Many people turn to the markets to help increase wealth or build a retirement nest egg. But unlike a bank, where deposits are guaranteed by federal deposit insurance, the value of stocks, bonds, and other securities fluctuates with market conditions. No one can guarantee that you’ll earn a return on your investments, and assets you invest money in may lose value. While the U.S. Securities and Exchange Commission (SEC) does enforce laws on how investments are offered and sold to you, there is no recourse if the asset you invest in loses value. You are responsible for the investment decisions you make.
This is exactly the case when investing in cryptocurrency also. Investor.gov describes bitcoin as “a decentralized, peer-to-peer virtual currency that is used like money – it can be exchanged for traditional currencies such as the U.S. dollar, or used to purchase goods or services, usually online. Unlike traditional currencies, Bitcoin operates without central authority or banks and is not backed by any government.” The site warns about fraudulent schemes involving bitcoin, pointing out that bitcoin users may be targets for fraud or high-risk investment schemes. This is 100% true and every potential investment should be thoroughly researched, regardless of the asset but particularly for bitcoin.
Recovery or recourse when it comes to cryptocurrency is limited, to say the least. Volatility of price, lack of insurance, security concerns, and limited regulations to protect investors increase the risks and should be considered.
Note: In this case, “safest course” assumes that you have researched exchanges and wallet types, making the best choice in regards to security and goals. This should be done long before you decide to buy that first bitcoin or altcoin.
There are basically three options when investing in cryptocurrency:
- buy and hold;
- invest and lend to earn interest; or
- buy and sell to make a profit.
For newcomers to cryptocurrency, buying and holding is by far the safest option. However, if this is the option chosen, the decision to invest should be based on the belief bitcoin will eventually increase in value – not due to FOMO. Fear of missing out (FOMO) is one of the biggest dangers, and the result is often a loss. There is no substitute for proper research and sensible assessment of loss/gain potential, as well as an understanding of the asset. Buying because you know someone who made money on bitcoin is absolutely no guarantee that you will also.
Options 2 and 3 are covered in dedicated articles and pose the highest risk – particularly for newcomers. These options represent anything BUT the safest course to take.
Buy and Hodl* (Hold)
Buying bitcoin and securing the private keys in cold storage is the recommendation for beginners. This is the philosophy many early adopters still embrace. There are a few reasons to consider this strategy.
- Since May 2010, when the value was around $0.003 per coin, bitcoin’s price has surged in value approximately 583,170,000%. There have been times when the price surged 73% in a seven day period, and there have been times when the price dropped drastically overnight. Most of the crashes occurred as a result of unpredictable events that shook confidence in cryptocurrency as a whole, and most of the meteoric rises were due to FOMO.
- Slow, steady organic growth has occurred despite these drastic fluctuations. Hodlers ignore both the extremely fast drops in value and the equally fast recoveries, and do not get overly concerned about the day-to-day price. 99% of the people who invested in 2012 have realized incredible ups and downs, and are now multi-millionaires off a $30 to $1000 investment.
- Only 21 million bitcoins will ever be mined and over 17 million already have been mined. Many bitcoin whales (those who have millions or billions of dollars worth) never sell any of their coins, no matter how high the price goes, unless they need money to survive or sustain their lifestyle. HODLing by investors keeps the supply of coins available for sale very low in the supply/demand equation, which helps accelerates the price.
- Bitcoin itself has never been hacked. Despite what others believe, the only bitcoin hacked has been that which was stored on an exchange. Exchanges are vulnerable and assets should never be stored in an online account. Not only do they make the largest target for hackers, you do not control the private keys. Store bitcoin in a hardware wallet and it will be impossible for a hacker to access. There may be other concerns, like theft, loss or damage of the device itself, but hacking won’t be one of them.
- In the U.S., bitcoin holders that hold for at least a year can pocket long-term capital gains, which are lower than short-term gains. This applies to any investment.
- Should a fixed supply currency become the de facto currency standard, those who held will owe virtually no short-term or long-term capital gains taxes when it is eventually sold or spent. Granted, there’s a long way to go before this happens if it ever happens. But it is a reason to hodl.