Small Bitcoin Investments: Are They Worthwhile?

Bitcoin is a popular type of cryptocurrency that utilizes a large chain of interconnected computers to store and protect your digital assets. It is a highly volatile asset that's prone to large and fast swings in value, which presents an opportunity for large returns but also poses tremendous risk. You can invest small amounts in bitcoin through crypto exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs, and Bitcoin ETFs. However, it's important to understand the risks and volatility associated with Bitcoin before investing.

Fractional shares

For example, if the price of Bitcoin is $50,000 and you only want to invest $1,000, you can use your money to buy 0.02 Bitcoin. As the price of Bitcoin increases, the value of your proportional share will also increase.

You can purchase fractional shares through major cryptocurrency exchanges or brokerage firms. Some popular options include Coinbase, Robinhood, Binance, Kraken, Gemini, and Bitfinex.

It's important to note that investing in Bitcoin is risky due to its volatile nature, and you should carefully consider your risk tolerance and investment strategy before purchasing any Bitcoin.

Diversifying your portfolio

• Diversify by coins and tokens: You can choose from many types of crypto coins, including payment tokens (e.g. Bitcoin and Ethereum), security tokens, utility tokens, governance tokens, basic attention tokens, gaming tokens, and non-fungible tokens (NFTs).
• Diversify by industry focus: Invest in cryptocurrency projects that focus on different industries, such as healthcare, supply chain, transportation, entertainment, climate change, and real estate.
• Diversify by asset class: Invest in other major asset classes such as stocks, bonds, and real estate. You can buy stocks of companies focused on the crypto sector or with large cryptocurrency holdings. You can also invest in blockchain-based or crypto bonds and real estate tokens.
• Diversify by investment vehicle: You can diversify your crypto holdings across various investment vehicles and account types, including digital wallets, taxable brokerage accounts, cryptocurrency IRAs, and decentralised financial products.
• Diversify by time and location: Be mindful of your timing and location when investing in cryptocurrencies. Take advantage of downward trends to buy new cryptocurrencies and sell when the market is up. Also, consider investing in projects from different regions to balance your portfolio despite shifts caused by external issues.

Choosing a crypto exchange

Crypto exchanges are platforms where people can buy and sell cryptocurrencies like Bitcoin. You can use the exchanges to trade one cryptocurrency for another or to purchase the cryptocurrency using regular fiat currencies like the USD or GBP.

There are hundreds of cryptocurrency exchanges available to traders and investors, so choosing the right one can be challenging. Here are some factors to consider when selecting a crypto exchange:

• Authenticity and security: Research the exchange to ensure it is a legitimate and secure platform. Check the reputation of the platform and the various security protocols they have in place to protect your data and funds.
• Payment methods: Some platforms support deposits by bank transfer, while others use PayPal, credit/debit cards, or cryptocurrency for purchases. Choose a platform that accepts fiat currency if you are just starting and don't have any coins.
• Supported coins and tokens: While most exchanges support Bitcoin and Ethereum, there are thousands of cryptocurrencies. Binance, for example, offers traders exposure to more cryptocurrencies than other platforms.
• Transaction fee structure: Understand the fee structure of the exchange, as fees can vary for different activities. Choose a platform with transparent and competitive fees.
• User interface and experience: An intuitive interface and good user experience make it easier to trade cryptocurrencies. Also, consider the customer service and other customer-related functionalities offered by the exchange.
• Binance: One of the most powerful and largest crypto exchanges, offering access to hundreds of coins and advanced features like staking and derivative trading.
• Coinbase: A widely used exchange, especially in the US, offering insured custodial wallets and advanced trading options.
• Kraken: One of the oldest crypto exchanges, providing access to hundreds of cryptocurrencies and funding options.
• CEX.io: A user-friendly exchange with excellent customer support, offering access to a wide range of cryptos, including Bitcoin, Ether, and Litecoin.
• Crypto.com: Supports more than 250 cryptocurrencies and provides unique perks and rewards for its Visa Card users.
• Gemini: Available in all 50 US states, Gemini offers a simple, intuitive interface and a range of features, including a crypto reward card.
• KuCoin: Headquartered in Seychelles, KuCoin provides access to a wide library of altcoins at low fees, but it is not licensed in the US.

Payment methods

There are several ways to pay for Bitcoin, and the method you choose will depend on your preferences and circumstances. Here are some of the most common payment methods:

• Cryptocurrency exchanges: You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, Crypto.com, and Binance. These exchanges offer a variety of cryptocurrencies and carry different fees and consumer protections, so it is important to research them before choosing one.
• Traditional stockbrokers: A few traditional brokers, such as Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. These brokers typically charge no fees for Bitcoin trades.
• Peer-to-peer money transfer apps: Cash transfer services like PayPal, Venmo, and Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps. This can be convenient if you are already familiar with these interfaces.
• Bitcoin ATMs: These ATMs allow you to buy and sell Bitcoin and are often placed in locations where you would find regular ATMs, such as convenience stores. Be sure to check the fees and have a plan for where to send the Bitcoin once you buy it.
• Bitcoin exchange-traded funds (ETFs): The Securities and Exchange Commission has approved spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This development has made it easier for traditional investors to gain access to Bitcoin.
• Credit cards: Some providers allow you to purchase Bitcoin with a credit card, but it is generally not recommended due to the risk of taking on high-interest debt if the value of Bitcoin drops.
• Debit cards: You can use a debit card to connect your bank account and purchase Bitcoin through exchanges or brokerage firms.
• Bank account: You can also connect your bank account directly to an exchange or brokerage firm to purchase Bitcoin.

It is important to note that each payment method may have different requirements, fees, and risks associated with it. Be sure to research and understand the process before choosing a payment method for investing in Bitcoin.

Storing your crypto

Hot wallets

Hot wallets are software that stores your keys and have connections to the internet. They are how most users access and make transactions in bitcoin. However, they are vulnerable and can be hacked. Examples of hot wallets include Electrum and Mycelium.

Cold wallets

Cold wallets are not connected to the internet; therefore, they hold far less risk of being compromised. They are also called offline wallets or hardware wallets. Cold wallets are considered much more secure than hot wallets. Examples of cold wallets include Ledger Nano X and Trezor Model T.

Multi-signature wallets

A multi-signature wallet is one where multiple private keys are required to move the bitcoins instead of a single key. Such a wallet can be used for requiring agreement among multiple people to spend, eliminating a single point of failure, and can be used as a form of backup. Multi-signature wallets are cheaper than hardware wallets and nearly as convenient.

Custodial wallets

Custodial wallets are where a third party, such as an exchange, holds your bitcoins in trust. They can be hot or cold. The third party stores your private keys for you, sometimes providing insurance on holdings up to a certain amount. However, custodial wallets have been the target of many attacks.

Non-custodial wallets

Non-custodial wallets are those you use to store your keys without anyone else involved. They can also be either hot or cold.

Desktop wallets

A desktop wallet is a program that resides on your computer. It is not the safest storage method.

Mobile wallets

A mobile wallet is a program that is hosted on a mobile device. It is not very secure.

Hardware wallets

A hardware wallet is a device similar to a USB drive. It can be secure, depending on whether it is connected and how it connects to another device.

Web-based wallets

A web-based wallet is hosted by a web service. It is not secure, as you're letting someone else store your keys for you.

Paper wallets

Paper wallets are an obsolete and unsafe method of storing bitcoin. They simply store a single private/public key pair on paper. They are vulnerable to theft, and it is easy for someone to view your private key at a glance.

Other storage options

• USB drives can be used to store your private keys, just like a commercial wallet.
• Write down your private keys on paper and place them in a safe.

Security precautions

• Back up your bitcoin wallet early and often.
• Keep your software up to date.
• Use a multi-signature (multi-sig) wallet, which involves transaction approval from several people.
• Use a seed phrase to recover your keys if you lose your storage devices or your access.
• Only transfer the amount of bitcoin you want to use from cold storage to your hot wallet.
• Use a strong password and two-factor authentication.

Frequently asked questions