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Lesson 6: Bitcoin Investing

Lesson 6: Bitcoin Investing

While Bitcoin can be a risky asset, its historical outperformance to the stock indices may help allay the fears of some investors. More people are investing in Bitcoin despite its volatility

Investing in Bitcoin is more accessible than ever before. It only takes a few moments to register your account on a trading platform. However, successful long-term investors take the time to understand what steps to take before investing and how to make well-informed Bitcoin investment decisions.

By seeking answers to your questions about investing in Bitcoin and how to get started, you are more likely to avoid unwanted drawdowns in the future.

Understanding Bitcoin investing

More investors got interested in Bitcoin in the last few years, especially during bullish times. While Bitcoin may not yet share gold's status as a store of value, the crypto king is gradually gaining acceptance and could have a place in your investment portfolio depending on your goals and risk tolerance.

You must consider these before investing in Bitcoin. However, the cryptocurrency space can be intimidating for those new to cryptocurrency investing. Knowing the exact options to invest in Bitcoin is the very first step you need to take as a newcomer.

For instance, hedge funds and pension funds are prohibited from investing in Bitcoin directly. This is because it would violate their agreements with investors. Investors may not be able to access cryptocurrencies via these investment vehicles.

Some investors may not wish to invest in Bitcoin directly for other reasons. That is because Bitcoin is a highly volatile asset class and tokens are only worth what other investors assign to them. It would take only a sentiment shift to erase any cryptocurrency's value.

Other investors can't afford the risk of investing in Bitcoin, and they prefer more stable investment vehicles that indirectly may provide some Bitcoin exposure. Regulating digital currencies is also an issue. Any new laws could have a significant impact on their valuations.

If you are bothered by any of these concerns, there are some options and different ways to invest in Bitcoin for each type of investor.

How to Invest in Bitcoin – How to Get Started

Here are the most popular several ways to get started with Bitcoin.

  • Trade Bitcoin CFDs through online brokers
  • Buy Bitcoin directly through exchanges
  • Gain exposure through Bitcoin-related companies
  • Follow a Bitcoin ETF

Trade CFDs on Bitcoin – BTCUSD CFD

invest in bitcoin
Source: CAPEX WebTrader

Bitcoin contracts for difference (CFDs) give you exposure to the bitcoin price without having to purchase the underlying asset. This gives you additional confidence because you don’t hold any actual bitcoins, meaning you don’t need to use a wallet to store them.

Bitcoin is usually quoted against the US Dollar — so when you buy bitcoin on an exchange, you are selling USD and buying bitcoin. If bitcoin’s price rises, then you can sell it for a profit because bitcoin is worth more USD than when you bought it. If bitcoin’s price falls, then you make a loss.

When you buy bitcoin with CAPEX, you’re doing the same thing. But instead of taking ownership of bitcoin, you’re opening a position that will increase in value as bitcoin’s price increases against the dollar. If bitcoin’s price falls, then your position will lose value.

You can use CFDs to open short positions as well as long: so, if bitcoin's price drops, your position increases in value. The accuracy of your prediction and the size of the market movement will determine your profit or loss. Shorting with derivatives can be an effective way to hedge your portfolio and protect against market declines

CFDs are always traded with leverage, which means you’ll only have to put up a deposit – known as margin – to get full market exposure. Leveraged products, such as CFDs, magnify your potential profit – but also your potential loss.

If you’re new to CFDs, you can practice on a risk-free demo account before you start trading real money.

When trading bitcoin derivatives with us you enjoy benefits like:

  • Deep liquidity. Asset prices are sourced prices from multiple platforms, which helps us improve liquidity. As a result, trades are executed quickly and at lower costs.
  • No exchange account. We source our prices from multiple exchanges on your behalf.
  • Fast account opening. You won’t need access to the exchange directly because we’re exposed to the underlying market on your behalf. You won’t need to set up and manage an exchange account, so you could be set up and ready to trade much more quickly. In fact, you could be trading in less than five minutes, with our simple application form and instant online verification.

Buy Cryptocurrency directly

If you decide to buy and hold Bitcoin directly, then you can use your credit or debit card on centralized cryptocurrency exchanges.

When buying the actual cryptocurrency, you need to deal with adjacent services such as Bitcoin wallets and exchanges to protect your portfolio. To make a profit means that Bitcoin must go up in price.

If you are new to crypto, it is important to ensure that the chosen cryptocurrency exchange allows fiat purchases in U.S. dollars or Euros. This is especially important for your first investment since some crypto exchanges only offer crypto to crypto trades.

Using cryptocurrency exchanges to buy crypto may attract higher fees. Each exchange has different fees, and investors should research them before funding their accounts. You should look at the exact fees for deposits, withdrawals, transfers, and crypto trades. Some of these fees can be percentual, while others are flat fees. There can be also a minimum amount required for deposits and transfers.

Over the years, numerous hackers attacked centralized cryptocurrency exchanges, which caused customers to lose funds. While parts of these funds were later traced and returned to the owners, the threat still exists. Other concerns to pay attention to when using a crypto exchange may be the available liquidity and complicated fee structure. Most crypto exchanges do not have a central office and exist in a legal grey area.

Buying bitcoin through an exchange is mainly for those who use a buy-and-hold bitcoin strategy. This is because buying through exchange means that you’re taking direct ownership of bitcoin – with the expectation that its price will rise.

Public companies with cryptocurrency investments

Investors can certainly invest in cryptos themselves, but a popular way to gain exposure to the sector is to invest in companies -- even bigger, more established companies -- that benefit from the increased popularity of blockchain and Bitcoin. The revenue Bitcoin service providers are deriving from blockchain tech has explosively grown over the past few years.

Companies that adopt blockchain technology, especially in finance, may be able to gain a huge edge over a traditional competitors in processing payments. And brokers who offer digital assets also may attract more customers than exchanges that only offer traditional assets such as stocks and bonds.

  • Public companies that own cryptocurrency. It’s a known fact that MicroStrategy (MSTR) and Tesla (TSLA) own large amounts of Bitcoin.
  • Crypto exchanges. For instance, Coinbase (COIN) is a major cryptocurrency exchange. The company is listed on the Nasdaq exchange.
  • Cryptocurrency miners. Riot Blockchain (RIOT) is a Bitcoin mining company.
  • Financial services firms. For instance, CME Group (CME), which established the first bitcoin futures market, and Robinhood (HOOD), an online trading platform for stocks and crypto.
  • Payment processors. Square (SQ) and PayPal (PYPL) allow users to buy and store cryptocurrencies. Visa (V) and Mastercard (MA) handle payments for several crypto-linked credit and debit cards.
  • Tech companies. NVIDIA (NVDA) and Advanced Micro Devices (AMD) are the essential microchip producers for the blockchain hardware infrastructure. VMWare (VMW) is a leading cloud computing company that has blockchain-focused businesses. DocuSign Inc (DOCU), a platform that facilitates electronic signings and agreement processes, uses blockchain technology to secure signer identities and keep contract evidence.

Cryptocurrency stocks are not pure plays on the industry, giving investors the reward of ample diversification. Cryptocurrencies are highly volatile and can cause wild swings in the revenue and earnings of companies with sector exposure. Experts expect further momentum in crypto stocks as more companies join in the blockchain revolution.

With CAPEX you can trade most of these companies' shares as a single CFD product with the Blockchain Future ThematiX. The weight of each share (percentage allocation) to the ThematiX is determined based on their Market Capitalization.

Blockchain Future ThematiX is comprised of a group of shares as below:

  • IBM 4%
  • NVIDIA 21%
  • CME 3%
  • Square 4%
  • MasterCard 11%
  • DocuSign 2%
  • AMZN 55%

Bitcoin ETFs

In their current form—and the form desired by many investors—Bitcoin ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying them. They eliminate the need for security procedures and excessive funds while providing a familiar investment type.

While you don't technically have cryptocurrency in your wallet, you have security keys that you need to safeguard. If you buy your cryptocurrency through an exchange, you can choose to have your keys stored on that exchange if it offers that service.

However, wallets and exchanges can be hacked, and keys are stolen—which means your cryptocurrency can be stolen. You can store your keys offline using several methods, but none of these methods are 100% secure or guaranteed. An ETF doesn't require you to own any cryptocurrency, store keys safely, or move the keys back and forth between different types of storage—you own shares of the fund, which takes the risks of storing keys for you.

The first official Bitcoin-linked ETF was The ProShares Bitcoin Strategy ETF (BITO), approved by the SEC in October 2021 and listed on the New York Stock Exchange.

The SEC has not approved any Bitcoin ETFs for funds that hold bitcoin. Instead, it has approved Bitcoin ETFs linked to Bitcoin futures contracts that trade on the Chicago Mercantile Exchange (CME).

Strategies For Investing in Bitcoin

Despite the many differences between buying Bitcoin and buying other equities like stocks, there are inherent similarities that must be addressed. In fact, the actual strategies for investing in Bitcoin aren’t all that different from their stock counterparts. That said, many of the strategies for buying Bitcoin must do more with investment timeframes. Investors may exercise one of the two most popular Bitcoin investment strategies:

  • Buy and ‘Hodl’ Bitcoin
  • Trade Bitcoin on Short-Term Volatility

Buy and ‘Hodl’ Bitcoin

Those familiar with Bitcoin are probably already aware of the concept between Buy and ‘Hodl.’ Those who aren’t, however, can get caught up quickly. ‘Hodl’ (an intentional misspelling of hold) is merely an investment philosophy. Short for “hold on for dear life,” ‘hodl’ suggests the best Bitcoin investment strategy is to hold it forever. Those who subscribe to this strategy are more than aware of the asset’s volatility but strongly believe in its prospects. Therefore, this strategy will require investors to weather the many ups and downs of Bitcoin price fluctuations without selling.

However, this phrase shouldn’t be taken too seriously – you should only buy and hold bitcoin if you’ve got a positive outlook on its long-term price. If your research or trading plan indicates that you should sell your positions to take profit or limit loss, you should – or you could set stop losses to close your positions automatically.

Trade Bitcoin on short-term volatility

One of the most popular strategies for investing in Bitcoin relies on the asset’s volatility. If for nothing else, Bitcoin has become synonymous with violent swings in valuation. Simply looking at a one-year Bitcoin chart will identify just how volatile the asset can be, which bodes well for short-term traders. Not surprisingly, this strategy will have investors ride the ups and downs, selling at the peaks and buying on the dips. This is the hardest of the strategies and exposes investors to the most risk; however, it may also compound gains faster than the previously mentioned.

Hedging

Hedging bitcoin means mitigating your exposure to risk by taking an opposing position to the one you already have open. You’d do this if you were concerned about the market moving against you. For example, if you owned some bitcoins but were concerned about a short-term drop in their value, you could open a short position on bitcoin with CFDs. If the market price of bitcoin falls, the gains on your short position would offset some or all the losses on the coins you own.

Day trading

Day trading bitcoin, including scalping, means that you’ll open and close a position within one single trading day – so you won’t have any bitcoin market exposure overnight. This means that you’ll avoid overnight funding charges on your position. This strategy could be for you if you’re looking to speculate from bitcoin’s short-term price movements, and it can enable you to make the most of daily volatility in bitcoin’s price.

Swing trading

Swing trading bitcoin involves trying to capture price moves that happen on a short to medium time frame. The idea behind swing trading is to catch market "swings" that play out over a few days to several weeks.

Swing trading strategies work best in trending markets. If there's a strong Bitcoin trend on a higher time frame, swing trading opportunities can be plentiful, and swing traders can take advantage of larger price swings. In contrast, swing trading can be more difficult in a consolidating market. If Bitcoin is going sideways, it's harder to capture large price changes.

Short-term bitcoin traders will typically use technical analysis to generate trade ideas. Price action, Japanese candlestick chart patterns, support and resistance levels, and technical indicators are very commonly used to identify trade setups. Some of the most common indicators used by swing traders are moving averages, the Relative Strength Index (RSI), MACD, Bollinger Bands, and the Fibonacci retracement tool.

What Determines Bitcoin’s Price?

Bitcoin is not issued by a central bank or backed by a government; therefore, the monetary policy tools, inflation rates, and economic growth measurements that typically influence the value of a currency do not apply to Bitcoin. Bitcoin acts as more of a commodity being used to store value, so the following factors influence its price.

The supply and demand

The supply of an asset plays a vital role in determining its price. A scarce asset is more likely to have high prices, whereas one available in plenty will have low prices. Bitcoin's supply is generally well-publicized, as there will only ever be 21 million produced and only a specific amount created per year. Its protocol only allows new bitcoins to be created at a fixed rate, and that rate is designed to slow down over time.

The rate at which Bitcoin is created is reduced about every four years. This is known as Bitcoin halving, where the number of coins given as a reward for successfully mining a block is cut in half, the last of which was in May 2020.

Bitcoin has attracted the attention of retail and institutional investors, increasing demand fueled by an increase in media coverage and investing "experts" and business owners touting the value Bitcoin has and will have. Bitcoin has also become popular in countries with high inflation and devalued currencies, such as Venezuela. Additionally, it is popular with those who use it to transfer large sums of money for illicit and illegal activities.

This means that shrinkage in future supply has coupled with a surge in demand to fuel a rise in bitcoin's price. However, its price still fluctuates in alternating periods of booms and busts.

The cost of producing

Like other commodities, production costs play an essential role in determining bitcoin's price. According to some research, bitcoin’s price in crypto markets is closely related to its marginal cost of production.

For Bitcoin, the production cost is roughly a sum of the direct fixed costs for infrastructure and electricity required to mine the cryptocurrency and an indirect cost related to the difficulty level of its algorithm. Bitcoin mining consists of a network of miners competing to solve for an encrypted number—the first miner to do so wins a reward of newly minted bitcoins and any transaction fees accumulated since the last block was found.

An indirect cost of bitcoin mining is the difficulty level of its algorithm. The varying difficulty levels of bitcoin’s algorithms can hasten or slow down the bitcoin production rate and affect its overall supply, thereby affecting its price.

Solving the hash to open a block and earn a reward requires brute force in the form of considerable processing power. In monetary terms, the miner will have to buy many expensive mining machines. The bitcoin-mining process also requires costly electricity bills. According to estimates, electricity consumption for the bitcoin-mining network equals more than that of some small countries.

The competition

Though Bitcoin is the most well-known cryptocurrency, hundreds of other tokens are vying for investment dollars. Bitcoin dominates trading in cryptocurrency markets. But its dominance has waned over time. Few years ago, Bitcoin accounted for more than 80% of the overall market capitalization in cryptocurrency markets. These days, that share is down to less than 50%.

The main reason for this is increased awareness of and capabilities for alternative coins. For example, Ethereum has emerged as a formidable competitor to Bitcoin because of a boom in decentralized finance (DeFi). Investors who see its potential in reinventing the rails of modern financial infrastructure have invested in ether (ETH), the cryptocurrency used as “gas” for transactions on its network. Ethereum accounts for around 20% of the overall market cap of cryptocurrency markets.

New cryptocurrencies are introduced daily. CAPEX maintains a list of new cryptocurrencies that are added and available for trading.

Regulations

Bitcoin was released in the aftermath of a financial crisis precipitated by the loosening of regulations in the derivatives market. The cryptocurrency itself remains unregulated and has garnered a reputation for its border- and regulation-free ecosystem.

Bitcoin’s lack of regulatory status has both benefits and drawbacks. The absence of regulation means it can be used freely across borders and is not subject to the same government-imposed controls as other currencies. However, governments and interested parties are continuing to push for cryptocurrency regulation.

Investors also influence prices when they become overly excited over an asset, causing it to be overvalued. They can also cause it to drop when they panic about possible losses.

The development of a regulatory framework is only a matter of time, and the effects it will have on Bitcoin's price are unknown. For example, in the United States, cryptocurrency rulings delivered by the Securities and Exchange Commission (SEC) can impact Bitcoin's price. Bitcoin price surged a few weeks after the SEC approved the first U.S. bitcoin-linked ETF: the ProShares Bitcoin Strategy ETF (BITO).

China’s bitcoin trading and transaction ban in September 2021 affected the cryptocurrency’s supply and demand. Mining farms in China were forced to pack up and move to cryptocurrency-friendly countries.

Media and news

In an attempt to keep investors and interested parties informed, the media and news coverage work both for and against Bitcoin's price. Any changes in any of the factors previously discussed are quickly published and disseminated to the masses. As a result, good news for cryptocurrency investors tends to send Bitcoin's price up, while bad news sends it down.

Is Bitcoin a Good Investment?

Here’s one of the most commonly asked questions about Bitcoin: is Bitcoin a good investment?

The real answer is no investment is inherently “good” or “bad.” It depends entirely on your risk tolerance, your investment strategy, and your financial goals. Before you consider Bitcoin as an investment, you should carefully consider your own goals and determine what you want to accomplish in your investment activities. Do you want to develop a passive income? Become a full-time investor? Save for retirement? Answering these questions will help you figure out whether Bitcoin is the right investment option for you.

One of the main concerns about the Bitcoin network, which uses the proof-of-work consensus, is that the blockchain consumes a lot of energy. Also, there is more congestion as more Bitcoin investors come onto the platform, and fees associated with each transaction can add up. But there is an alternative consensus mechanism called "proof of stake," which rival blockchain Ethereum is anticipated to roll out in 2022.

If Bitcoin also switches over to proof of stake, this may help improve some of the network's challenges. The proof-of-stake consensus mechanism's theory is like proof of work but is more energy-efficient and allows for more scalability. This change may help the Bitcoin blockchain network run more smoothly and encourage more Bitcoin investor participation.

Anyway, Bitcoin is a high-risk investment because it’s a volatile asset. That means that Bitcoin values may rise or fall dramatically in value over a very short period—even as quickly as a few hours or days.

Like all cryptocurrencies, Bitcoin has no intrinsic value. It’s not backed by any physical asset, like gold or silver, and there’s no central regulator to ensure that the value remains stable. Furthermore, Bitcoin value isn’t linked to the profits of any one corporation. The value of Bitcoin is dependent on market demand. When there are more people buying Bitcoin, the value will increase. When there are fewer people buying Bitcoin, the value will decrease.

To increase your income through Bitcoin investments, you may need to rely on “timing the market,” which is a difficult investment strategy. Nonetheless, there’s a potential for profit.

Bitcoin vs. Other Investments

Choosing which investments to jump on and which to avoid can be a very confusing decision. Your choice will decide whether you enjoy great returns for years to come or lose it all. It is impossible to turn on the TV or read an investment blog without hearing about Bitcoin. It is one of the hottest topics in the world right now, but it’s not the only way to invest your money, which begs the question: How does Bitcoin stack up against other wealth-building vehicles?

Investing in Bitcoin:

  • Many experts believe that Bitcoin is a bubble, meaning it is overvalued and could crash at any moment.
  • Bitcoin’s value is volatile; it is equally prone to massive spikes and drops in price.
  • Bitcoin is entirely digital, meaning it is more vulnerable to security breaches than a tangible asset.

Investing in Stock Market:

  • As the economy grows, so do corporate earnings. That's because economic growth creates jobs, which creates income, which creates sales.
  • Historically, over the long-term stocks have yielded a generous annualized return. For example, as of January 1, 2022, the 10-year annualized return for the S&P 500 was above 15%. That's better than the average annualized inflation rate.
  • The stock market allows you to sell your stock at any time. Economists use the term "liquid" to mean that you can turn your shares into cash quickly and with low transaction costs.
  • Dividend-paying stocks provide a way for investors to get paid during rocky market periods when capital gains are hard to achieve.

Bottom line

Bitcoin is a popular type of cryptocurrency that utilizes a large chain of interconnected computers to store and protect your digital assets. Bitcoin is a highly volatile asset that’s prone to large and fast swings in value, which presents an opportunity for large returns but also poses a high risk. It is critical that you learn how to invest in Bitcoin responsibly before making any decisions. Be sure to diversify your investment portfolio to protect yourself from marketplace volatility.

When you trade Bitcoin CFDs at CAPEX.com, you’ll find that the spreads are tighter and there is no commission for opening and closing trades, but you’ll incur rollover charges for positions maintained overnight. We also offer CFDs on shares and funds that may give you some Bitcoin and blockchain exposure through the largest U.S-listed companies.

Ready to start investing in Bitcoin & other crypto assets?

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Invest in Bitcoin BTCUSD

Le informazioni contenute nel presente documento sono redatte da CAPEX.com e non costituiscono né devono essere interpretate come suggerimenti di investimento. Le informazioni di cui al presente documento costituiscono comunicazioni di marketing generali a scopo informativo e, in quanto tali, non sono state preparate nel rispetto dei requisiti di legge che promuovono le ricerche di investimento indipendenti. Inoltre, non sono soggette ad alcuna limitazione sulle transazioni condotte in anticipo rispetto alla divulgazione delle ricerche di investimento in questione.

Gli utenti / lettori non dovrebbero fare affidamento esclusivamente sulle informazioni qui presentate e dovrebbero fare le proprie ricerche / analisi anche leggendo la ricerca reale sottostante. Il contenuto è generico e non tiene conto di circostanze personali individuali, esperienza di investimento o situazione finanziaria attuale.

Pertanto, Key Way Investments Ltd non accetta alcuna responsabilità per eventuali perdite di trader a causa dell'uso e del contenuto delle informazioni presentate nel presente documento. Le prestazioni passate e le previsioni non sono un indicatore affidabile dei risultati futuri.
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