No matter what type of investor you are, Bitcoin (BTC -1.84%) has probably caught your attention, thanks to its rapid ascent to over $60,000 a coin in just a few years. It's natural to wonder if you should add it to your portfolio, especially as some optimistic investors claim its value could one day exceed $100,000 per coin.
But if you're hoping to become a Bitcoin millionaire, you can't put your cart before your horse. Two things need to happen before you can make a fortune off Bitcoin or any other cryptocurrency.
1. You have to invest in Bitcoin
Let's start with the obvious: You're never going to make any money off of Bitcoin if you don't own any tokens. If you're just interested in purchasing a small amount of Bitcoin, that's not too difficult to do. Most cryptocurrency exchanges enable you to purchase partial coins, so you don't need thousands of dollars to get started. And you can still make a handsome little profit, even if you don't own a whole coin.
Let's say you invest $5,000 in Bitcoin right now. At the time of writing, that would buy you about 0.13 of a Bitcoin. If Bitcoin makes it back to $60,000 a coin and you sell it, you'd pocket about $2,800 in profits. That's not bad, but it's not going to make you a millionaire.
A single Bitcoin is trading for just under $39,000 while I write this. Even if you had a whole coin, you'd only make about $61,000 should Bitcoin make it to $100,000 a coin. You'd need to buy over 16 Bitcoins in order to make a $1 million profit if Bitcoin hits $100,000, and that means coughing up over $620,000 right now. That's not an easy feat for a lot of people.
You may be able to make a million-dollar profit with less Bitcoin if it ends up worth more than $100,000 a coin, but now we're running into our second problem.
2. More companies have to adopt Bitcoin
Bitcoin's current value is largely driven by speculation. Few companies currently allow customers to pay for products with Bitcoin or any other cryptocurrency, so its practical value is limited. That could change if cryptocurrency sees more widespread adoption over the coming years, but there's no way to know if that will actually happen.
There are some legitimate concerns about widespread cryptocurrency adoption, including:
- Account access and security: People have already lost millions of dollars because they've lost access to their crypto wallets and all the coins they contain. Hackers have also stolen billions of dollars worth of crypto tokens from cryptocurrency exchanges.
- Illegal activities: The untraceable nature of cryptocurrency transactions makes them an ideal payment method for criminals, and it can be more difficult for governments to figure out where that money is going.
- Environmental effects: Bitcoin mining requires massive amounts of energy. A single Bitcoin transaction has the same carbon footprint as 123,963 hours of watching YouTube, according to Digiconomist, and the amount of electricity it uses could power a U.S. household for nearly 54 days. That problem would only get worse if Bitcoin saw more widespread use.
- Government oversight: Federal governments have largely been sitting back and observing the crypto craze so far, but that probably won't last forever. Governments could outright ban cryptos, like India is considering, or they could try to regulate the crypto market.
These are some significant hurdles to overcome, and if Bitcoin isn't able to do it, all those coins people are currently buying for $39,000 a pop could become worthless. It's not impossible that Bitcoin could someday be worth $100,000 or more, but it's far from a sure bet.
Is investing in Bitcoin right for you?
If all this is making you a little leery of investing in Bitcoin, that's OK. It's not for everyone. If you have some extra cash and you'd like to invest a little money in the cryptocurrency just to see what happens, that's fine. But if you're not willing to take that risk, there are other, safer paths to millionaire status.
You could invest in cryptocurrency stocks rather than cryptocurrencies themselves. These are stocks in companies that stand to benefit if cryptocurrencies become more widely accepted. But they're also strong companies in their own right, so they have the potential to make you money even if Bitcoin never takes off.
Or you could opt for an index fund instead. These instantly give you ownership in hundreds of stocks at once, so you can diversify your portfolio without spending a fortune. There are many index funds out there, but some of the most popular are the S&P 500 index funds. These contain stocks in all 500 companies in the S&P 500, and they tend to generate returns very similar to the index itself.
No one knows what the future holds for Bitcoin. But even if it does live up to people's wildest expectations, you don't want all your eggs in one basket. Cryptocurrency prices fluctuate wildly, and that's problematic if you need to sell your coins at a certain time. It's best to spread your money around between several of the investments discussed above to give yourself the best chance of becoming -- and staying -- rich.