What risk does Bitcoin entail?
In the first part of the mini-series, we looked at some of the reasons why Bitcoin has been able to record such strong growth in recent years. Originally conceived as a currency, even well-known organisations such as Black Rock or J. P. Morgan have now included the cryptocurrency in their portfolios. In the course of its increasing popularity, it is hardly surprising that the global trading volume of Bitcoin as well as its market value have risen sharply. So it’s a good time to get in on the action…
Before you emulate the institutional investors and enter the crypto market, you should first be able to assess the risks involved and understand the basic rules of the crypto market.
The risk is omnipresent
After all, high growth is also accompanied by high volatility. Behind this complex-sounding technical term, the extent of price fluctuations is measured. And this can generally be considered very high for Bitcoin. In 2020 alone, the Bitcoin price took on values between $5,000 and $28,800. In other words: Anyone who would have invested $1000 in Bitcoin on 13 March last year could enjoy a deposit value of around $5,760 at the turn of the year on 31 December.
In 2018, on the other hand, an opposite price trend could be observed. The value of bitcoin fell from as high as $17,700 in December 2018 to a low of $3,200 in December of that year. So if you are considering investing in the cryptocurrency, you need to be aware of the risk involved.
Safety First – Newcomers to the market should invest safely
In view of the strong price fluctuations, you should follow a few basic rules to protect the capital you have invested. The most important rule is: never invest capital that you need for your livelihood. After all, even a few hours of extreme price movements can mean that you have to accept large losses. At the same time, the use of urgently needed capital increases the pressure on your decisions. In the area of investment, however, emotions should be largely avoided and can quickly lead to ill-considered, bad decisions.
If the fluctuations of the Bitcoin are too great, so-called stable coins can serve as a rock in the surf. Stable coins are linked to a specific value such as the US dollar and are not affected by the ups and downs of the crypto market. This means that you can secure the capital you have invested within the crypto market without having to pull out your investment directly. Common stable coins are Tether (USDT) and USD Coin (USDC).
Bitcoin as a lead currency
Bitcoin is not only the first and most valuable virtual currency based on blockchain, it also serves as a lead currency that helps determine the development of the entire crypto market. The price developments of the Bitcoin can have a massive impact on the other cryptocurrencies in the market. For example, the past has shown that a sharp rise in the Bitcoin exchange rate can lead to a decline in the performance of the Altcoins. At the same time, a gentle rise as well as a stabilisation of the Bitcoin after a strong rise in the price value can represent a strong buy signal for the Altcoins.