Is Bitcoin a Good Investment? – NerdWallet
Is Bitcoin a Good Investment? – NerdWallet
Is Bitcoin a Good Investment? Eye-popping returns make Bitcoin attractive, but make sure you understand the risks before investing. Kurt Woock Aug 13, 2022 Many
What’s inside Pros Cons What kind of investment is Bitcoin? Bitcoin and volatility Alternatives Pros Cons What kind of investment is Bitcoin? Bitcoin and volatility Alternatives If you bought $100 worth of Bitcoin in early 2010, today you’d have more than $20 million. With those kinds of returns, it’s hard not to think, “Can I get in on that?”
Bitcoin , the largest cryptocurrency by market cap, is a good investment if you have a high risk tolerance, are in a strong financial position and want to increase your portfolio’s exposure to digital currency. It’s not a sure thing, however. Its extreme price volatility, regulatory uncertainty and limited utility are red flags for some. While it allows people to make international transactions at a relatively low cost and protects users’ privacy through the innovative use of a decentralized blockchain, skeptics argue it does so at a price that vastly overstates its true value. Others say it’s worthless — a bubble that will one day pop.
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.
Pros Potential for high returns.
It’s secure — at least as secure as your password is.
It’s decentralized. That said, many people choose to trade and store Bitcoin on centralized platforms .
Cons Its price can go down — a lot. In 2022, it fell 70% below its all-time high.
Transactions are irreversible. People have lost millions of dollars of Bitcoin because they lost or forgot their wallet credentials.
Its regulatory future is uncertain.
Platforms where you can buy and sell it 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 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, Securities and Exchange Commission 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.
» Learn how to buy Bitcoin with our guide 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.
Anyone investing in Bitcoin will hope for the best, but they should be prepared for big downturns, too.
Alternatives Ethereum Bitcoin is one of many cryptocurrencies. The second largest by market cap is Ethereum . Unlike Bitcoin, which only records new transactions, Ethereum allows for other technologies to be built using its technology. Ethereum enthusiasts say these decentralized apps, or dApps, make Ethereum useful and, therefore, valuable.
» Get started with NerdWallet’s cryptocurrency basics Crypto-related stocks and ETFs You don’t need to own Bitcoin to get investing exposure to it. There are dozens of cryptocurrency stocks — companies that supply the crypto ecosystem with goods and services. These include Coinbase , a trading platform, and Nvidia, which sells computer chips popular with Bitcoin miners. For a more diversified option, you could consider a crypto-related ETF or mutual fund.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
About the author: Kurt Woock is a writer at NerdWallet. Read more
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