I invested $10k in Bitcoin. Here’s what I learned along the way.

In this post, I’ll share my account of my first adventure in Bitcoin investing and what I learned from the experience. If you’re curious about crypto but don’t have first-hand experience, this post is for you.

My story starts on a chilly winter morning early in 2021. I sat hunched over my laptop, scrolling through article after article, trying to decide if I should invest in Bitcoin. After three years of trading more or less flat, the cryptocurrency had quadrupled in value over the past six months, climbing from just over $9,000 per coin in July of 2020 to a peak of $40,287 in just five months.

Bitcoin was having a moment.

How much higher would it go? Where were we on the price curve? And also: was there anything you could actually do with it?

Quick Refresher: Bitcoin and Blockhain

You’ve probably heard about Bitcoin, but just in case a refresher is helpful, here’s a quick primer.

Bitcoin is a type of cryptocurrency. There are lots of others, but Bitcoin is the most well-known. It exists on a blockchain, which is like a digital ledger.

You can think of it as a giant, public spreadsheet. Every Bitcoin transaction is logged automatically (person X sends Y amount of Bitcoin to person Z). It’s maintained by a network of computers all over the world which means that it’s not managed by any central authority.

There are a lot of great guides out there if you’re interested in learning more. I like this one from the New York Times.

What can you use it for?

Despite lots of buzzy talk about the merits of decentralized finance, there aren’t many practical uses for Bitcoin. At least not yet.

For now, there isn’t much that you can buy with it, and even if you could, it is impractical as a currency because it can take as much as an hour to complete a transaction. Bitcoin can handle 4–5 transactions per second; by contrast, Visa can handle up to 65,000.

It’s also not great as a currency because its value is so volatile. Imagine if the value of a dollar suddenly plunged by 25%, before going back up, then back down, and on and on. It would make pricing a nightmare, and your purchasing power would vary wildly.

So basically Bitcoin is super volatile with no clear use. Why do so many people buy it? Why was I thinking about buying?

The case for investing in Bitcoin

I saw three reasons for buying Bitcoin: volatility isn’t (always) bad, it’s a potential hedge against inflation, and the upside is (hypothetically) limitless.

#1: Volatility isn’t a deal breaker

For one, volatility gets a bad rap. Big fluctuations in value arent necessarily a bad thing if you have the time and stomach to ride them out. I didn’t have any fixed timeline for turning a profit. I could afford to buy, hold, and wait to see how things played out.

#2: It could be a hedge against inflation

The argument here is that Bitcoin, similar to gold, could serve as a hedge against inflation. During economic downturns or crises (e.g. the COVID-19 pandemic), governments print a lot of money. This results in inflation, which can quickly get out of control.

Because there are a fixed number of Bitcoins in circulation (by design, there will only ever be 21 million Bitcoins), the argument is that Bitcoin is protected from devaluation in a way that traditional currencies are not. So, it’s a potentially great way to balance out your portfolio and mitigate risk.

#3: Unlimited potential (aka “some risk, huge reward”)

Bitcoin’s potential was the most compelling reason I saw to buy it. Sure, it might tank. It might someday end up featured on a listicle entitled “10 things that defined the 2020s.”

But… it might not. The odds of success might be very low, but the potential upside was significant, as evidenced by the 4x price spike at the end of 2021.

This is what investors call an “asymmetric bet.” Asymmetric bets are instances in which the potential upside is much greater than the potential downside.

It’s sort of like asking someone out on a date. If they say no, your ego takes a hit but your life goes on. If they say yes, you could potentially be taking your future life partner out on a date. It’s (relatively) low risk, with huge potential upside.

How did I approach investing in Bitcoin?

#1: Define acceptable losses upfront.

This stems from the maxim that you should never invest money that you can’t afford to lose. This advice will do wonders for both your finances and your mental health, and I highly suggest following it. I think this is especially useful for something Bitcoin, which could very well be worth nothing in the near future.

I decided I’d buy $10,000 worth of Bitcoin, which, if it came to pass, I could stomach losing.

#2: Pick a platform

I used Coinbase because the fees were relatively low and I found the interface to be simple and easy to use.

There are a lot of other good options. Robinhood allows buying and selling Bitcoin and many other cryptocurrencies. Nerdwallet has a good summary here if you want to explore other options.

Use dollar cost averaging

One of my biggest mistakes was not using dollar cost averaging (or DCA).

This means that you invest your money in equal portions, at regular intervals, regardless of the ups and downs in the market. For example, you could buy $150 worth of Bitcoin on a set day of the week. Coinbase allows you to do this.

Sometimes you’ll buy when the price is higher, and other times you’ll buy when it’s lower. But over the long run, your average purchase price is much lower than if you had tried to time the market.

After weeks of research, I was eager to board the crypto hype train and bought $5k worth of Bitcoin in one go. A week later the price dropped by 20%, meaning that I would have been able to afford a lot more Bitcoin if I’d DCA’d.

Lesson learned.

Buying Bitcoin

Starting in April 2021, I made 36 individual purchases totaling $5,000. DCA was a low-stress and low-maintenance strategy. Coinbase would automatically buy BTC for me every Sunday. Because I was committed to this approach for the rest of the year, I never had to sweat about whether I should make a purchase or not based on the current price.

The next few months were a rollercoaster. Bitcoin reached just over $61,000 per coin in March, before dropping precipitously back down to $31,000 in July. It was hard to know where the floor was and I assumed at multiple points that I would lose my original investment.

However, I stuck it out and watched Bitcoin bounce back over the next few months, eventually peaking at an all-time high of $68,990 per coin in November. At the peak, I was up nearly 50% on my initial investment. Opening the Coinbase app felt nice.

And then the music stopped.

Helloooo, inflation

In 2022, inflation became an unavoidable topic. February’s consumer price index showed an increase of 0.6% and an annual inflation rate of 7.5%, much higher than expected and the largest increase since 1982. Interest rate hikes were on the horizon. Meanwhile, it began to look like Russia might do the unthinkable and invade Ukraine.

It seemed like this was the moment crypto enthusiasts had been waiting for.

Rampant inflation, the outbreak of war, wild swings in markets: people would want a secure, decentralized store of value: digital gold in a chaotic and turbulent world.

But the moment never arrived. Aside from a spike immediately following the invasion of Ukraine, trading volume stayed relatively flat, meaning that people did not rush to convert their dollars and rubles and euros into Bitcoin.

And as opposed to holding its value like digital gold, Bitcoin’s correlation with the stock market reached record highs as inflation soared earlier this year, meaning that Bitcoin is behaving more like an index fund than an investment safe haven.

Sadly, I watched the value of my “wallet” steadily shrink.

What happened?

There are several theories. TechCrunch’s Kay Khemani suggests that:

“Bitcoin ‘whales’ are known for their ability to manipulate prices by selling or buying in large quantities, meaning that bitcoin can be dictated by speculative forces, not solely the money-supply rule.

Was it time to revisit the assumptions I made when I started investing?

Calling it quits

At the beginning of the year, I turned off automatic BTC purchases in Coinbase. My return (so far) is -19%. From the other side of my investing journey, I can say that Bitcoin looks more overvalued and overhyped than when I started.

I don’t plan to sell, because there is still plenty of time for the price to swing the other direction in the months and years to come. But I also don’t have any plans to buy additional Bitcoin.

Bitcoin has so far failed to act as a hedge against inflation and political and economic instability. Nicholas Nassim Taleb has pointed out that Bitcoin actually dropped further than the stock market in March 2020, and mirrored the market’s recovery following massive injections of cash throughout 2020 and 2021.

If I have a choice between investing in a speculative asset with no utility or a company with products and people that create actual value, why would I pick the former?

What’s next for Bitcoin?

Bitcoin is a nascent technology and it’s still early days. This is true for cryptocurrency in general. There are thousands in circulation and many are attempting to address Bitcoin’s shortcomings.

All to say, Bitcoin (or some other cryptocurrency) may indeed replace the dollar someday. Here are three questions to keep in mind in the months and years to come.

#1: How will the ongoing struggle against inflation impact the price of Bitcoin?

Bitcoin does not seem insulated from the effects of inflation, as previously theorized, and it would stand to reason that its value will be dragged down.

#2: Will the price of Bitcoin continue to rise when the US and other governments are not injecting trillions of dollars into the financial system?

It seems clear that people around the world used the excess disposable income generated from pandemic-induced saving to buy cryptocurrency. With the end of stimulus checks and a resurgence in travel and restaurant spending, will we continue to see the same level of demand for crypto in the coming years?

#3: Will anyone develop a practical use for Bitcoin?

It’s been suggested that bitcoin will be the currency of the metaverse. Will we finally see a “place” where we can use Bitcoin?

A digital lottery ticket

I think a good way to think about Bitcoin is as a very expensive lottery ticket. You might make a ton of money, but you probably won’t. As long as you’re okay with that then have fun and enjoy the ride.