Is Bitcoin a Good Investment?
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Bitcoin, the largest cryptocurrency by market cap, is once again making headlines. After Donald Trump's presidential win on Nov. 5, 2024, Bitcoin repeatedly hit new record highs throughout November on the belief that he will be a pro-cryptocurrency president.
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 generally should be considered only if you have a high risk tolerance, are in a strong financial position already and can afford to lose some or all of your investment.
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.
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.
The Securities and Exchange Commission approved a spot Bitcoin ETF in early 2024. Learn what that means for Bitcoin and other cryptocurrencies.
Bitcoin cons
The price of Bitcoin can go up, as referenced above. It can also go down — a lot. 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.
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.
Some have argued Bitcoin should still be considered a security. Others suggest it is 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
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. Recent highs don't carry the promise of continued returns.
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.
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