What Bitcoin’s Wild Price Swings Means for Your Wallet

Published on: Dec 20, 2021fb-roundtwitter-roundemail-round
BitcoinsDesign: theSkimm | Photo: UnSplash

Bitcoin had a rollercoaster 2021. In July, the value of one coin sunk below $30,000. Then hit an all-time high of about $68,000 in November— with plenty of big swings in between.

A lot has influenced the digital currency's wild ride. Think: institutional investors, inflation fears, Elon Musk tweeting. Its mainstream status leveled up when El Salvador became the first country to officially adopt it as legal tender. Which also stirred up a lot more volatility (and criticism).

Here's what all this could mean for your wallet.

Are you thinking of investing in Bitcoin?

Before you jump on the Bitcoin bandwagon...

  • Know the risks. Not to burst your bubble, but Bitcoin is still pretty new. And not without downsides. See above: extreme volatility. Also, being based on new tech makes it hard to fully understand. To help with that, we Skimm'd more about Bitcoin and blockchain and how they work.

  • Get your financial sh*t together. Before you invest in crypto, make sure the rest of your financial ducks (aka your emergency fund, debt repayment plan, and retirement savings) are in order. And remember: when betting on any speculative investment, you should keep it to a small part of your portfolio. And only invest money you'd be okay losing. As in, not your whole life savings.

  • Look for a familiar way in. After years of anticipation, Bitcoin-related exchange-traded funds made their way to the US market starting in October 2021. (Canadian regulators approved the first publicly traded North American Bitcoin ETF in February.) Reminder: ETFs are baskets of investments that trade like stocks. Read: a more familiar, efficient way to invest in your regular investment account. But red flag with this first-gen ETF option: they track Bitcoin futures, which are bets on where prices are going. Meaning it may not deliver the same results as Bitcoin itself. US regulators still haven't approved an ETF that more directly tracks the crypto.

Do you already own Bitcoin?

Your next move is up to you. You could:

  • Trade it. For fiat currencies (aka paper money that's backed by the gov). Or other cryptocurrencies like Dogecoin, Ether, and Litecoin, if you like their prospects better.

  • Spend it. Companies like PayPal and Xbox, are accepting it as a form of payment. But heads up: the IRS currently considers Bitcoin "property." Read: if it's worth more when you spend it than when you bought it, the difference in its value is taxed as a capital gain

  • Hang in there. If you buy the hype about crypto flying higher, holding onto your investment could be smart.

Are you wondering why people care about digital money?

The short answer: it could affect the global economy and future of money.

  • Bitcoin is making it easier for people in some developing countries to work around stringent regulations and access capital not regulated by problematic governments. Especially in poorly banked countries and areas with high inflation. 

  • In the same way that paper money eventually replaced gold bars, crypto could one day replace some current forms of payment. But probably not without some tweaks. Bitcoin's anonymous nature makes it a magnet for things like tax evasion, money laundering, and fraud. Addressing these challenges might mean more regulation, especially now that one country has adopted it. Psst…a crypto task force was recently formed to investigate and prosecute criminal misuse of virtual currencies and exchanges.

theSkimm

Bitcoin is still the new kid on the block(chain) when it comes to investing. Read: high risk. So proceed with caution. If you're tempted, make sure Bitcoin fits into your overall financial plan. And that you'll be okay financially (and emotionally) no matter what it does next.

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Updated Dec. 20 to include recent news on Bitcoin's price, Bitcoin ETFs, and government regulation.

Skimm’d by Ivana Pino, Casey Bond, Liz Knueven, Stacy Rapacon, and Elyse Steinhaus