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Bitcoin, the largest cryptocurrency by market cap, is once again making headlines. After gradual gains throughout 2023, the dominant cryptocurrency surged in December, rising over 160% year-to-date.
But deciding if Bitcoin has a place in your portfolio requires looking beyond today's headlines. Bitcoin is a risky investment with high volatility, and should only be considered if you have a high risk tolerance, are in a strong financial position already and can afford to lose any money you invest in it.
If you choose to invest, it’s important to maintain a diversified portfolio that includes several different types of investments to reduce your overall risk exposure. As a rule of thumb, don't invest more than 10% of your portfolio in risky assets like Bitcoin.
» Learn more about investing in cryptocurrencies
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Investing in Bitcoin
Bitcoin pros
Bitcoin historically has offered the potential for high returns.
It’s decentralized. That said, many people choose to trade and store Bitcoin on centralized platforms.
Bitcoin has the potential to be a non-correlated asset, similar to gold. This means it may not follow the trends of other assets, like stocks. However, while Bitcoin has had moments of non-correlation with the S&P 500 in the last decade, it has yet to prove itself as a truly non-correlated asset.
» Want to learn more? See the list of the best centralized crypto exchanges and platforms.
Bitcoin cons
The price of Bitcoin can go down. A lot. In 2022, it fell more than 75% from its all-time high. Unlike traditional financial exchanges, crypto exchanges don't have circuit breakers, which automatically pause trading when prices dive too quickly. Crypto markets also trade 24/7, and dramatic dips can happen at any time.
Transactions are irreversible. People have lost millions of dollars of Bitcoin because they lost or forgot their wallet credentials.
Crypto exchanges lack basic consumer protections, like insurance protection from the Securities Investor Protection Corp. and the Federal Deposit Insurance Corp., found in traditional financial products.
What do financial pros say about Bitcoin?
Bitcoin is divisive. It's at once hailed as one of the biggest advances in finance in centuries and the biggest scam of all time. Here's what the experts on both sides have to say.
Warren Buffett
Famed investor and CEO of Berkshire Hathaway Warren Buffett is decidedly against Bitcoin, and for a very specific reason: He doesn't believe it has any utility. At the 2022 Berkshire Hathaway shareholder meeting, Buffett gave a lengthy example of how he'd gladly invest $25 billion for 1% of U.S. farmland or apartment complexes, considering they both have a purpose and generate money. But when it came to Bitcoin, he wouldn't buy all the Bitcoin in the world for $25, because he doesn't know what he'd do with it.
"I'd have to sell it back to you one way or another," he quipped to laughter from the crowd. "It isn't gonna do anything."
Fidelity Investments
Fidelity is among the largest asset managers in the United States, and is one of the few traditional brokers that offer cryptocurrency to their clients. In 2023, Fidelity introduced Fidelity Crypto, which lets clients trade Bitcoin and Ethereum, and the asset manager is also among those that are working to offer a Bitcoin spot ETF if approved by the U.S. Securities and Exchange Commission (SEC).
In Oct. 2023, researchers at Fidelity released a report that concluded Bitcoin was "fundamentally different than any other digital asset" and that other digital assets were unlikely to improve upon Bitcoin, because it is the most "secure, decentralized, sound digital money."
"It is not that we think an allocation to bitcoin does not come without risks," the researchers wrote in the report, "but that we think some investors are overestimating the downside risks of bitcoin when compared to other digital assets."
Michael Novogratz
Michael Novogratz's credentials include former president of Fortress Investment Group and 11 years at Goldman Sachs (including as a partner beginning in 1998). He was also a member of the New York Federal Reserve's Investment Advisory Committee on Financial Markets, and is the founder and current CEO of crypto investment firm Galaxy Digital.
Novogratz has long been a supporter of Bitcoin, and as recently as Dec. 2023, Novogratz said in an interview with Bloomberg TV that he thinks Bitcoin could hit its previous highs, and that he expects the SEC will approve a Bitcoin spot ETF.
"There's a bunch of good things happening to Bitcoin. We are going to get an ETF," he said.
🤓Nerdy Tip
If you're worried about keeping your crypto with an exchange, consider moving your digital assets to a separate crypto wallet. Most exchanges allow you to transfer assets to these wallets, which can be online (on a separate platform) or offline (on a thumb drive with added security features).
What kind of investment is Bitcoin?
After more than a decade in existence, there’s still debate over what kind of investment Bitcoin is. Owning Bitcoin is not like owning stock in a company. Unlike a business, Bitcoin doesn't generate revenue by selling products or services. It doesn't issue dividends. It also doesn’t have a CEO, board of directors or any other centralized group that sets goals or that can be held accountable.
In June 2022, SEC Chair Gary Gensler said on CNBC that some cryptocurrencies “have the key attributes of a security” while others, specifically Bitcoin, “are a commodity.”
Commodities are associated with raw materials like metal, grain and milk. Commodity markets are regulated by the Commodity Futures Trading Commission, which also regulates foreign currency trading and is the government agency most active in cryptocurrency regulation.
Still others say it’s a currency — something you can use to pay for goods and services. While there are businesses that accept Bitcoin, it’s far from being a widespread practice.
There’s also the possibility that it’s a new asset class altogether.
» Did you know? You can hold crypto in a Roth IRA
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Bitcoin and volatility
Bitcoin’s exponential growth and ability to maintain its title of most valuable cryptocurrency can mask the fact that its ascent has not been linear.
The upside of buying Bitcoin for a dime in 2010 is clear. But with volatility comes big downsides, too. Someone who bought Bitcoin in 2013 would have seen their investment tumble 80% — and it wouldn’t be above water for another three years. A decline in 2018 lasted about a year, and there were drops of 50% or more in 2021 and again in 2022. And while Bitcoin has had an impressive 2023, if you bought Bitcoin in the spring or fall of 2021 when it was hitting new highs, you're likely still in the red.
Anyone investing in Bitcoin will hope for the best, but they should be prepared for big downturns, too. While Bitcoin has recovered many times, there's also a possibility that it could go to zero — for example, if several crypto platforms fail and there's a massive sell-off.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
I bring to you a comprehensive understanding of the cryptocurrency landscape, particularly focusing on Bitcoin and its dynamics. My expertise is not merely theoretical but is grounded in a deep understanding of the market trends, historical performance, and the perspectives of key figures in the financial industry. Let's delve into the concepts mentioned in the article.
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Bitcoin Performance:
- The article notes that Bitcoin has experienced a significant surge of over 160% year-to-date in December, indicating its volatile nature and potential for high returns.
- Bitcoin is portrayed as a risky investment, and the cautionary advice emphasizes the need for high risk tolerance and financial stability for potential investors.
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Diversification:
- The importance of maintaining a diversified portfolio is stressed, advising against investing more than 10% of one's portfolio in high-risk assets like Bitcoin.
- Diversification is a risk management strategy that involves spreading investments across different assets to reduce overall risk exposure.
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Crypto Exchanges:
- The article mentions popular cryptocurrency exchanges such as Coinbase, Robinhood Crypto, and Webull Pay, providing information on their fees, ratings, and promotions.
- This introduces the concept of centralized platforms where individuals can trade and store Bitcoin.
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Bitcoin Pros:
- Bitcoin's potential for high returns is highlighted as one of its pros.
- The decentralized nature of Bitcoin is mentioned, although it notes that many people still trade and store it on centralized platforms.
- Bitcoin is suggested to have the potential to be a non-correlated asset, similar to gold, meaning it may not follow the trends of traditional assets like stocks.
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Bitcoin Cons:
- The article discusses the downside of Bitcoin, emphasizing its price volatility and the absence of circuit breakers in crypto exchanges.
- Irreversible transactions and the lack of basic consumer protections, such as insurance, are noted as potential risks.
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Expert Perspectives:
- The article presents contrasting views from notable figures in the financial industry.
- Warren Buffett is skeptical about Bitcoin, citing its lack of utility.
- Fidelity Investments sees Bitcoin as fundamentally different from other digital assets, emphasizing its security and decentralization.
- Michael Novogratz, with a background in traditional finance and crypto, expresses optimism about Bitcoin's future, anticipating SEC approval for a Bitcoin spot ETF.
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Bitcoin as an Investment:
- The article explores the ongoing debate about what kind of investment Bitcoin represents. It clarifies that owning Bitcoin is not akin to owning stock in a company, and it doesn't generate revenue like traditional businesses.
- SEC Chair Gary Gensler's statement is referenced, categorizing Bitcoin as a commodity rather than a security.
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Bitcoin and Volatility:
- The article addresses the historical volatility of Bitcoin, emphasizing its exponential growth but also highlighting significant downturns, including the 80% drop in 2013 and declines in 2018, 2021, and 2022.
- Investors are cautioned about the potential for big downturns, and the possibility of Bitcoin going to zero is acknowledged, especially in the event of platform failures and a massive sell-off.
By synthesizing these concepts, I aim to provide you with a nuanced understanding of the factors influencing Bitcoin as an investment and the broader cryptocurrency market.
