Currency vs. Investment
When deciding how much bitcoin you should own, it helps to have a clear idea of what you intend to do with it. Bitcoin can be purchased for use as a day-to-day currency, or it can be bought and held as an investment or as part of your savings strategy.
If purchasing bitcoin for use as a currency, it is important to be aware of bitcoin’s limitations in this regard. First, bitcoin’s value is highly volatile, which means that if you buy bitcoin one day, it can increase or decrease in value dramatically over the short-term. For example, you might purchase a certain amount of bitcoin one day with the intent to purchase a specific item the following day, only to find that you no longer have enough bitcoin to purchase that item because bitcoin’s value has decreased. Second, only a handful of vendors accept bitcoin as a payment option, so before purchasing bitcoin with the intent of using it as a currency, you should double check that the vendor(s) you are purchasing from will accept bitcoin. See our article about where you can spend bitcoin for more details.
Due to its high volatility and current limitations as a day-to-day currency, it is often recommended to purchase bitcoin as part of a long-term investment or savings plan. There are plenty of strategies for purchasing bitcoin as an investment, which are covered in our article “What’s the Best Basic Strategy for Bitcoin Investing”.
The amount of bitcoin you should own will vary depending on how you intend to use it. If you are using bitcoin as a currency for day-today transactions, it is likely that you can safely purchase small amounts of bitcoin on an ongoing, as needed basis. But you may instead consider purchasing bitcoin as a long-term investment, or for long-term savings. As you hold bitcoin for a longer period, the chances of its value dropping due to fluctuating markets will be reduced. If you choose to go with the investment route, put careful thought into what percentage of your savings should be allotted to bitcoin.
It can be tempting to invest a significant portion of your savings in bitcoin if you are looking for large returns, or if you are a strong supporter of bitcoin’s purpose. But keep in mind that bitcoin is considered a high-risk asset. The high-risk nature of bitcoin stems from its significant price volatility, as well as the possibility for financial loss from scams (see “How to Avoid Crypto Scams”), fraud, or loss of hardware wallets or seed phrases. For this reason, if you are purchasing bitcoin as an investment, it is recommended to make sure that you diversify your portfolio by also including lower-risk options (i.e. non-cryptocurrency investments). This will help you decrease risk involved with bitcoin investments, while still maintaining the possibility of a high reward.
To sum up, here are five things you should understand when deciding how much of your portfolio you want to devote to Bitcoin:
- Have a clear understanding of what you intend to do with your bitcoin – are you purchasing bitcoin as an investment, for savings, or for use as a general currency?
- Consider the high volatility and general high-risk nature of bitcoin when deciding how much you should own.
- If investing in bitcoin, consider diversifying your portfolio to protect yourself against large financial losses. Remember the age-old saying; “don’t put in more than you are willing to lose”, as this applies to most investments!
- No one can tell you what is right for you – your financial situation and your personal tolerance for risk will be the largest determining factors in deciding how much bitcoin you should own.