How to invest in Bitcoin (if you insist!)

We know Bitcoin probably got mentioned at least once at your office Christmas party this year. It did at ours.

You might be feeling down that you missed out or envious others around you have hit the jackpot. That’s a normal feeling. Those types of emotions are the fuel that drives speculation.

Our advice on speculating in Bitcoin (if you can’t resist the temptation) is the same as the advice we would give on investing in any other undiversified risky asset like individual shares, equity crowdfunding or art. You should still follow a sensible investment process to give you the best chance of success.

1. Consider your financial position

First, stay well clear if you’re not in the financial position to be speculating in the first place because you have debts or expenses coming up. Do not borrow money to speculate. I repeat: do not borrow money to speculate.

2. Limit your exposure

If you insist on speculating it’s wise to limit your exposure in any bet like Bitcoin to 2% of your wealth or less. If it doesn’t work out you won’t be devastated financially. And if it does work out then you have our full permission to gloat, be smug and merry. Only betting a small amount of your total savings means you won’t feel forced to sell if there is a big fall.

3. Dollar cost average

With risky investments it’s worth dollar cost averaging rather than buying your entire amount at once. Buying small amounts over time is obviously more difficult with some assets (like art) but can be done with individual shares or Bitcoin.

By dollar cost averaging you can reduce the chance of being sucker who bought at the top because of FOMO. Like the people who bought Amazon in 1999 for $110 had to wait 10 years to get to breakeven. It improves your chances of doing well in the long run if you are eventually right, because it reduces the impact of market timing. Trying to time the market is dangerous because the most tempting time to buy is usually the time you shouldn’t be.

4. Know your counterparty risks

In most cases with Bitcoin exchanges you don’t own the underlying instrument, you’re relying on someone to hold and manage it on your behalf.

This adds an extra level of risk – called counterparty risk. Some bitcoin exchanges have gone bust, many bitcoins have been stolen and little protection exists in this area for consumers.

Fast rising markets like Bitcoin and other cryptocurrencies attract fraudsters, financial cowboys and hidden dangers. If it sounds too good to be true, it almost certainly is. You should know whether you own the underlying instrument or a derivative over it like a futures contract, CFD or fractional unit. Understand your ‘counterparty risk’ and what protections you have (if any).

5. Rebalance

Rebalance – aka lock in some of your profits. If you’re lucky enough to make outsized gains in any speculative investment, don’t forget to rebalance.

It’s one of Stockspot’s core principles for managing and growing wealth over time.

Investments grow at different rates and then tend to revert (i.e. fall) back to average over time. When you invest with us, we periodically rebalance your portfolio to harvest returns and keep risk in check. Basically we sell some assets that have done well and buy some that haven’t.

The same should go for Bitcoin or other speculative investments. Let’s say you bought at the start of 2017 when Bitcoin was trading at $1,000 and allocated 2% of your wealth. With Bitcoin now trading at $19,000 it has probably grown to around 26% of your savings which is a much bigger part of your portfolio. Great work! To ensure you keep a good level of diversification and reduce your risk, it’s probably a smart time to rebalance.

If you’re holding out for a higher price, our advice would be don’t wait – at least sell some to minise the potential for regret.

One way to think about it is to consider how you would feel if it fell 80%. If that would make you feel regret for not selling some, then you should. Remember, nobody ever went broke taking a profit.

Trying to time the market brings human emotions into play. That’s why we automate the rebalancing process for clients – to remove the dangerous tendency to ‘follow the crowd’. It’s always hardest to sell when markets have risen because that’s when everyone is most optimistic.

6. Ignore short term market movements

Ignore the daily moves.

Watching prices go up and down on a daily basis will almost certainly cause you to buy and sell too often and destroy any long term gains. If you’ve followed the above rules, be confident in your process and ignore the daily noise because it’s irrelevant in the long term if Bitcoin is successful. Put it in the bottom drawer, so to speak, and get on with your life.

Res tantum valet quantum vendi potest

(A thing is worth only what someone else will pay for it)

Speculation can be fun to watch and exciting to participate in because it shares more in common with gambling than investing.

If you want to speculate on Bitcoin or any risky investment, stick to a disciplined process. Have a small position size, dollar cost average, rebalance to reduce your risk over time, and ignore the noise along the way. Following these steps will give you the best chance of long term success and prevent your investment from becoming a financial catastrophe.

If you’re not planning to jump on the Bitcoin bandwagon, that’s perfectly fine too! We think a mix of low-cost diversified ETFs is a smarter (and less emotionally exhausting) way to invest.

What Our Clients Think

Bottom line Control, headed by Malcolm Chilman, have been by tax agent/accountant/book keeper for more than 10 years now, and I have nothing but praise for the efficient and cost effective way they go about their work. I have recently given them my SMSF as well and am impressed by the meticulous way he goes about the process of staying within the lines of the over-complex Superannuation law.

Whether it is simple BAS bookkeeping or complex questions of tax law, Malcolm is always there to help. And if he does not know some intimate detail of our almost incomprehensible tax process, he knows where to find the answer.

Every business has the occasional need for a quick answer, so one of the characteristics that I appreciate here, is Malcolm's ready availability, by phone and email.

PA Apartments - Business Accountant Client

Byron Scott

Business Owner & Investor
PA Apartments
40 Wholseley St, Woolloongabba, Qld 4102
Phone: (07) 3891 1742 | Email: info@PAapartments.com.au

Thank you for your support, and assistance over the past several years. I personally feel that from our cooperative services that Ram Automotive has been able to grow toward the sustainable company of which is today.

Bottom Line Control has given myself a great understanding of the companies finances, and also through ongoing fiscal performance meetings. Now knowing what Ram Automotive can expect for the future.

I look forward to an ongoing relationship with Malcolm and Bottom Line control, to secure our future within our community.

Ram Automotive  - Business Accountant Client

Matthew Katterns

Proprietor of Ram Automotive Coolum Beach

We changed all of our financials over to Bottom Line a few years ago and have been quite impressed with the service and advice we have received. Nothing is too much to ask of them. Thank you to Malcolm and staff for being there for us.

Rex and Turtle- Business Accountant Client

Wayne & Penny Rex

Business owners and Property Developers

We switched to Bottom Line Control after realizing that our previous accountant was giving us incorrect advice and charging a premium for it.  We have now been using Bottom Line Control for several years and have found Malcolm to be thorough and reasonably priced.  He always finds ways to save money on our taxes. Malcolm and his staff are highly responsive and very easy to work with.  We highly recommend.

Equathon Horse Riding - Business Accountant Clienti

Alex & Rebecca Watson

Equathon Horse Riding
PO Box 301 Noosa Heads, QLD 4567
Phone: (07) 5474 2665

Thanks Malcolm for saving me the stress of sorting through all the issues of self-employment, and the many confusing deductions and tax items associated with that. Although I was extremely late in lodging my tax return, it was not a problem for you, and you managed to get me a healthy refund when I was sure I was going to have a bill! I will certainly be using your services in the future and have already been recommending you to others.

Kim Anderson  - Business Accountant Client

Kim Anderson

Freelance Journalist (The Anderson Outlook)

I have found Bottom Line Control to be very attentive to the needs of the business and reacts in a speedy manner, getting the job done.

Ricks Pies - Business Accountant Client

Graham Martin

Founder of “Dough Fusion” chain of bakeries and Rick’s Artisan Pies and Sourdough