Bitcoin’s skyrocketing price of over the last decade may be cuase to believe that buying Bitcoin is the best and most profitable profitable investment. There are many successful storied, some people decide to invest their life savings into the cryptocurrency. There’s even the famous “Bitcoin Family” who sold everything, including his family home and car, to make an investment and fully dedicate himself to the cryptocurrency. Although he may not have not done it explicitly for returns on investment, he sees it as an investment in a revolution. While others have seen tremendous short-term gains, it may certainly sound like a crazy idea, but that doesn’t mean it’s not a tempting idea. After all, if this guy is that confident in Bitcoin, why can’t I be?
Before investing your life savings, consider the rationality of doing so. Investing all savings into Bitcoin would not be wise. Here’s some reasons why you should reconsider dumping all of your cash into Bitcoin, and what recommendations people have made.
Having everything in one investment is always too risky
Allocating all your funds into one investment means that you are extremely vulnerable to what happens in the market. It’s comparable to going into a casino and putting down everything you own in a single bet. Sure, you may make a lot of money back very quickly, but you can also lose it all just as fast (or faster). It’s just not cautious, nor wise to do this.
This investment rule, doesn’t only apply to Bitcoin. Investing everything into one market/industry such as the stock market, gold, or anything else comes with tremendous risks. Even relatively stable investments are vulnerable to price shocks and economic shifts. If there’s one thing for certain among all investment markets, it’s that the future is uncertain. No one is right 100% of the time.
Cryptocurrency is extremely high risk and volatile
Cyptocurrency is one of the riskiest investments one can make, for a variety of reasons. Bitcoin has no physical backing and isn’t directly controlled or regulated by any central agency. Bitcoin is modified by a group of individuals who vote on changes over time. These disadvantages have given cryptocurrencies a unique market position. This gives Bitcoin some advantages over traditional investments, which has in turn allowed it to grow so quickly. But it also leads to higher volatility in pricing, and a fragmented marketplace for these assets don’t help either. Overtime, larger institutions are purchasing Bitcoin and governments will become more fluent in their advantages, which may help to stabilize markets. However, it is a relatively new asset and that there are essentially no rules in the market, allowing anything to happen at any time.
Bitcoin is one of many (MANY) Cryptocurrencies
Even if cryptocurrency does have a successful and prosperous future, it doesn’t necessarily mean that Bitcoin will continue to grow. Bitcoin is the biggest and most well-known cryptocurrency, but it is just one of many cryptocurrencies. The competition in the cryptocurrency marketplace has grown substantially since Bitcoin was first used in 2009 and is only starting. There are plenty of decentralized cryptocurrencies that offer faster and cheaper transactions than Bitcoin, the ability to run applications, and features that Bitcoin may never integrate.
That being said, Bitcoin’s market coverage is still the largest, but the price of Bitcoin doesn’t necessarily reflect the state of the cryptocurrency market as a whole.
It could all disappear in seconds
Having all of your savings in cryptocurrency means that it’s at the mercy of sophisticated hackers that are now targeting cryptocurrency holders and companies. Keeping quiet about holdings and securing your investments are the biggest ways to stay secure. However, cryptocurrency thieves are getting more sophisticated. Although cryptocurrency is quite secure, slip ups in security may lead to vulnerabilities that can cause it to be easier steal over the internet. Plus, it’s practically untraceable once it’s been taken. This makes Bitcoin an enticing target.
Looking after your own Bitcoin is a tricky process. Misplace your private keys and your financial future could be gone in seconds. Cryptocrooks have written extensively about simple ways to secure Bitcoins.
It can add stress to your life
Apart from the purely rational factors, there are emotional consequences of having all of your life savings tied up in one high-risk asset. If your financial prosperity is tied up into Bitcoin, then every price move makes a huge difference to your total wealth. A 30% price correction, which is common for Bitcoin, means your net worth decreases by 30%.
Imagine if your house dropped by 30% in value in just a couple of weeks. You’d be devastated. Even worse, knowing that this could happen at any time would mean you’d be living in constant anxiety.
It’s less Liquid than Other Assets
Another aspect of Bitcoin is that it’s still not a very liquid investment. It can be challenging to cash out Bitcoin for most people and in many parts of the world. Finding ways to spend Bitcoin can also be challenging, although acceptance is increasing. Still, you never want to find yourself in a position where you can’t liquidate or spend your savings. It is still much more difficult to spend Bitcoin for goods and services than pretty much anything else.
The jury is out on regulation
The final argument against going all-in with Bitcoin is that regulators still haven’t decided how they are going to treat cryptocurrency. They are still in a legal, regulatory, and tax grey area. Many governments have warned against investing in cryptocurrency, as exchanges can be hacked and customers defrauded.
Consequences for investors could include unexpected tax bills, all the way up to the outright ban of cryptocurrency, essentially making their life savings untradable. While cryptocurrencies are in this legal limbo, it’s best to make sure you’re covered. For those who have invested in crypto, taxes can be simplified using a software to automate much of the tedium. Our review of Taxbit demonstrates that software can help regular people file complicated tax returns.
A Diverse Investment Portfolio is best
All these reasons add together to make a compelling argument against putting your life savings into one asset, even the most profitable one. But, this doesn’t mean that you should abandon Bitcoin altogether and just buy something else.
The smartest and the best investment strategy is to have a diversified investment portfolio that’s built for long-term growth and stability. This means you’ll want to choose a number of investments that aren’t correlated with each other, meaning that the value of one doesn’t have much relationship to the others. A small, yet reasonable, allocation to Bitcoin can be beneficial to all but the most conservative portfolios. The portfolio should align with investment goals and be coordinated with professionals such as accountants and financial planners.
It’s simple to diversify your portfolio and ensure your life savings are secure and will continue to grow long into the future. Along with Bitcoin, it could be wise to pick a few non-cryptocurrency investment options and invest a portion of your savings into them. Stocks, bonds, and gold are great places to start. It is also worth noting that many rebalance their portfolio regularly to ensure that they stay diversified.
Bitcoin is an exciting new type of investment, there’s no doubting it. But when it comes to investing, it pays to stay smart and distribute your money across several assets.