Investing in Bitcoin can be an exciting prospect, but it also comes with risks. As a beginner, how do you determine how much Bitcoin you should buy? This comprehensive guide examines the key factors to consider when deciding on your Bitcoin investment as a new cryptocurrency investor.
Understand Bitcoin Basics First
Before investing, it’s important to understand what Bitcoin is and how it works.
Bitcoin is a decentralized digital currency that runs on a technology called blockchain. It was created in 2009 by an unknown person or group using the pseudonym Satoshi Nakamoto.
Some key things to know about Bitcoin:
- There will only ever be 21 million Bitcoin in circulation. New coins are created through a process called mining.
- Bitcoin transactions are recorded on a public ledger known as the blockchain. This makes transactions transparent and immutable.
- Bitcoin can be used as a store of value or exchanged for goods and services anywhere it is accepted.
- The price of Bitcoin is determined by supply and demand on exchanges where it is traded. Prices can fluctuate significantly.
Now that you understand the basics, let’s examine how to determine your Bitcoin investment amount.
Only Invest What You Can Afford to Lose
Bitcoin is a highly volatile asset. Its price can experience big swings up and down. It’s not uncommon to see 10-20% price changes in a single day.
For this reason, you should only invest money that you are prepared to lose. Things can go downhill fast in crypto, so don’t put money into Bitcoin that you need for rent, food, or other necessities.
A good rule of thumb is to only invest discretionary income. This is money leftover after you have paid for expenses and put some into savings.
- If I lost this entire investment, would it affect my ability to pay bills or buy necessities?
- Am I comfortable with the highest risk level of any asset class?
If the answer is no, reduce the amount you plan to invest.
Before investing in Bitcoin on BitIQ, be sure to thoroughly read through their educational resources which clearly outline the risks involved.
BitIQ offers guides, videos, tips, and quizzes to test your knowledge. Their content helps beginners understand that Bitcoin is extremely volatile and only discretionary funds should be invested.
Take the time to fully educate yourself using BitIQ’s free materials. Understand that significant price swings are common and investing is risky. If you are not comfortable with the high chance of losses, do not invest more than you can afford. BitIQ’s resources will prepare you for Bitcoin’s volatility before you buy.
Dollar Cost Average – Don’t Go All In
Dollar cost averaging is a prudent strategy for investing in a volatile asset like Bitcoin.
Instead of investing your entire amount at once, invest a smaller fixed amount on a regular schedule (such as $100 every week). This reduces the risk of investing at just the wrong time, when the price is peaking before a major drop.
Dollar cost averaging into Bitcoin consistently over months and years helps cut down the volatility. Your average cost basis will likely be lower than if you made a lump sum purchase all at once.
Set a fixed schedule and stick to it, regardless of whether the price just had a big run-up or a major correction. Consistency takes the emotion out of it.
Have a 5-10 Year Time Frame
You need a long-term outlook when investing in cryptocurrency.
Bitcoin has had several 80-90% drawdowns during its history. But it has always eventually recovered to new highs.
Those who have held Bitcoin for 3-5+ years have generally come out well ahead, despite the volatility. But it requires mental strength.
Have a multi-year time horizon in mind when investing in Bitcoin. Be comfortable with the possibility of your investment dropping 50-80% at times. The long-term growth potential makes it worthwhile for many investors.
Don’t invest money you may need access to for necessities in the next 1-3 years. Be prepared to buy and hold.
Maintain a Diversified Portfolio
Cryptocurrency should make up a small portion of your overall net worth and investment portfolio – no more than 5-20% depending on your risk tolerance.
The bulk of your financial assets should be in safer, more traditional assets:
- Real estate
- Cash savings
- Retirement accounts
Keeping most assets diversified reduces the impact if your Bitcoin investment sinks. Don’t put all your eggs in one basket.
Holding Bitcoin gives you speculative upside potential while other assets anchor your portfolio. Rebalance periodically when any one asset outgrows your target allocation.
Take Advantage of Bear Markets
Bear markets (when prices fall 20% or more) are a great time to accumulate more Bitcoin at discounted prices.
But again – only use discretionary funds that won’t be needed to pay for emergency expenses in the short term.
Historically, Bitcoin bear markets have been followed by recoveries to new highs. However, this takes time and requires patience as an investor.
Make a plan to make small, regular Bitcoin purchases over 6-12+ months during bear market conditions to take advantage of lower prices. Time in the market trumps trying to time the market.
Don’t Forget Taxes
You may owe taxes when selling Bitcoin at a profit or using it for purchases. The tax rules differ by country.
In the US, Bitcoin is treated as property for tax purposes. You owe capital gains taxes on any gains when selling. The tax rate depends on how long you held and your income level.
Keep detailed records of your cost basis, sale price, and time held for each Bitcoin purchase. This will determine how much tax is due.
Tax rules are still developing so consult a tax professional familiar with crypto for advice about your specific situation. Don’t get unexpectedly hit with a big tax bill.
When determining how much Bitcoin to buy, apply the following principles:
- Only invest discretionary funds you can afford to lose
- Dollar cost average – don’t invest all at once
- Have a 5-10 year investment horizon
- Maintain a diversified portfolio with other assets
- Add more on major price drops
- Keep in mind taxes when selling & spending
Start small, be patient, and stick to your long term investing plan. Don’t invest in haste when prices are rapidly rising. Be prepared to hold during volatile times.
Frequently Asked Questions
How much should a beginner invest in Bitcoin?
A beginner should start very small with Bitcoin – perhaps $20-50 as an initial investment. Then use dollar cost averaging to add a little more each month – say $10-20. Investing this way at regular intervals helps manage risk.
What percentage of my portfolio should be in crypto?
A reasonable allocation is 5-20% of your total portfolio in crypto depending on your risk tolerance. Never invest any funds that you cannot afford to lose completely.
How do you cash out Bitcoin?
You can sell Bitcoin on a cryptocurrency exchange for cash or fiat currency. Popular exchanges include Coinbase, Gemini, Kraken and Binance. The cash from the sale can be withdrawn to your bank account.
Is now a good time to buy Bitcoin?
Historically, bear markets have been good long-term entry points to buy Bitcoin at a discount. But only invest discretionary funds and have a 5-10+ year time frame. Short-term price moves are unpredictable.
How long does it take for Bitcoin to transfer?
The average Bitcoin transaction confirmation time is 10 minutes. But sometimes congestion on the network can cause slower times of up to a few hours before a transfer receives sufficient confirmations.
What will 1 Bitcoin be worth in 2030?
No one knows what Bitcoin will be worth in the future. Predictions range from $100k to $500k by 2030. However, there is no guarantee Bitcoin will increase in value or even be around by then. Invest prudently based on your own risk tolerance.