Bitcoin For All: Who Can Invest?

Bitcoin is a well-known cryptocurrency that has crossed the $20,000 mark in value. It offers tech enthusiasts an alternative form of money and a new method of tracking and verifying asset ownership. While it is relatively easy to buy Bitcoin, it is also a risky and volatile asset. Before investing, it is important to consider various factors, including its volatile price history and the potential for hacks and losses. Additionally, it is crucial to understand the technical aspects of buying, selling, and storing Bitcoin securely.

Bitcoin's value and volatility

Volatility

Bitcoin is known for its volatile price history, with its value increasing by tens of thousands of dollars and sometimes rising or falling by thousands within a single day. This volatility is driven by various factors, including supply and demand, media influence, investor actions, and varying beliefs in its utility.

Supply and Demand

The price of Bitcoin, like most commodities, is heavily influenced by supply and demand. As Bitcoin has a limited supply of 21 million coins, the closer the circulating supply gets to this limit, the higher the prices are likely to climb.

Media Influence

Media outlets, influencers, industry moguls, and cryptocurrency fans can create investor concerns or hype, leading to price fluctuations. For example, when media outlets announced Proshare's introduction of its Bitcoin Strategy ETF in late October 2021, Bitcoin's price skyrocketed to almost $69,000. However, when investors realized the ETF was linked to Bitcoin through futures contracts, prices dropped back down to around $50,000.

Investor Actions

Bitcoin's demand increases as supply becomes more limited. Wealthier investors tend to hold onto their Bitcoins long-term, preventing those with fewer assets from gaining exposure. This concentration of wealth can also drive volatility, as a sudden sale of large holdings could cause a panic that leads to a rapid drop in prices.

Belief in Its Utility

Bitcoin's volatility is also influenced by varying beliefs in its utility as a store of value and method of value transfer. Many investors believe that Bitcoin will retain its value and continue growing, using it as a hedge against inflation. However, due to its well-known volatility, investors also fear missing out on big upswings or falling victim to large downswings, leading to panic buying or selling.

Value

Bitcoin's value has seen significant fluctuations since its creation. It began its rise to popularity around 2010 when the price for one token rose from fractions of a dollar to $0.09. In 2017, the price for one Bitcoin increased from less than $1,000 to more than $19,000 before falling back to around $8,000 by mid-2018. In 2020, the price fell to around $5,500 in March before starting a sharp rally.

In December 2020, the price of Bitcoin fell sharply from over $18,000 to around $3,200. It then went up to over $10,000 in July 2019, and by June 2024, it had crossed the $20,000 mark.

Factors Influencing Value

The value of Bitcoin is influenced by various factors, including increased acceptance during the pandemic by large players like PayPal and Indian lenders, as well as steps taken by stakeholders towards legitimizing the cryptocurrency.

Comparison to Other Currencies and Assets

Bitcoin's volatility is significantly higher compared to major currencies and assets such as gold. The volatility of gold averages around 1.2%, while other major currencies average between 0.5% and 1.0%. Bitcoin's volatility is almost 10 times higher than the volatility of major exchange rates, making it difficult for Bitcoin to function as a medium of exchange and limiting its use as a risk diversifier.

How to buy Bitcoin

Step 1: Choose a Crypto-Trading Service or Venue

You can buy bitcoin from cryptocurrency exchanges, such as Gemini, Kraken, Coinbase, and Crypto.com. These exchanges offer a breadth of features and more cryptocurrencies for trading. They also enable investors to buy, sell, and hold cryptocurrency and allow users to transfer crypto to their online wallet for safekeeping.

Step 2: Connect Your Exchange to a Payment Option

Depending on the exchange, you may need to connect your bank account or link a debit or credit card. Although you can use a credit card to purchase cryptocurrency, you should be aware that cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges.

Step 3: Place an Order

Cryptocurrency exchanges offer several order types and ways to invest. Almost all crypto exchanges offer both market and limit orders, and some also provide stop-loss orders.

Step 4: Safe Storage

Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered, but not recommended, for large or long-term cryptocurrency holdings.

Hot Wallets vs. Cold Wallets

Online wallets, also known as hot wallets, are apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices. Hot wallets are best for small amounts of cryptocurrency or cryptocurrency that is actively trading on an exchange.

A cold wallet isn't connected to the internet and is, therefore, less risky. These offline wallets or hardware wallets store a user's private key on something that isn't connected to the internet and come with software that allows investors to view their portfolio without putting their private key at risk. Cold wallets are considered the most secure way to store your bitcoin but require technical knowledge to set up.

Alternative Ways to Buy Bitcoin

You can also buy bitcoin through payment processors like PayPal, in-person bitcoin exchanges such as Bitcoin ATMs, or through peer-to-peer (P2P) exchanges.

Where to store Bitcoin

When it comes to storing Bitcoin, there are several options available, each with its own advantages and disadvantages. Here is a detailed guide to help you navigate the various methods for storing your Bitcoin:

Bitcoin Wallets:

Bitcoin wallets are digital wallets that allow you to send, receive, and store Bitcoin. They are similar to physical wallets in that they save the cryptographic information needed to access Bitcoin addresses and facilitate transactions. Some Bitcoin wallets also support other cryptocurrencies. When choosing a Bitcoin wallet, it is important to consider factors such as security, convenience, and accessibility.

Types of Bitcoin Wallets:

• Mobile Crypto Wallets: These are essential tools for those who actively use Bitcoin for daily transactions. Mobile crypto wallets are apps on smartphones that store private keys and enable users to pay, trade, and store crypto securely. Some apps use near-field communication (NFC) technology, allowing users to tap their phones against terminals without providing any additional information. While mobile wallets are convenient, they are susceptible to malware and hacking. It is recommended to enable two-factor authentication (2FA) for added security.
• Web Wallets (Exchange Wallets): Web wallets store your private keys on a server controlled by a third party and are constantly online. They offer features like linking to mobile and desktop wallets and replicating addresses across multiple devices. However, web wallets come with security risks as the organisations running the websites can access your private keys and gain control of your funds. Additionally, exchanges are frequent targets for hackers, and there have been instances of exchanges shutting down and misappropriating user funds.
• Desktop Wallets: Desktop wallets are downloaded and installed on computers, storing private keys on hard drives or solid-state drives (SSDs). They are more secure than online and mobile wallets as they don't rely on third parties for data storage. However, they are still connected to the internet, making them inherently less secure. Desktop wallets are suitable for users who trade small amounts of Bitcoin from their computers.
• Hardware Wallets: Hardware wallets are physical devices that store private keys securely offline. They are considered one of the most secure ways to store Bitcoin. Unlike paper-based wallets, hardware wallets can be used interactively and are immune to computer viruses. Most hardware wallets have screens that add an extra layer of security by verifying and displaying wallet details. It is recommended to purchase hardware wallets directly from the manufacturer to ensure authenticity and avoid fake products.
• Paper Wallets: Paper wallets are physical documents that contain a public address for receiving Bitcoin and a private key for spending or transferring Bitcoin. They are highly secure against hacking attempts as the keys are stored offline. However, precautions must be taken during the creation of a paper wallet to ensure privacy and avoid the risk of spyware. It is also important to protect the paper from water damage, wear and tear, and theft.

Other Storage Options:

In addition to Bitcoin wallets, there are alternative ways to store your Bitcoin:

• USB Drive Wallets: USB drive wallets, also known as cold storage, are ideal for casual investors who want to protect their Bitcoin from theft. They are offline wallets that keep your private keys secure and inaccessible via the internet.
• MetaMask Wallet: You can store BTC on a MetaMask wallet by downloading the Ethereum Mist Wallet from the MetaMask website using the Open browser.
• Trezor and Ledger Wallets: These are hardware wallets that keep your Bitcoin offline on real USB-like devices. They offer enhanced security against theft or loss, and it is important to keep your recovery seed safe.
• Third-Party Wallets: Wallets like Binance and Coinbase allow third parties to hold your private keys. However, it is crucial to carefully consider the risks associated with giving control of your private keys to another entity.

Security Considerations:

Regardless of the storage method chosen, it is essential to prioritise security to protect your Bitcoin from thieves and hackers. Here are some general security precautions to keep in mind:

• Back up your Bitcoin wallet regularly: In case of computer failure or loss of access keys, regular backups may be the only way to recover your Bitcoin. Ensure you back up all wallet.dat files and store the backups in multiple secure locations, such as USB drives, CDs, or other removable devices.
• Keep your software up to date: Update your wallet software, mobile device operating systems, and computer operating systems regularly to patch security vulnerabilities and enhance the safety of your Bitcoin.
• Enable two-factor authentication (2FA): Add an extra layer of protection to your wallet by enabling 2FA, which requires you to enter a code sent to your email or phone in addition to your login credentials.
• Use a strong password: Protect your backups with strong passwords and encryption to prevent unauthorised access.
• Multi-signature (multi-sig) transactions: Consider using multi-sig transactions, which require approval from multiple people (typically three to five) to reduce the risk of theft by a single controller or server.
• Seed phrases: Seed phrases, also known as recovery phrases or mnemonic phrases, are randomly generated words that act as a master password for your wallet. They allow you to recover your keys if you lose your storage devices or access.
• Physical Bitcoin: Physical Bitcoin coins are preloaded with a fixed amount of BTC and use a tamper-evident seal to prevent the private key from being accessed. However, they are primarily used as collector's items due to the limitations of physical currency.

Risks of investing in Bitcoin

Bitcoin is a digital currency that is issued and transmitted through an open-source digital protocol platform known as the "Bitcoin Network". It is an online, peer-to-peer user network that utilises a digital transaction ledger called the "Blockchain". Each transaction is recorded, timestamped, and publicly displayed in a "block" within the publicly available Blockchain, creating a verifiable transaction history of all existing bitcoins.

While Bitcoin and other cryptocurrencies have gained popularity in recent years, there are several risks associated with investing in them. Here are some of the key risks that anyone considering investing in Bitcoin should be aware of:

Volatile and Fluctuating Market

The price of Bitcoin is highly volatile and constantly fluctuating. Its value is unpredictable and can change drastically in a short period, making it difficult for investors to secure gains or predict returns on their investments. Small investments made over time are generally recommended as a safer strategy when dealing with Bitcoin.

Cyber-Security Risks and Hacking

Bitcoin is a technology-based investment, which makes it vulnerable to cyberattacks and hacking. If an investor loses their private key or it is stolen, there is often no way to retrieve their bitcoins. Additionally, exchanges and mining losses are common targets for hackers, and many buyers lose their investments in these attacks. The lack of central authority backing Bitcoin also means that there is no standard practice for recovering missing funds in the event of a hack.

Fraud and Scams

The Bitcoin market is prone to fraud, with fake exchanges and scams that dupe unsuspecting investors out of their bitcoins. The lack of regulation in the Bitcoin market further exacerbates this risk, as there are limited security measures in place to protect investors.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations, as it is a relatively new concept for governments and financial authorities. The lack of taxation and clear legal standing can be enticing for investors, but it also creates uncertainty and the potential for future restrictions or even bans. The regulatory landscape is complex and inconsistent across different jurisdictions, making it challenging for investors to navigate.

Technology Reliance and Digital Security

As a digital currency, Bitcoin is entirely reliant on technology. Without the underlying technology, Bitcoin has no value, and investors are left vulnerable. The digital nature of Bitcoin also exposes investors to various cyber threats and online fraud. Despite ongoing improvements in security measures and the emergence of secure wallets, the legal risks associated with owning Bitcoin may never be fully eliminated.

Loss of Confidence in Digital Currencies

Bitcoin and other cryptocurrencies are part of a new and rapidly evolving industry. Their value is determined solely by market participants' perception of their worth. A loss of confidence in digital currencies could lead to a sudden collapse in trading activities and a sharp drop in their value.

Bitcoin as an alternative currency

Bitcoin is a cryptocurrency, a virtual or digital currency that takes the form of "tokens" or "coins". It was created in the aftermath of the 2008 financial crisis and was intended to provide an alternative to fiat money and become a universally accepted medium of exchange directly between two involved parties.

Bitcoin is a distributed and/or decentralised digital currency. It can be transacted without any outside agents and has no legal entity responsible for its activities, falling outside traditional regulation. It is intended to be free from government manipulation and control.

Bitcoin has grown in popularity since its creation, with its market capitalisation, user base, and popularity continuing to lead the pack of cryptocurrencies. However, its price has always been volatile, and there is no clear explanation for its current rally.

Some of the factors that have contributed to the rise in Bitcoin prices include increased acceptance during the pandemic and decisions made by large players like payments firm PayPal, and Indian lenders like State Bank of India, ICICI Bank, HDFC Bank and Yes Bank.

Traditional investment experts are wary of Bitcoin as an investment due to its high volatility and the lack of underlying assets or fundamentals driving its price. Before investors can consider Bitcoin as a legitimate asset, several things need to fall into place, including regulation to reduce volatility and ease acceptability and monetisation.

Frequently asked questions