Content of the material
- What Is Bitcoin?
- How Does Bitcoin Work?
- Cryptocurrency Investing table
- Do You Know How To Invest in Bitcoin Safely?
- How to make money by investing in bitcoin
- About the Author
- Is there a less risky way of investing in crypto?
- Still Worrying About Making The Wrong Decision?
- Strategies For Investing In Bitcoin
- Buy and ‘Hodl’ Bitcoin
- Hold Bitcoin Long Term
- Trade Bitcoin On Short-Term Volatility
- How Much Should I Expect to Pay to Purchase Bitcoin?
- What Are the Steps for Purchasing Bitcoin?
- Cryptocurrency Coin Trusts
- Factor #3: Timing
- 4. Practice Safe Storage
- How To Invest In Bitcoin
- Step 2: Connect Your Bank Account to the Exchange
- Can I Buy Crypto With a Credit Card?
- Step 4: Store Your Bitcoin
- What Is a Cryptocurrency Wallet?
- But Be Aware!
- Should You Use a Hot Wallet or a Cold Wallet?
- How to Invest in Bitcoin in 5 Steps
- 2. Get a Bitcoin Wallet
- 3. Connect Your Wallet to a Bank Account
- 4. Place Your Bitcoin Order
- 5. Manage Your Bitcoin Investments
- Store Your BTC
- Frequently Asked Questions
What Is Bitcoin?
Bitcoin is a decentralized digital currency, which operates without the oversight of banks and governments. It holds the distinction of being the first-ever cryptocurrency, launched in 2009.
In the words of its creator, Satoshi Nakamoto, Bitcoin was created to allow “online payments to be sent directly from one party to another without going through a financial institution.”
Today the entire cryptocurrency market is roughly worth $1.1 trillion, with Bitcoin representing 41% of the market.
While it began life as a payments network, Bitcoin has evolved into an investment asset. Most holders consider BTC a store of value, and it’s often referred to as “digital gold.”
How Does Bitcoin Work?
Bitcoin transactions are verified by crypto miners via a proof-of-work consensus mechanism. Proof of work is a validation process that uses a group of miners to validate each block in the blockchain.
For Bitcoin, this process usually takes up to 10 minutes. That’s much slower than many competing cryptocurrencies, to say nothing of conventional payments networks.
Still, Bitcoin is accepted as a form of payment by some retailers and merchants, such as Microsoft, Overstock and Whole Foods, to name a few.
Cryptocurrency Investing table
Cryptocurrency Investing table > Benefits Benefits > Risks Risks > Cryptocurrency Investing > Benefits Potential for appreciation Some investors are attracted to the volatile price swings as a potential for profit. Portfolio diversification Some investors believe that if the lack of correlation with other asset classes continues, cryptocurrency could add diversification to a portfolio. > Risks Potential for financial loss Cryptocurrency prices historically have been highly volatile, and fluctuations could result in significant financial losses regardless of whether you have direct or indirect exposure. > Direct Investing (spot market) Considerations > Benefits Transaction transparency The use of blockchain records transactions between parties in a verifiable and permanent way visible to all. 24/7 access Unlike traditional exchange-traded products, cryptocurrency can be bought or sold at any time. Control With no ties to banks, regulators, or governmental policies, cryptocurrency theoretically provides user autonomy. > Risks Potential for fraud According to the Federal Trade Commission, “Many people have reported being lured to websites that look like opportunities for investing in or mining cryptocurrencies, but are bogus.” Lack of recoverability Cryptocurrency assets are accessed using a key that’s not retrievable if lost. Similarly, if you lose access to the place where you store your key, you will effectively lose possession of your cryptocurrency. > Indirect Investing Considerations > Benefits Regulation The investment products offered at Schwab provide an element of regulation and consumer protections that spot trading lacks. Recoverability Access to conventional investment accounts can usually be recovered if your credentials are misplaced. > Risks High expenses for trusts and funds Cryptocurrency trusts and mutual funds can involve high expenses, with fees exceeding 2% or more of the investment. Leverage risk for futures Cryptocurrency futures are leveraged products, meaning you could lose more than you initially invested. >
More Details Pricing Free – $49.95 per month Account Minimum 50EUR – 500 EUR, dependingsecurely through WunderBit’s website More Details
Another great option to buy Bitcoin is Wunderbit. The platform lets you buy and sell Bitcoin, Ethereum and altcoins at the best rates on the market. Plus, users can fund accounts with crypto or buy cryptocurrencies with a credit or debit card. Another cool feature that Wunderbit has that makes it unique is its ability to identify ‘dirty’ bitcoin. This is bitcoin that may have been involved in hacks, money-laundering, or other illegal activity that may be at risk of being seized by government officials.
Do You Know How To Invest in Bitcoin Safely?
If you’re new to cryptocurrency investments, you should be pretty careful since the market is very volatile, and you can end up losing your money quickly. Here are some tips to be on the safer side:
- Research: Make sure you learn all you need to know about cryptocurrency exchanges before you select one. You can also talk to experienced investors through online forums, especially those on Reddit.
- Diversify: Investing in Bitcoin seems like a lucrative move since the currency has spiked exponentially in the past few years. Still, you should not put all your money in one cryptocurrency. Instead, diversify your investments so that your money is more durable to shifts in the market.
How to make money by investing in bitcoin
Like any investment, making money depends on what price you buy and sell an asset for. If you sell when its price is higher than you bought it for, you will make money.
If you sell for a lower price than you bought it for, you will lose money.
For example, if you had invested in bitcoin at the start of:
- 2020 and sold on 31 December 2020, you would have made a 300% profit
- 2018 and sold on 31 December 2018, you would have made a 73% loss
Bitcoin is extremely volatile so the trick is not to panic and crystallise your losses by selling when its value inevitably falls. This is the same with all investments.
About the Author
Scott Jeffries is a seasoned technology professional based in Florida. He writes on the topics of business, technology, digital marketing and personal finance. After earning his bachelor’s in Management Information Systems with a minor in Business, Scott spent 15 years working in technology. He’s helped startups to Fortune 100 companies bring software products to life. When he’s not writing or building software, Scott can be found reading or spending time outside with his kids.
Is there a less risky way of investing in crypto?
“Stablecoins” could be a less risky way of investing in cryptocurrency, according to Gavin Brown, associate professor in financial technology at the University of Liverpool.
Brown points to tether, the largest stablecoin, backed by one dollar per coin. It topped the $50bn mark on 26 April 2021 but he warns that potential investors shouldn’t necessarily see tether as the next big thing.
“In theory it won’t ever be worth more than a dollar. But it’s potentially an interesting option for any varied portfolio and it could be a slice of stability if [other] things start to suffer.”
The stablecoin has not been without controversy either – being fined by the New York Attorney General and banned from the state the year.
You could also buy shares the companies associated with bitcoin.
There are also some funds and investment trusts that have exposure to cryptocurrencies, which is a less risky way of investing than buying the currencies themselves.
Still Worrying About Making The Wrong Decision?
If you’re still afraid of investing in your first pieces of Bitcoin, follow these advice that will help you get started smoothly:
Invest even $10 on any recommended cryptocurrency exchange or broker. This way you’ll get started and you’ll have a much better understanding of what it is to be a cryptocurrency investor.
- Divide the budget you had in mind and invest it over some time -. 1 month, 3 months, 12 months – it’s your call. But doing so will prevent you from making costly mistakes and save you money.
- Remember that you can still reevaluate your decision in the future.
- Choose the best platforms to buy Bitcoin. To make it simple for you, I’ve compiled the list of my favorite exchanges below.
*eToro Disclaimer: Your capital is at risk
Now, let’s dive into my cryptocurrency-related recommendations, and specifically 5 factors you should consider when deciding how much to invest in Bitcoin and the best way to invest in Bitcoin.
The College Investor is dedicated to helping you make informed decisions around complex financial topics like figuring out the best cryptocurrency exchange. We do this by providing unbiased reviews of the top bitcoin and crypto platforms for our readers, and then we aggregate those choices into this list.
We have chosen crypto exchanges based on our opinions of how easy they are to use, the availability of tokens and coins on their platform, their costs and fees, their trustworthiness and security, and a variety of other factors. We believe that our list accurately reflects the best cryptocurrency exchanges in the marketplace for investors.
Strategies For Investing In Bitcoin
Despite the many differences between buying Bitcoin and buying other equities like stocks, there are inherent similarities that must be addressed. In fact, the actual strategies for investing in Bitcoin aren’t all that different from their stock counterparts. That said, many of the strategies for buying Bitcoin have to do more with investment timeframes. In particular, investors may exercise one of the three most popular Bitcoin investment strategies:
Buy and ‘Hodl’ Bitcoin
Hold Bitcoin Long Term
Trade Bitcoin On Short-Term Volatility
Buy and ‘Hodl’ Bitcoin
Those familiar with Bitcoin are probably already aware of the concept between Buy and ‘Hodl.’ Those who aren’t, however, can get caught up quickly. ‘Hodl’ (an intentional misspelling of hold) is merely an investment philosophy. Short for “hold on for dear life,” ‘hodl’ suggests the best Bitcoin investment strategy is to hold it forever. Those who subscribe to this strategy are more than aware of the asset’s volatility but strongly believe in its prospects. Therefore, this strategy will require investors to weather the many ups and downs of Bitcoin price fluctuations without selling.
Hold Bitcoin Long Term
Not all that different from the first strategy, investors who want to hold onto Bitcoin for the long term are convinced it will appreciate over long periods of time. However, unlike the ‘hodl’ strategy, long-term holders may be inclined to sell once they are satisfied with returns. These investors are convinced Bitcoin will increase in value, perhaps as serving as a new store of value (like gold), but aren’t against selling for a profit when the time is right.
Trade Bitcoin On Short-Term Volatility
One of the most popular strategies for investing in Bitcoin relies on the asset’s volatility. If for nothing else, Bitcoin has become synonymous with violent swings in valuation. Simply looking at a one-year chart will identify just how volatile Bitcoin can be, which bodes well for short-term traders. Not surprisingly, this strategy will have investors ride the ups and downs, selling at the peaks and buying on the dips. This is definitely the hardest of the strategies discussed and exposes investors to the most risk; however, it may also compound gains faster than those previously mentioned.
How Much Should I Expect to Pay to Purchase Bitcoin?
Typically, the price for purchasing bitcoin consists of a fee per trade plus the cost to convert a fiat currency (generally dollars) to bitcoin. (Cryptocurrency exchanges and payment services make money off of this conversion spread.) The fee per trade is a function of the dollar amount of the trade. A higher trade amount will carry higher fees. The overall purchase cost also depends on features offered by the venue. For example, Robinhood does not currently offer an online wallet for storing bitcoin. Therefore, you will need to budget for online wallet costs for your purchase.
What Are the Steps for Purchasing Bitcoin?
The process to purchase bitcoin consists of four steps: choosing a venue or exchange to place your order, selecting a payment method, and ensuring safe storage for your purchased cryptocurrency. Depending on the type of venue chosen in the first step, there might be additional steps involved in the process. For example, if you purchase the cryptocurrency through Robinhood you might need to factor in additional costs for an online wallet and custody of your bitcoin because it does not offer these services.
Cryptocurrency Coin Trusts
These products allow investors to trade shares in trusts holding large pools of a cryptocurrency, although these can involve high volatility, hefty fees, and other risks. They trade over-the-counter (OTC) and behave like closed-end funds.
Factor #3: Timing
I bet you’ve heard much more about cryptocurrencies when Bitcoin’s price was booming, as opposed as to when it’s declined or stabilized. This is because of people and media alike have a natural tendency to follow existing trends.
But do you know that the cryptocurrency market is made of repeated market cycles? These market cycles often last for 1 to 2 years. Prices surge fast, creating bubbles. BIG bubbles. And then, these bubbles burst badly.
This is why timing is crucial in cryptocurrencies. It can completely change your journey and the way you’ll look at it.
As a result, when deciding how much you should invest in Bitcoin, look at where we’re at now in these market cycles, and you are going to find the best way to invest in Bitcoin.
To find out this information, open the global market chart of CoinMarketCap. Look at it closely, and answer the following questions:
- Are we close to the market all-time high?
- How long since we experienced a market bull run?
The closer we are from the market’s all-time high both in terms of price and time, the least you want to invest. On the other hand, if the current price is $5,000 and the highest price was $20,000 two years ago, then it should be a better time to invest in Bitcoin right now.
Don’t get me wrong: even though we’re in the middle of price surges, it’s not a bad idea to invest money in cryptocurrency right now, because it gets you started. The timing should only change your entry approach and lower/increase the amount you had in mind initially.
4. Practice Safe Storage
Many exchanges allow you to leave your investment within your account, which is easiest for most beginners. But if you want to further secure your digital assets, you can transfer them into a cryptocurrency wallet.
A cryptocurrency wallet is a place to store digital currency. There are various types of cryptocurrency wallets available, and they all have different levels of security associated.
The exchange you use may offer a wallet option, so you can easily transfer your coins from your exchange account to a more secure wallet. You can also use a third-party software, or opt for cold storage on an offline hardware device.
Some platforms you can use to buy crypto — including PayPal and Venmo — don’t allow you to move your coins onto your own storage device. Consider whether that’s an option you want before you buy, whether for offline security of your assets or because you may want to trade using another platform in the future.
How To Invest In Bitcoin
Investing in BTC is similar to investing in stocks, except far more volatile because of the daily swings in BTC. Here are the steps to invest in stocks from the beginning:
- Open a brokerage account at a firm that allows crypto investments
- Deposit funds from your bank into the brokerage account.
- Buy a stock using deposited funds (cash balance).
- Later sell the stock for a gain or loss. Funds are returned to your cash balance.
The main difference with BTC is for step three; you buy BTC or another cryptocurrency instead of stock.
With BTC, the above flow is similar in most cases but it depends on the exchange or trading platform. In some cases, you can buy BTC using your credit card or by transferring funds from your bank account.
For other platforms, you must transfer BTC directly. This is known as a direct deposit of BTC.
We’ll discuss how to invest in BTC for US citizens. The methods vary across countries because of differences in laws and regulations. Some countries require more private information than others to verify you are legitimate.
Step 2: Connect Your Bank Account to the Exchange
Step 2 is pretty straightforward — at some point, your chosen crypto exchange is going to ask you to connect a bank account as your primary payment method. Hand ’em your bank account and routing numbers and you’re good to go.
As simple as it is, Step 2 does raise a common question:
Can I Buy Crypto With a Credit Card?
In most cases, no. In fact, Coinbase, like most crypto exchanges, won’t even let you add a credit card.
Here’s why: Most banks treat crypto purchases like cash advances. Therefore, your bank will immediately charge you a cash-advance fee of 3% to 5% of the purchase amount. It also won’t give you a grace period, meaning you’ll accumulate high interest on your crypto purchase immediately. Heck, if the exchange isn’t U.S. based, it’ll even charge you a foreign transaction fee on top of everything else, just for good measure.
But banks don’t mind wiring the money from your bank account to the exchange. The reason is simple: That’s your money, not theirs.
So if you were hoping that your bitcoin investment would earn you some rewards points on the side, sorry to burst your bubble.
Step 4: Store Your Bitcoin
At Step 4 we reach a hotly contested debate within the crypto community:
Do you store your crypto in a “hot wallet” with the exchange where you bought it? Or extract it to an offline “cold wallet”?
First, let’s discuss what wallets even are.
What Is a Cryptocurrency Wallet?
A crypto wallet isn’t what it sounds like — it’s not where you store your crypto, since crypto lives on the blockchain.
Rather, a crypto wallet is where you store the keys to your crypto.
When you purchase crypto, you’re given two long strings of code: a public key and a private key.
- Your public key is like your account and routing numbers combined — it’s what lets others send you crypto — but that’s all they can do with it.
- Your private key is like your account password — anyone who has your private key can decide what to do with the crypto inside your account.
Now, your exchange will always have your public keys ready to copy and paste. The question and ongoing debate within the community is where best to store your private keys: a hot wallet or a cold wallet.
- A hot wallet, aka virtual wallet, is when you store your private keys in a database online. Most exchanges will automatically generate a hot wallet for you and encourage you to keep your crypto there, citing their rigorous security measures.
- A cold wallet is when you store your private keys offline on a USB stick, hard drive or even a piece of paper.
Most beginners start with a hot wallet out of convenience — it’s free, it’s automatically generated for you and you don’t have to remember where you put it. Hot wallets also enable instant trades — you don’t have to manually input your private keys or plug in a USB each time you make a trade.
Looking for a crypto wallet? These are our favorites right now >>>
But Be Aware!
Many traders still prefer cold wallets due to safety concerns. To date, several billions of dollars of crypto has been stolen by hackers stealing private keys. And because crypto holdings aren’t FDIC-insured, the victims have been mostly out of luck. The major exchanges have beefed up security and purchased private insurance, but many experienced traders still aren’t convinced.
Should You Use a Hot Wallet or a Cold Wallet?
If you plan to invest only small amounts in bitcoin and continue making regular trades, you’ll likely be happier with a hot wallet — it’s convenient, flexible and free.
But if you plan to purchase large amounts of crypto and hold it for the long haul, you might consider the safety of “hiding it under the mattress” in a cold wallet.
Just don’t lock yourself out of your bitcoin fortune by forgetting where you put it!
And for more on wallets, check out “Hot Wallet vs. Cold Wallet.”
How to Invest in Bitcoin in 5 Steps
Are you ready to dive into cryptocurrency? You’re in luck, as buying Bitcoin is simpler than you might think. Here’s how to invest in Bitcoin, in 5 easy steps:
Join a Bitcoin Exchange
Get a Bitcoin Wallet
Connect Your Wallet to a Bank Account
Place Your Bitcoin Order
Manage Your Bitcoin Investments
2. Get a Bitcoin Wallet
When you purchase a coin, it’s stored in a “wallet,” which is where all your cryptocurrency is stored. There are two types of wallets you can get: a “hot wallet” or a “cold wallet.”
A hot wallet is a wallet that’s operated by either your cryptocurrency exchange or by a provider. Some exchanges will automatically provide you with a hot wallet when you open your account. In any case, hot wallets are convenient because you’ll be able to access your coins through the internet or a software program.
Some notable hot wallets are:
Electrum: Software that enables you to store your coins on your computer
Mycelium: A mobile-only app for Android and iPhone users
However, hot wallets are not the most secure form of coin storage. If the hot wallet provider is hacked, then your coin information may be at risk.
A cold wallet is the safest storage method for your coins. A cold wallet is an actual piece of hardware that stores your coins, usually, a portable device that’s similar to a flash drive. Most cold wallets cost between $60 to $100. Some popular cold wallets are:
If you’re only going to purchase small amounts of coin, then you might be fine using a hot wallet with an insured crypto exchange. But if you’re going to be trading large amounts of coin, then a cold wallet would be well worth your investment.
Need help deciding which wallet is right for you? Take a look at our picks of the best bitcoin wallets.
3. Connect Your Wallet to a Bank Account
When you’ve obtained your wallet, you’ll need to link it to your bank account. This enables you to purchase coins and sell coins. Alternatively, your bank account may be linked to your cryptocurrency exchange account.
4. Place Your Bitcoin Order
Now you’re ready to purchase Bitcoin. Your cryptocurrency exchange will have everything you need to buy. The big question is, how much Bitcoin should you purchase?
Some coins cost thousands of dollars, but exchanges often allow you to buy fractions of a single coin—your initial investment could be as low as $25.
Investing in Bitcoin is very risky, and it’s important that you carefully determine your risk tolerance and review your investment strategy before you purchase any Bitcoin. We’ll go over this in the next section.
5. Manage Your Bitcoin Investments
After you’ve purchased bitcoin, you can:
Use your coins to make online transactions
Hold your coins for a long period in the hopes it’ll appreciate in value
Perform day trading with your coins—that is, buying and selling coins with other Bitcoin owners, which can be facilitated on the cryptocurrency exchange
Your cryptocurrency exchange will provide you with everything you need to buy and sell coins.
[ Want to learn how to safely invest in Bitcoin & other crypto assets? Take a 2-hour online training class today! ]
Store Your BTC
The crypto exchange you use probably has an integrated Bitcoin wallet or at least a preferred partner where you can safely hold your BTC. Some people, however, do not feel comfortable leaving their crypto connected to the internet—a “hot wallet”—where hackers may more easily steal it.
However, many major exchanges have private insurance to reimburse clients if this happens. BTC can be stored in several ways, whether with online or offline storage:
- Hardware Wallets. A hardware device stores the private keys to your assets and allows you to interact with the wallet without exposing your data. Trezor and Ledger are examples of hardware wallets that support BTC.
- Offline storage. Sometimes referred to as “cold storage” or a “cold wallet,” it is considered a safe way to store BTC because this type of storage isn’t accessible via an internet connection. You can keep your crypto on paper using a paper wallet—this will generate a public key and private key for your crypto.
- Software Wallets. Desktop wallets, considered “hot” wallets, are programs downloaded to store your crypto asset. There are also mobile wallets that interface with managing crypto assets. Trust Wallet is an example of a mobile wallet where you can store BTC.
- Crypto Exchanges. Many exchanges that trade BTC will let you store your crypto with their wallets. These crypto exchanges include Coinbase or eToro, to name a couple.
Frequently Asked Questions
QIs Bitcoin a good investment longterm?A Over Bitcoins existence, we have seen it grow exponentially. If history repeats it self, which we have seen multiple times now, Bitcoin tends to reach new all time highs every 3-4 years.