Bitcoin Investing 101: Is ‘Buy and Hold’ Better for Your Bank Account?
Let’s start with the basics of bitcoin investing.
What is “buy and hold”?
Buy and hold is one of two major ways of managing an investment. In buy and hold, otherwise known as “passive,” investing, the investor holds assets for a long period hoping to ride out short-term changes in favor of long-term trends. A passive investor generally selects their assets based on big-picture performance, interested in how the investment will perform over a period of years.
This is in contrast with “active” investing.
The investor buys and sells assets based on fluctuations in the price. The goal here is to capitalize on price changes and, essentially, “buy low/sell high.” An active investor generally selects their assets based on either short-term projections or current price relative to the anticipated baseline. If an active investor thinks an asset is overvalued, they’re likely to sell and purchase assets they believe are temporarily priced below the future market.
So, how does that relate to bitcoin investing?
And which approach will result in a larger bitcoin bank deposit? Bitcoin is a difficult case study for two reasons. First, it is an extraordinarily volatile asset. Its price has changed by orders of magnitude within a year, only to drop by half within months. For an active investor, this can mean either high profit or high loss based on timing.
Like all cryptocurrencies, it is also a relatively new class of asset. Bitcoin and related cryptocurrencies have only been around for a historically short while, meaning that there are few relevant benchmarks against which to compare them. For a passive investor, this is problematic because it’s difficult to know exactly how to judge Bitcoin’s five- or ten-year future.
While many investors will purchase bitcoins for their intended use as a digital currency, increasingly more approach these purchases as an investment. For an asset which has ranged in value as high as $20,000 and which fluctuates by thousands of dollars sometimes in a single day, this is probably a more sound approach. The spending power of a bitcoin is, for all intents and purposes, speculative.
Active bitcoin trading is equally risky.
Someone can make a fortune in this market if they get their timing right. An active investor with enough money to sink into their initial purchase can make thousands of dollars on a single coin.
The trouble is, that exposure cuts both ways. An investor who bought early in 2017 could have made $15 or more for every dollar invested if they sold at the right time. On the other hand, an investor who jumped in midway through the year might have lost nearly as much.
Buy and hold, on the other hand, has far more success as a market strategy in general. As Charles Schwab published in 2013, passive investing has an overwhelmingly more successful track record than active. This is because of fundamentals that have nothing to do with the specifics of a specific stock or token.
Timing a trade is the key component of active investing.
You want to trade before the asset’s value changes too much, and that’s incredibly hard to do. By the time you’ve noticed the price start shift so has everyone else. With a property as volatile as bitcoin, the challenge is only magnified, as once the price starts to rise or fall it can gather momentum incredibly quickly.
Buy and hold may not have the satisfaction of constant returns, but as an investing strategy it is almost always more profitable. You will profit not from the immediate peaks and valleys but from the long-term performance of a given asset. If you think that bitcoin will be around for years to come and the price will only increase down the road, then put those coins away and sit on them.
If you think, however, that the ephemeral and volatile nature of the project will catch up to it, or that a fork will eventually erode the project’s value below its current five-figure threshold, it may be time to sit bitcoin investing out and look into another cryptocurrency.
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