most crypto investors encounter circumstances similar to these often. You must, therefore, have faith in Bitcoin as a long-term investment and be ready to stick to your plan of action. If not, you might be inclined to sell as soon as problems arise.
Do I Afford to Lose Money?
Due to its volatility, Bitcoin is not the place to deposit money you'll need anytime soon. Investing the amount you're willing to lose when it comes to Bitcoin and other high-risk ventures is advisable. Both of the following must be true in order to be able to afford that:
- You have three to six months' worth of living expenses stashed up in your emergency fund. If not, you can find yourself in a situation where you have to withdraw the funds you used to purchase Bitcoin due to financial difficulties.
- You own a well-balanced portfolio that includes no more than 5% to 10% of high-risk assets, such as Bitcoin. In this manner, if Bitcoin doesn't pan out, it's merely a small setback and will not wipe out your entire portfolio.
Last Words
It's strongly advisable to only invest in an asset if you thoroughly understand it. Investors should have in their portfolio only assets that could provide them with a return in the long run.