- Date : 18/11/2021
- Read: 4 mins
The steep rise in the price of Bitcoin may attract your attention and you may be tempted to invest (or increase your investment) in it. While doing so, be aware of the risks involved and book profits from time to time.
In the last one year, the price of bitcoin has been nothing short of a roller-coaster ride for investors. In November 2020, the price rose from USD 9200 to USD 63,000 by April 2021. It then crashed to USD 30,000 by July 2021, before rising again to reach a new peak of USD 68,000 in November 2021. Now that the price of Bitcoin is rising again, in this article, we will discuss some points that an investor should consider before investing.
Price doubling in just four months
In just a short span of four months, between July and October 2021, the price of Bitcoin more than doubled.
As seen in the above chart, the price of Bitcoin has rallied from USD 30,000 to over USD 68,000 in just four months. The price doubling in such a short span is bound to attract many investors to participate in the Bitcoin rally. But before you jump in to invest in Bitcoin, do consider the following points.
1) Don’t get carried away by FOMO
When the price of any investment doubles in four months, and if you have not invested or are under-invested in that financial product, there will be the Fear Of Missing Out (FOMO). But don't get carried away by FOMO, and don't rush to invest or increase your existing investment. If you check the last few years' price history of Bitcoin, there have been instances of big rises, followed by equally big falls. The current rise has been too big, and too soon, and may not sustain. The price may fall, and you may get an opportunity to invest at a lower price.
2) Understand the value of Bitcoin
Bitcoin and altcoins are not backed by any underlying asset. The digital currency doesn't have any earnings or profits and losses to show. The valuation of Bitcoin and altcoins is based on demand/supply, use cases, speculation, etc. If the valuation gets too stretched, the sell-off and the resulting price crash can be brutal. So, before investing, understand how to value the investment (Bitcoin in this case) that you are getting into. While investing in the crypto market, you should consider Bitcoin and altcoins' market cap and trading volumes.
3) Be aware of the bubble bursting
While you may continue enjoying the rise and rise of Bitcoin, you should guard yourself against the bubble bursting. You can do this using the stop limit feature. The feature automatically sells your Bitcoin once the price falls to the set price. It will protect your profits in the event of a sharp fall in the price of Bitcoin. As the Bitcoin price keeps rising, you may revise the stop limit price upwards from time to time to take it closer to the market price.
4) Have a proper diversification investment strategy in place
Even if the price of Bitcoin is rising, you should continue to follow your asset allocation strategy. Allocate only a specific portion of your investment portfolio to cryptocurrencies. Within this, diversify among Bitcoin and altcoins. You may allocate some additional money to Bitcoin in the current rally from the cryptocurrency allocation, but not much. You could follow the 6:3:1 Bitcoin investment plan followed by many crypto investors. It involves allocating 60% money to Bitcoin, 30% to Ether, and the remaining 10% to other coins.
5) Rupee Cost Averaging (RCA) strategy
If you are investing a specific amount every month, say a Systematic Investment Plan (SIP), you should continue following the strategy even if the price of Bitcoin is rising too much too quickly. Trying to predict Bitcoin's rise and fall is a futile exercise. The regular monthly investment will help you benefit from the Rupee Cost Averaging (RCA) strategy.
6) Invest only what you can afford to lose
Bitcoin and altcoins’ prices are highly volatile. If the rise is big, the fall also can be big or even bigger. So, if you are planning to allocate more money to Bitcoin, understand the risks associated with it. You should neither invest borrowed money nor divert money meant for other financial goals.
Seeing the steep rise in the price of Bitcoin, you may be tempted to invest in it or increase your existing investment in it. However, it is important to stick to your asset allocation. You should invest only a specified percentage of your overall portfolio in Bitcoin and altcoins. While investing, be aware of the risks involved and be mindful of booking profits from time to time.