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Bitcoin, the largest cryptocurrency by market cap, is a risky investment with high volatility. It should only be considered if you have a high risk tolerance, are in a strong financial position and can afford to lose any money you invest in it.
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.
» Ready to invest in crypto? Start planning here
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.
» Want to learn more? See the list of the best centralized crypto exchanges and platforms.
The price of Bitcoin can go down. A lot. In 2022, it fell more than 75% below its all-time high. 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.
Multiple crypto platforms, where you can buy or sell Bitcoin and other coins, have collapsed, leaving users holding the bag. Most recently, exchanges FTX and FTX.US filed for Chapter 11 bankruptcy.
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).
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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.
In June 2022, Securities and Exchange Commission Chair Gary Gensler said on CNBC that some cryptocurrencies “have the key attributes of a security” while others, specifically Bitcoin, “are 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. See the chart below to explore this.
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. A decline in 2018 lasted about a year, and there were drops of 50% or more in 2021 and again in 2022.
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.
» Prices crashed in 2022. Will they go back up in 2023?