Bitcoin is a hot topic right now—from memes to Reddit, people are talking about it everywhere you look. Whether you have no idea what Bitcoin is or are just a little lost on how to invest, this guide is for you. Today we'll be taking a deep dive into Bitcoin. By the time we wrap things up, you'll have all the information you need to start building your digital fortune.
Ways to Invest in Bitcoin
Buying Standalone Bitcoin
The most straightforward way of investing in bitcoin is to buy it outright. There are many ways of buying bitcoin, but one of the easiest is to use a regulated broker such as Coinbase or Gemini.
Purchasing bitcoins this way incurs transaction fees for both the purchase and sale, which range between 0-0.25%. This means that if you buy $100 worth of Bitcoin at $1,000 per BTC, your cost basis will be calculated at about $10,100 (depending on how high the fee was).
(Obviously, Bitcoin is more expensive, so this is just for illustrative purposes.)
These brokers can charge more than exchanges like GDAX because they offer higher levels of account verification and security features in their products, which translates into lower counterparty risk for users who wish to invest more significant amounts without providing extensive identity documentation verifying their identities.
The benefit of using a broker to buy standalone Bitcoin is that you don't have to wait for the Bitcoin's price to go up before selling it. That said, if this is your method of buying and selling assets—or if you're planning on using a lot of money to invest in Bitcoin—you might want to consider another option as well.
Trust - Greyscale's Bitcoin Investment Trust (GBTC)
You can purchase Bitcoin through Greyscale's Bitcoin Investment Trust (GBTC) without having to provide extensive identity documentation. The GBTC is an open-ended private trust that invests exclusively in bitcoin and derives its value solely from the price of bitcoin.
The issue with this option is that it trades at such high premiums because there isn't enough liquidity on Greyscale's Bitcoin Investment Trust (GBTC). It also doesn't have as many benefits as some exchanges may offer, like insurance coverage for your account or lower fees than most brokers charge.
The upside of investing in Greyscale's Bitcoin Investment Trust (GBTC) is that it's a more straightforward process than going through an exchange, and you'll immediately have a position in Bitcoin.
ETF - Amplify Transformational Data Sharing ETF (BLOK)
There is also an ETF that will give you exposure to Bitcoin - the Amplify Transformational Data Sharing ETF (BLOK) - that will be rebalanced to include Bitcoin.
BLOK has substantially lower fees than other ETFs and no commissions for buying or selling shares. It also includes a free portfolio management service. This is great if you're new to investing in this space and want some guidance on how best to allocate your money across multiple cryptocurrencies.
The BLOK's downside is that it trades at substantial premiums because there isn't enough liquidity on the fund as well, so, like GBTC above, it's not a good option unless you are an experienced trader looking for exposure to crypto assets without having to go through the headache of opening accounts everywhere and possibly paying high brokerage fees.
Index fund - Bitwise 10 Private Index Fund (BITW)
The Bitwise 10 Private Index Fund (BITW) is another way to get into Bitcoin through an index fund.
It was created by Bitwise Asset Management and is currently open for investment. The fund has about $25 million in assets under management at the time of this writing.
Investors get exposure to all publicly traded companies that invest primarily in bitcoin or cryptocurrency, allowing them to diversify their holdings without going through the cumbersome process of buying Bitcoin ETFs on various exchanges.
The BITW invests exclusively in long-term private crypto assets with an emphasis on what it deems as "quality" investments (exchanges such as Coinbase) over those viewed as more speculative (newer coins like Ripple).
This index fund also offers access to professional managers responsible for day-to-day fund operations and asset allocation, so you don't have to be a crypto expert to invest in it.
In addition, you can buy into this index fund with fiat currency without any friction or hassle as opposed to buying Bitcoin on an exchange that requires some technical know-how and time.
For these reasons, the BITW is one of the best ways for investors who are not cryptocurrency experts but want exposure to bitcoin and altcoins through a passively managed product that charges no fees and has low minimums.
Crypto Mining Stocks
Finally, you can invest in Bitcoin through crypto mining stocks. Four of the most popular crypto mining stocks right now are:
- Riot Blockchain (NASDAQ:RIOT) - Riot Blockchain is a biotech company that has recently pivoted to cryptocurrencies.
- Hive Blockchain Technologies (OTCMTKS:HVBTF) - Hive Blockchain Technologies is a publicly traded company specializing in mining crypto, including Bitcoin.
- Hut 8 Mining Corp (OTCMKTS:HUTMF) - Hut 8 Mining Corp is one of the world's largest producers and operators of Bitcoin mining hardware.
- Bit Digital (NASDAQ:BTBT) - Bit Digital is a mining company based out of Las Vegas, Nevada.
The benefit of buying crypto mining stocks is that you could potentially see short-term gains and long-term growth. However, many crypto mining stocks are speculative investments which means they carry a much higher risk than other types of Bitcoin stock such as bitcoin.
And like any other stock, I strongly recommend you do fundamental analysis to ensure you are not making an investment that is too risky for your tolerance.
The Risks of Investing in Bitcoin
The two most significant risks in the Bitcoin market are its lack of regulation and high volatility. Exchanges are also vulnerable to cyber theft, hacking, and fraud, despite extensive security measures.
While the overall increase in Bitcoin’s value makes it an attractive investment option, cryptocurrency is still in its infancy. Consequently, Bitcoin investors have no proven strategy for building wealth.
Bitcoin also doesn’t have a clear identity as an asset or currency, which results in uncertainty. For example, the Commodity Futures Trading Commission formulates Bitcoin as a commodity, while the IRS sees it as taxable property.
How to Buy Bitcoin
Now, here are some ways to buy Bitcoin:
Since you can't invest via a bank or credit union, the primary method for investing in Bitcoin involves buying and selling coins through an exchange, speculating on its price movements.
This process involves opening an account with a Bitcoin exchange and buying the coins that you store in a digital wallet until you want to sell. To invest in Bitcoin via an exchange, you also need personal identification documents, a secure internet connection, and a verified payment method, such as a bank account, credit card, or debit card.
What is a Cryptocurrency Exchange?
A centralized cryptocurrency exchange (CEX) is a private company providing a platform for trading Bitcoin and other cryptocurrencies. You’ll need to go through a registration process and provide verified identification before trading Bitcoin on a cryptocurrency exchange.
Cryptocurrency exchanges operate as middlemen, conducting transactions between Bitcoin traders. As a central operator, an exchange keeps an order book that records traders’ buy and sell orders.
Popular examples of cryptocurrency exchanges include Coinbase, Gemini, and Binance. Some brokers, such as Robinhood, also offer crypto exchange platforms. Most centralized exchanges accept fiat currency deposits.
Signing up with a cryptocurrency exchange offers optimal liquidity, and you can close your positions at any time to cash out. Centralized exchanges also allow large trading volumes and user-friendly interfaces for beginner traders to learn the ropes.
If you are a PayPal account holder who lives in the U.S., you can buy, hold, and sell cryptocurrencies, including Bitcoin, directly from your account. They deal with Ethereum, Bitcoin Cash, and Litecoin.
On your PayPal account’s home page, select “Buy crypto on PayPal.” You will see the selection of tokens you can buy, along with resources providing more information on cryptocurrency. After selecting Bitcoin, you can select the amount you want to purchase, with a minimum of $1.
Overall, PayPal’s cryptocurrency is an easy way to get into cryptocurrency trading if you are looking to get your feet wet.
Peer-to-Peer (P2P) Exchanges
Unlike centralized exchanges that facilitate Bitcoin transactions as middlemen, P2P exchanges are decentralized, offering a direct connection between traders. You can buy and sell Bitcoin on these platforms without disclosing your identity.
When registering on a P2P exchange, you only have to provide an email address and password. After logging in, you can look through the different buy and sell offers from various participants, and each offer has a unique payment method, minimum purchase amount, and rate.
Popular P2P platforms include:
- HODL HODL
- Binance P2P
P2P platforms don’t offer the same liquidity and security as centralized exchanges. However, you can trade anonymously on a P2P exchange, and you also don’t have to pay the high transaction fees of CEXs.
A Bitcoin ATM is a kiosk that connects to a crypto exchange online where you can quickly and securely buy and sell tokens.
Before you can use a Bitcoin ATM, you need to verify your identity via a verification code the machine sends to your phone. After logging in, you decide whether you want to buy or sell. To buy Bitcoin, you make a debit card or cash payment, and the machine generates a QR code, which you can scan to receive the Bitcoin in your wallet.
If you want to sell Bitcoin, you send the tokens to the machine’s QR code from your digital wallet. After selling your Bitcoin, the machine will dispense your cash.
Selecting the Right Exchange for You
When choosing an exchange for investing in Bitcoin, there’s a lot to consider, the most significant of which being the platform’s security protocol. Without proper security and authenticity measures, your investment is susceptible to pump-and-dump schemes and hackers.
The cryptocurrency exchange you choose should accept your preferred payment method, be it a bank transfer or PayPal payment. If you don’t own cryptocurrency, select an exchange that accepts fiat currency deposits.
Most reputable exchanges offer Bitcoin trading platforms. However, if you think you may want to invest in other cryptocurrencies, such as Ripple, Dogecoin, or Litecoin, in the future, look for exchange with a wide range of currency options.
When evaluating potential exchanges, consider their fee structures carefully. Standard crypto exchange fees include:
- Trading fees
- Deposit fees
- Withdrawal fees
- Liquidation fees
- Borrowing fees
Some exchanges charge high fees but offer high-end features, such as a wide altcoin variety, high liquidity, and built-in wallets. It all comes down to your preferences and needs.
Set Up Your Account
After deciding on a crypto exchange, you have to set up your account. Exchanges often require extensive information, including your social security number, funding source, employment information, and driver’s license.
The account setup process also involves connecting a payment method for making deposits. Conventional methods include a bank account or debit card, but some exchanges allow a credit card or third-party payment processors.
Due to the unregulated nature of cryptocurrency trading, some banks don’t allow direct deposits to cryptocurrency exchanges. If your bank blocks crypto transactions, the best solution is to open an account with another bank supporting direct exchange deposits or opt for an intermediary, like PayPal.
The Bitcoin you buy exists on the blockchain, and you can’t access and control it in the same way as you would funds in your bank account. Instead, you interact with the Bitcoin blockchain to carry out trades using software or Bitcoin wallets.
Cryptocurrency wallets store one public key and one or more private keys, which are address codes allowing you access and control over your Bitcoin on the blockchain. A digital Bitcoin wallet typically has password protection.
Many Bitcoin exchanges offer custodial wallets. However, many investors prefer to withdraw their tokens to their own wallets for optimal security.
Bitcoin wallet types fall under two categories: hot wallets that connect to the internet and cold wallets that are offline. Examples of cold wallets include paper wallets with printed keys and hardware wallets. Hot wallets include web wallets, desktop wallets, and brain wallets.
Exchange Order Types
After opening an account and adding a payment method, you can start exploring the different investment options and features. Cryptocurrency exchanges offer several order types, with the most common options being market orders, limit orders, and stop-loss orders. Your exchange may also offer:
- Stop-limit orders
- Take-profit orders
- Take-profit limit orders
If possible, try to set up a recurring buy, which involves automated Bitcoin purchases at regular intervals. This dollar-cost averaging strategy is a viable option for growing your crypto holdings as it mitigates your risk of buying at the wrong time. A set-and-forget strategy also eliminates emotional trading.
Avoid Credit Card Purchases
Even if your credit card issuer and crypto exchange allow credit card deposits, you should avoid doing so at all costs. Credit card issuers treat a crypto deposit as a cash advance, which means you pay a one-time cash advance fee ranging between 3% to 5% of your investment.
The interest rate for cash advances is higher than for regular purchases, and there is no grace period, which means you start paying interest immediately after making the deposit.
Wrapping It Up: When to Invest in Bitcoin
With proper risk management, a Bitcoin investment can generate significant returns. However, like all cryptocurrencies, Bitcoin has a speculative nature, and it is critical to only invest with funds you can afford to lose.
Ideally, your Bitcoin investment should be a vehicle for diversifying an established and growing portfolio with a relatively conservative asset allocation. Before buying Bitcoin, aim to have a growing retirement fund, emergency fund, and portfolio of bonds and equities that include value and growth stocks.
That said, if you are looking for a high-risk-high-reward investment option, Bitcoin is hands down one of the best assets to consider.