3 Secrets To Bitcoin Investment Success
This week the bitcoin ecosystem got a lot of great news – investors are pouring millions into the ecosystem, the IRS clarified the U.S. tax situation, and Stripe announced they will support bitcoin this year.
However bitcoin investors got a serious jolt yesterday when bitcoin dropped 20 percent. Quick drops like that can hurt bitcoin investors by causing them to buy high and sell low or sell low and miss big gains.
Successful bitcoin investors need to do three things: have a plan, expect drops, and secure their bitcoins.
Have a Plan
Bitcoin investors need to have a strategy: It could be day trading, trying to pay off student loans, trying to retire, etc. These different strategies will provide a framework to make a risk reward tradeoff decision.
For example, a student wanting to pay off loans may decide it makes sense to invest $100 now with the potential to pay off their student loan debt in 4 years, whereas a young software developer may invest $10,000 looking to retire in ten years.
If their bitcoin holdings increase to $100,000, the student has realized his goal and knows it makes sense to cash out, whereas the software developer knows $100,000 is not enough to retire on. Without a framework like that, traders can always be questioning: should I get out now?
Bitcoin's price will drop. It's price will probably drop more and faster than any other investment you've held. Bitcoin is held nearly exclusively by speculators and early adopters making its volatility normal. In fact bitcoin is more stable than it has ever been.
No one knows if this nascent technology will disrupt finance with the same magnitude the internet disrupted communications or be displaced and relegated to the dust bins of history like the pager. It is volatile like a tech startup and that is where the potentially massive financial upside comes from.
Secure Those Bitcoins!
Bitcoin gives owners 100 percent control over their funds. With that great power comes responsibility. Aside from being your own worst enemy by selling low, the next worst way to lose bitcoins are to have them stolen by bad security practices. Too many bitcoin investors have lost small fortunes through poor investment decisions and outright thefts.
Reasonably estimate the root issue for 90 percent of thefts stem from people trusting funds with another party. This is ironic because the bitcoin creator saw the need to remove trust, stating in his white-paper: “What is needed is an electronic payment system based on cryptographic proof instead of trust, allowing any two willing parties to transact directly with each other without the need for a trusted third party.”
Any time funds are held in an online wallet, online exchange, or business those funds are at an increased level of risk. The company can get hacked, run their business poorly, or have an insider steal the funds. The more users of the service, the larger the prize awarded in a successful heist.
When evaluating places to put bitcoins it is important to think of trust factors such as: who owns this company, where is this company located, what security features does this company employ, and how does this business make money? Some bitcoin “businesses” entire business model is just to take users money like the bitcoin savings and trust.
Unfortunately storing bitcoins yourself, on your computer or smartphone doesn't eliminate the threat of loss entirely. It does substantially reduce the target, but your computer can be attacked through software flaws, viruses, and phishing attempts.
Keep the wallet on the household computer least likely to get infected, ensure it is password protected, and wait for better solutions. Hardware manufacturers like Trezor are rapidly working to make bitcoins much safer for individuals to store.
If a bitcoin investment grows into the tens of thousands of dollars it probably makes sense to explore setting up an encrypted offline paper wallet and storing it in a bank safety deposit box. That eliminates the risks outlined above but reduces access to all the funds stored on the wallet.
If bitcoin achieves even a fraction of the potential venture capitalists are projecting investors following these three steps: having a plan, expecting drops, and securing those bitcoins are likely to benefit from their early investment in the technology.
Disclosure: At the time of this writing David Smith has a long bitcoin position.
© 2014 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
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