Bitcoin has showed great character during 2016 and the start of 2017 as an investable asset providing good returns to its investors. Its high non-correlation with other commodities made it a very important portfolio diversifier which found its place in the portfolios of even institutional investors. With growing adoption levels, predicted potential and rising prices people have moved on over the question on whether they should be investing in Bitcoin. Rather, they are now exploring for ways to invest in Bitcoin and reap the benefits of steady increase in value and short term volatility. People have indeed stumped me with questions on how the investing procedure is different from currency trading or about its similarities with commodity trading. Given Bitcoin’s analogousness to Gold and its defined characteristics of mimicking a currency, it often becomes difficult to understand how to treat the digital asset in terms of investment. To clear out the uncertainty and let know people of various investment methods in Bitcoin, I decided to chalk out few means that might help everyone to the best of my knowledge. I broadly classified them into long term and short term basing on the time frame to expect returns.
Direct Investment – Long Term (Buy and Hold):
As stated already, Bitcoin acts both as commodity and currency. You can own Bitcoin as an asset or spend it as any other currency. This means that Bitcoin would be influenced by a unique set of fundamentals that might affect currency and commodity markets respectively. But more importantly, Bitcoin fundamentals relate to the increase in the adoption of the digital asset, venture capital movements, implementation of disruptive technology and Chinese market dynamics.
A long term investment in any market would involve investment of heavy capital with heavy reward expectations. In Bitcoin market, with the prices moving more than 150% in an year, a long term investment for good returns might range somewhere between just a few weeks to an year depending on the market momentum. For taking a long term position in the market, it’s always imperative to get a clear idea of the existing market trend. Since Bitcoin market is bullish in the long run and with the adoption levels always on the rise, it is wise to only go for buy side investments in the market. Shorting wouldn’t reap long term profits and might backfire if the market becomes heavily bullish. Therefore, with a good entry position having strong support and good risk to reward ratio, one can reap good amount of profits from the trade. More often than not, price targets would be a better judge of exit positions than the time period in volatile markets.
Direct Investment – Short Term (Algorithmic Trading):
Bitcoin markets are blessed with volatility that will attract automated trading practices which contribute to the dense volumes observed in the digital currency recently. Short term trades that help in quickly scalping money from Bitcoin markets can be done algorithmically. While these trades are very effective in making money in quick time, strict safeguards have to be placed for quick shift in market dynamics that might lead to losing heavy money if caught in the opposite direction of the market.
These trading soft wares have to be updated regularly to adjust to the changing market dynamics and updated compliance regulations.
Further investment methods to be revealed in consequent parts of the posts.