Bitcoin went from obscure to mainstream relatively quickly, but it has only been well-known for the past few years. If you were to do an informal poll, chances are high that many people have heard of Bitcoin, quite a few less actually know how it works, and even fewer have invested in it.
As Bitcoin increased in popularity, there was excitement as people quickly jumped on board. What you used to be able to purchase with a swipe could suddenly be done, in some cases, with virtual currency.
Are you wondering if investing in Bitcoin is the right move for your portfolio? Let's dive into when a Bitcoin investment is a bad idea, and why.
10 Years of Bitcoin
Bitcoin began in 2009, and it has been all over the place since. Some Bitcoin investors have made decisions that led to financial gain, and others have seen huge losses.
Bitcoin climbed to over $17,000 a coin around a year ago. It soon fell to less than $8,000, and it started 2019 out below $4,000. One of the biggest lessons learned in the first decade of Bitcoin is that it is an extremely risky investment as things change quickly and drastically.
There is still a lot to learn about Bitcoin, but proponents of cryptocurrency are optimistic about the future. As Bitcoin continues to be more widely adopted, it's believed the currency will become increasingly less volatile.
How Can Bitcoin Ruin Your Portfolio?
As the first ten years of Bitcoin have proven, it is currently a high risk investment. At this point, investing in Bitcoin could ruin your portfolio, especially if it occupies a large chunk.
Bitcoin climbed to over $17,000 a coin around a year ago. It soon fell to less than $8,000, and it started 2019 out below $4,000.
If you're intrigued by Bitcoin and are young and have some time before retirement, you could consider making a small Bitcoin investment. You should still look to other investments for the majority of your portfolio, though, and here's why.
It's extremely risky
Bitcoin is super volatile, which is the opposite of what you should be looking for as you near retirement. Until the Bitcoin roller coaster settles down significantly, the risk in making a significant investment could be detrimental to your portfolio.
Have we mentioned that Bitcoin is virtual? That carries a whole new level of risk. You don't have a tangible asset, but instead are relying entirely on technology. A glitch or lost file could be absolutely devastating to your portfolio.
This risk and volatility can be extremely stressful, which isn't something your portfolio should be if it can be avoided.
The future is uncertain
Some experts are far from positive about the future of Bitcoin, expecting it to fizzle out sooner rather than later. Experts argue Bitcoin is headed for disaster based on the market cycle stages it has already seemed to go through. If this turns out to be true, a portfolio full of Bitcoin isn't likely to end well.
Governments could also find reason to shut Bitcoin down in their markets if they end up seeing it as a threat to local currency systems. This has already proven it affects Bitcoin rates, such as when South Korea considered banning Bitcoin early last year and the value fell 25%. Knowing that governments may ban Bitcoin and how that affects the value is another reason to be leery.
Even billionaire Warren Buffett himself thinks Bitcoin won't end well, declaring in an early 2018 interview that it will almost certainly "come to a bad ending."
The thrill can be dangerous
Bitcoin has had a roller coaster journey, which means there have been some major highs. There have been some days where investing in Bitcoin seemed like a really good idea – if you happened to have the good sense to sell at the right time and come out ahead.
However, that thrill has ended poorly for more people than the amount who got rich. The thrill can be dangerous if you get too excited and invest a significant amount of money in Bitcoin, only to have your portfolio ruined when its values drop significantly the next day.
There's still a lot to work out
Bitcoin is still a relatively foreign concept to a lot of people. While many people have heard of it, many still don't have any idea how it works, which adds to the volatility. Until Bitcoin has ironed out some important details and settled down, so to speak, it will be difficult for Bitcoin to be a stable investment for the average investment portfolio.
The IRS has something to say about Bitcoin, too. Before investing, it's important to know how it will affect your taxes because every Bitcoin transaction you make will be taxable.
The IRS has deemed Bitcoin as property, not currency. This means that while 60% of your profits are considered long-term capital gains (and the remainder short-term), you will be responsible for capital gains if you get rid of your Bitcoin after it appreciates.
This can get a little tricky, and while some Bitcoin exchanges might provide a 1099 form, not all will. The IRS caps the amount of net capital losses that can be written off each year at $3,000, which is not great news for investors who have suffered major losses.
Hold on For the Ride
Bitcoin has been on a wild ride over its first decade, and it's impossible to say what the future holds or what Bitcoin's impact on investors will be long term.
If you're intrigued and have a penchant for taking risks, make a small investment in Bitcoin. If you do, just make sure the bulk of your investment portfolio is made up of more stable investments that have proven themselves to be less risky.