Bitcoin has captured the attention of investors, financial institutions, and even governments, and its long-term prospects remain bright. However, Bitcoin is a risky investment. Its price fluctuates wildly, the stories of people making a fortune overnight or losing their entire life savings to a sudden crash dominate the headlines, and the whole thing seems like a digital gamble. If you want to start investing in Bitcoin but feel anxious about the entire thing, you’re not alone. One of the best ways to ease into the process is to figure out how much to invest in Bitcoin. This article will help you do just that by providing insights to help you confidently start investing in Bitcoin with a manageable amount, minimizing risks while building a solid foundation for future growth with Bitcoin annual returns.
Bitcoin Magazine Pro's Bitcoin analysis is a valuable tool to help you confidently start investing in Bitcoin with a manageable amount, minimizing risks while building a solid foundation for future growth.
How Much to Invest in Bitcoin as a Beginner?
Bitcoin investment strategies call for caution. The first thing to know about Bitcoin is that it is wildly volatile. Its price soared in 2024 but lost 64% and 74% of its value in 2022 and 2018, respectively.
If you lose 50% of your money, you need a 100% return just to get back to even. While Bitcoin returns have been high enough to offset its additional risk so far, it’s not a given that this pattern will continue.
How Much of Your Portfolio Should Be in Bitcoin?
Due to its extreme volatility, experts suggest making Bitcoin only a tiny part of an investment portfolio, generally no more than 5%. “You’re not going to have the same size allocation in Bitcoin as you would Nasdaq or the S&P 500,” says Ivory Johnson, a certified financial planner and founder of Delancey Wealth Management. “Whenever you have a volatile asset class, you need less of it in the portfolio to have the same impact as traditional assets like stocks and bonds.”
What are the Risks of Investing in Bitcoin?
With high returns comes high risk, and Bitcoin is no exception. Bitcoin has been nearly five times as volatile as U.S. stocks since September 2015, and Ether has been almost 10 times as volatile. “A portfolio weighting of 5% or less seems prudent, and many investors may want to skip Bitcoin altogether,” says Amy Arnott, a portfolio strategist for Morningstar Research Services.
BlackRock, a money manager, thinks there’s a case for owning Bitcoin in a diversified portfolio for investors who are comfortable with the “risk of potentially rapid price plunges” and who believe it will become more widely adopted, experts at the BlackRock Investment Institute wrote in early December. A 1% to 2% allocation to Bitcoin is a “reasonable range,” BlackRock experts wrote. They said going beyond would “sharply increase” Bitcoin’s share of a portfolio’s total risk. For example, BlackRock estimated that a 2% Bitcoin allocation accounts for roughly 5% of the risk of a traditional 60/40 portfolio. However, it said a 4% allocation swells that figure to 14% of total portfolio risk.
Is Bitcoin a Good Investment or Speculation?
“In Vanguard’s view, Bitcoin is more of a speculation than an investment,” Janel Jackson, Vanguard’s former global head of ETF Capital Markets and Broker & Index Relations, wrote in January 2024. “While Bitcoin has been classified as a commodity, it’s an immature asset class with little history, no inherent economic value, no cash flow, and can create havoc within a portfolio.”
What’s the Best Way to Invest in Bitcoin?
According to financial advisors, one’s total Bitcoin allocation is a function of an investor’s appetite for and ability to take risk. “Younger, more aggressive investors might allocate more to their portfolios,” said Douglas Boneparth, a CFP based in New York and CNBC’s Advisor Council member. “I think it could be a good idea to have some exposure to Bitcoin in your portfolio, but it’s not for everyone and it will remain volatile.”
According to Johnson of Delancey Wealth Management, investors who want to buy into Bitcoin should consider using a dollar-cost-averaging strategy. “I buy 1% at a time until I get to my target risk,” Johnson said. “And that way I’m not putting 3%, 4%, 5% at one time and then something happens where it drops precipitously.” Johnson said it’d also be prudent for investors interested in buying and holding it long-term as with other financial assets. Morningstar suggests holding Bitcoin for at least 10 years, Arnott wrote.
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9 Factors to Consider When Deciding How Much to Invest in Bitcoin
1. Charting Your Financial Course Before Investing in Bitcoin
Before deciding how much money to invest in Bitcoin, consider your current finances. After meeting all necessary living expenses, assess your monetary situation to see how much spare cash you have. The less exposed you are to risk, the better. Don’t invest money you might need soon for living costs or emergencies.
Say you have $500 left after expenses each month. Investing all of it in Bitcoin or any other volatile asset is unwise. Instead, you might allocate a smaller portion, such as $25 or $50, to lower the chances of financial stress if the investment doesn’t do well.
2. Follow the 5% to 30% Rule for Bitcoin Investing
For beginners, a basic rule to follow is to invest between 5% and 30% of your total available investment money in Bitcoin. If you don’t like risk, staying closer to 5% might be safer. This lets you gain experience with Bitcoin without a lot of risk.
If you are more comfortable with risk and have more money available, consider investing up to 30%. But anything more than that is considered risky and generally not advised for beginners.
3. Start Small and Build Your Knowledge
One good strategy for new investors is to start with a small amount. Consider putting in a small sum, such as $10 or $50, to learn how to buy and hold Bitcoin. This helps you understand how the market behaves without risking too much money. As you learn more, you can slowly increase your investment based on your comfort and knowledge.
To build this foundational knowledge, some beginners find value in structured learning paths, like the Certified Bitcoin Expert program. It provides a comprehensive overview of Bitcoin’s:
- Market dynamics
- Security
- Strategies
4. Use Dollar-Cost Averaging to Reduce Your Risk
An effective way to minimize risk is using dollar-cost averaging (DCA). DCA means investing a set amount of money regularly, like weekly or monthly, regardless of the asset’s current value. This can help reduce the effects of price swings and avoid the risk of trying to predict market movements.
For Bitcoin, this involves purchasing small amounts consistently rather than putting a significant amount in all at once. This strategy helps distribute the cost over time. It lowers the risk tied to sudden shifts in the market.
5. Be Ready for Big Changes
Bitcoin is known for being highly unpredictable. Its value can change quickly, sometimes dramatically gaining or losing value within days or hours. It’s crucial to be mentally prepared for these price swings.
Selling out of panic during a market drop is a standard error among beginners and can lead to significant losses. Keeping a long-term view and focusing on your overall plan is usually more effective.
6. Evaluate Your Comfort with Risk
Understanding your risk comfort level is also crucial. Think about how much you can lose without significantly impacting your financial security or emotional peace. If a loss severely affects you, investing a smaller amount is wise.
The main idea is to invest only what you are okay with potentially losing. If the thought of losing money causes stress, consider starting with a smaller amount that better fits your comfort level.
7. Spread Out Your Investments to Diversify Risk
Diversification is key when investing in any asset, particularly something as unpredictable as Bitcoin. Instead of investing extra money into Bitcoin, consider spreading your investments across various asset types like stocks and bonds. This helps balance the risk and ensures that a downturn in one area doesn’t heavily affect your entire investment mix.
8. Think About a Long-Term Plan
Many who succeed with Bitcoin focus on its long-term potential rather than trying for quick profits. Bitcoin has seen multiple market phases, including high peaks and sharp lows.
In the past, it has bounced back from most declines, but there is no assurance that it will always do so. If you choose to invest in Bitcoin, consider it a long-term decision and be ready to handle periods of significant price changes.
9. Be Prepared for Volatility
Bitcoin is notoriously volatile. It has had periods where it has lost 80% of its value in months. This uncertainty indicates that while there are chances for big profits, there are risks of significant losses.
Many experts advise preparing for emotional shifts and avoiding the temptation to sell in panic during downturns. A good way to manage this is to check the price periodically, not daily, and stick to your long-term investment strategy.
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