What happens if I buy Bitcoins and the price goes down. Will I lose a quantity of my money?

Consider:

Stock Market

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    It concerns me that people who lack such basic knowledge of economy would invest in a cryptocurrency. – Myridium Nov 18 '17 at 8:33
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    @Myridium OP has not stated that they have invested or is considering investing in a cryptocurrency. It's possible that they are merely asking the question in an attempt to learn. – Revetahw Nov 18 '17 at 12:38
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    @Myridium If anything, it should concern you that people who lack such basic knowledge of economics would invest in anything. – Craig Nov 18 '17 at 22:01
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    It's exactly as if you bought stock and its price went down. – chrylis Nov 18 '17 at 22:16
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    @Myridium With people everywhere calling bitcoin a ponzi scheme or pyramid scheme, it's not actually that odd of a question for a newbie. They often don't realize it's just a simple thing you can buy and sell. – fredsbend Nov 20 '17 at 5:37

10 Answers 10

If you bought a bar of gold at $1200 / ounce, then the price of the gold drops to $600 / ounce, you wouldn't actually lose any money at all unless you decided to sell your gold at that time. However, if you wait until the price of gold rises to $1800 / ounce, then sell it, you will gain money. The key is an ounce of gold is still an ounce of gold, regardless of the "price" in some other currency.

Same goes for bitcoin, or indeed any currency. If you trade it at one price, then subsequently trade it at a different price, you'll either gain or lose money.

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    Put a different way - if I buy a bitcoin for $5000, and someone comes up to me and offers me $4500 for it, I haven't lost $500 unless I sell it to him. – IllusiveBrian Nov 19 '17 at 20:31
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    Your market view of trading any commodity stands true, but your key example is wrong. "The key is an ounce of gold is still an ounce of gold, regardless of the 'price'" - You're implying that gold always has some intrinsic value, worst case scenario you could use it as a hammer or throw it at someone. Bitcoin has no intrinsic value, and can become worth absolutely zero. [In fact that will eventually happen given enough time (years, decades, centuries) unless invisible "bits" become collectible like paper money from long-collapsed empires.] – Xen2050 Nov 19 '17 at 21:49
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    Tax law is a completely different area. Consult a tax attorney or accountant in you jurisdiction for details applicable to your scenario. – Max Vernon Nov 19 '17 at 22:47
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    @Xen2050 There is nothing fundamentally different in the intrinsic value of gold; if someone invented a machine that could fabricate gold out of thin air, your bar of gold would have zero value; if a replacement were found for all uses of gold, it would have a value very near zero. The difference, I think, is one of risk: there is a higher risk of the bitcoin network becoming obsolete, and investments in it worthless, than all uses of gold becoming obsolete. But that's just a more extreme version of the risk of fluctuation in value. – IMSoP Nov 20 '17 at 13:03
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    @JoseAntonioDuraOlmos I disagree. This is the correct viewpoint. This is the viewpoint that says "If I have an ounce of gold, I have an ounce of gold, no more, no less." It demonstrates that one should decouple the perceived market value from the ownership of the asset itself, and take into account the whole picture. – Cort Ammon Nov 21 '17 at 4:46

If you bought one bitcoin and the price goes down, you still have one bitcoin. If the price goes up...still one bitcoin.

This is just like everything else, including groceries, gasoline, gold, stock certificates, etc... Measurements of value in fiat (such as dollars) does not affect the amount something you own, only the price at which you will be able to sell that something.

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    It goes both ways, too. If the value of fiat currency goes up (in the worst case via deflation), your money is worth more even though the amount you have doesn't change. – JAB Nov 18 '17 at 4:24
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    Groceries aren't a good comparison. If I buy a litre of milk, I only have a litre of milk for a week or so, regardless of what happens to the price. – David Richerby Nov 18 '17 at 20:38
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    @David, true. Groceries lack a property of money, namely durability. – Jestin Nov 18 '17 at 22:28
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    @DavidRicherby I think everyone with half a brain can understand the relevant points of the analogy and discard the irrelevant ones (like "milk goes off"). – immibis Nov 20 '17 at 3:56
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    @jestin - the question is on the "hot network questions" list. That's why it is getting a lot more attention than it probably deserves. – Max Vernon Nov 20 '17 at 13:15

tl;dr- This is called a capital loss. You're said to realize the capital loss if you sell the Bitcoins at the lower price, such that you lost money due to having bought/sold them. However, note that this isn't legal advice and I'm unsure about what the current legal statutes are surrounding Bitcoin.


Bitcoin's a capital asset (at least conceptually; dunno about legally):

A capital asset is defined to include property of any kind held by an assessee, whether connected with their business or profession or not connected with their business or profession. It includes all kinds of property, movable or immovable, tangible or intangible, fixed or circulating. Thus, land and building, plant and machinery, motorcar, furniture, jewellery, route permits, goodwill, tenancy rights, patents, trademarks, shares, debentures, securities, units, mutual funds, zero-coupon bonds etc. are capital assets.

-"Capital asset", Wikipedia [links omitted]

When a capital asset appreciates in value, it's called a capital gain, and may be subject to capital gains tax. And when a capital asset depreciates in value, it's called a capital loss (and sometimes results in a reduced tax burden).

Until you actually sell the Bitcoins, the loss is considered unrealized:

What is an 'Unrealized Loss'

An unrealized loss is a loss that results from holding onto an asset after it has decreased in price, rather than selling it and realizing the loss. An investor may prefer to let a loss go unrealized in the hope that the asset will eventually recover in price, thereby at least breaking even or posting a marginal profit. For tax purposes, a loss needs to be realized before it can be used to offset capital gains.

-"Unrealized Loss", Investopedia [links omitted]

Once you do sell the Bitcoins, then you know how much money you've gained/loss. This is called realization:

DEFINITION of 'Realized Loss'

A loss is recognized when assets are sold for a price lower than the original purchase price. Realized loss occurs when an asset which was purchased at a level referred to as cost or book value is then disbursed for a value below its book value. Although the asset may have been held on the balance sheet at a fair value level below cost, the loss only becomes realized once the asset is off the books.

-"Realized Loss", Investopedia [links omitted]


Summary

If you buy Bitcoins and they depreciate in value, then:

  • You've suffered a capital loss.

  • Before you sell the Bitcoins, it's an unrealized capital loss.

  • After you sell the Bitcoins, it's a realized capital loss.

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    Glad to see an answer which really hits the nail. I would say that capital gains/losses are unknown or hard to measure rather than hypothetical, but great answer regardless. Anyone who thinks there is no loss of capital till a sale should try to use assets to back a loan, no bank is going to accept the purchase value of those assets, they won't accept "you wouldn't actually lose any money at all unless you decided to sell your gold". The bank will valuate the assets. – Jose Antonio Dura Olmos Nov 20 '17 at 0:41
  • @JoseAntonioDuraOlmos Yeah, you're right, I should say "unrealized" rather than "hypothetical". – Nat Nov 20 '17 at 0:43
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    @MaxVernon Sure, your answer's conceptually correct and did a good job answering the question. I wrote this one up to provide the technical terminology since it's useful to have the vocabulary when engaging in stuff like this. – Nat Nov 20 '17 at 1:47
  • Cool. I've upvoted. – Max Vernon Nov 20 '17 at 1:51

The answer is not unique to bitcoin. It would be the same if you're dealing with (non-crypto) foreign currency, stock, a stock derivative or commodity or commodity futures.

When you buy something like the above, you are giving up your "real money" (fiat currency) to take possession of said commodity/stock/bitcoin/etc (let's call these assets in general). You bought an asset at a particular market value, which can fluctuate over time. If it rises, it's worth more of the fiat currency. If it falls, it's worth less of the fiat currency.

While you're still holding on to said asset, what you're experiencing are called unrealised gains and unrealised losses. The valuation chart fluctuates, but you're not seeing your purse of fiat currency changing in any way after the initial outlay.

You won't actually feel the "pain" of a fall in value until you decide to sell the asset. At this point you will experience a realised loss. You will get back less of the fiat currency (real money) than you put in in the first place. Conversely, if the asset has risen in value, you'll get back more "real money" than you put in and you've made a realised gain.

(I simplified the analysis to omit things like trading overheads - brokerage fees and commissions, etc. that always apply (those things always eat at your gains and losses pretty much equally). And taxes are a complex and murky thing I won't touch. And all this assumes you paid "real money" you actually had in full for the asset. If you borrowed money to buy the asset, that's called trading on margin and it can be much, much riskier - you're losing money in interest all the time and your losses can be more than the amount you borrowed to begin with. But ignore all these complications and focus just on the paragraphs above to give you a head start in understanding. And please learn more (and try trading simulations) before you trade real money for any asset).

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    @user189035 : Nah. A very good example is stocks which can vary for reasons which don't have to do with "objective reality" of the state of the company, but fears, hopes or expectations, rumors, commercials, propaganda et.c. Literally any other market is sensitive to the same things. – mathreadler Nov 19 '17 at 16:01
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    @mathreadler 'fears, hopes or expectations, rumors, commercials, propaganda et.c.' insofar as they change the price of the asset are part of objective reality. – user189035 Nov 19 '17 at 16:47
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    @user189035 it is not sure that they do. what we know is that the average price that people have been paying during the latest time has changed. what is measured (as far as I know) are averages of the trades that have been made the latest time. – mathreadler Nov 19 '17 at 16:59
  • "try trading simulations" - That sounds like a really neat suggestion! Would you happen to know any relevant trading simulators someone might try online? – Nat Nov 20 '17 at 5:28
  • Keep in mind that trading simulations have a different psychological effect on you than trading with real money does. Many a would-be trader has expected their simulated success to carry over to the real-world, and been deeply disappointed in the results. – Snowbody Nov 20 '17 at 15:23

Yes, you lose a quantity of your money, at the time you gave it away in exchange for the bitcoin you received. Subsequent changes in the exchange rate only vary the hypothetical value of what you would get if you wanted to trade back.

No; you lost the money when you used it to buy the Bitcoins. If the price goes down, you will get less money back if you sell them. If the price goes up, you will get more money back if you sell them.

  • Isn't this the exact same point as in Vadim Ponomarenko's answer, from the day before yours? – Xen2050 Nov 19 '17 at 21:59
  • The first word of his and my answer suggest we make a different point. – user65111 Nov 19 '17 at 22:37
  • Technically that's true, but it's still the same point – Xen2050 Nov 19 '17 at 23:38

Yes and no, depends on your perspective.

No: You lose money when you buy something, and you gain something else in return. In your case you lose money if you buy bitcoin, and you gain money when you sell bitcoin.

Yes: The monetary equivalent value of your assets/wealth decreases if your assets lose value, and increases if your assets gain value. If you own $1'000'000 in Bitcoin and Bitcoins lose half their value, you now hold $500'000 in bitcoin.

Notice that in the No case we count our Bitcoin in terms of # of coins, and in the yes case we thing of bitcoins in terms of $ of Bitcoins. If you were to count the value of all your assets in Bitcoins you'd gain value when the value of Bitcoins drops, because all your non-Bitcoin assets are now worth more Bitcoins, and the Bitcoin assets are still worth the same number of Bitcoins they used to be worth. It's more sensible, however, to value your assets in a currency that is stable and tied to most of your expenses.

I would like to add another aspect: minimize loss, in case you want to protect your principal (and commission paid when you bought Bitcoin). Please look into 'stop loss order' in case you want to get out of the position while minimizing the loss because you are not certain when the price will return enough to get your position back to 'gain'.

Many other answers explained the difference between realised and unrealised loss. I want to add some thoughts:

  1. It seems you are rather new to trading. Please understand that there is no "magic money making" machine, and that trading profits are often viewed as the compensation for accepted risks. So be cautions with investing money whose loss you cannot afford.
  2. Bitcoin is highly volatile, meaning that the price changes in rapid succession. It might be hard for a beginner to handle. You can, of course, but be extra cautious compared to trading, say, Dow Jones values.
  3. Bitcoin has no intrinsic value. Gold can be used for making jewelry, Coca Cola can still produce more drinks, but for a Bitcoin you need someone else willing to pay for it. Without spreading too much fear and doubt, it bears some reminiscence to once highly-priced collector cards.

The answer depends quite a lot on the semantics of the word "money". If money is those rectangular printed papers or circular metal discs made by the Federal Reserve in the United States of America as well as many other institutions in other nations then the answer is NO. You gave away (traded) some of those items when you bought the bitcoins. But a lowering of bitcoin value after that trade does not further diminish the amount of papers and discs you have.

But I would rather use the definition of money used by wikipedia:

Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, sometimes, a standard of deferred payment.Any item or verifiable record that fulfills these functions can be considered as money.

The papers and discs fit that definition so no money loss there. But, what else fits that definition?

BITCOINS

Before they got lowered in price you could go to Newegg and purchase a certain ammount of items. What happens if you go to Newegg after they got lowered in price?

  • If the answer is "I can buy the same" then no, you did not lose a quantity of your money.
  • If the answer is "I can buy less for the same ammount of bitcoins than I could before the lowering" then yes, you did lose a quantity of your money. They are diminished as a medium of exchange, now you can exchange those bitcoins for less than you could before.
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    ZOMG what kind of hyper pedantic answer is this. Of course he loses money if the price goes down. – Abdussamad Nov 20 '17 at 7:23
  • I think there is an interesting point here, although perhaps not well expressed: the bitcoins might be exchanged for something other than the original currency. However, if it were possible to exchange Bitcoins valued at USD10 for USD20 worth of goods, this would be an anomaly that the market would correct for by adjusting one or both prices. Otherwise, it would be the economic equivalent of a perpetual motion machine: buy BTC for USD -> buy goods for BTC -> sell goods for twice the original USD -> buy twice as many BTC -> repeat. – IMSoP Nov 20 '17 at 13:13
  • @Abdussamad Indeed, of course he does lose money. Alas, the most voted answer claims "you wouldn't actually lose any money at all unless you decided to sell your gold at that time". So I had to go the extra league. "Of course" was not enough. – Jose Antonio Dura Olmos Nov 20 '17 at 17:46
  • @IMSoP - arbitrage is what happens when you trade a good or asset through multiple exchanges and make a profit. i.e. if you sell BTC -> BCH -> USD -> BTC, and come out with more BTC at the end, that's arbitrage. And yes, normally the "market" will sort that out extremely quickly, since stakeholders take advantage of the arbitrage forcing equilibrium. – Max Vernon Nov 20 '17 at 20:15

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