The Basics Of Bitcoin Investment Explained

Bitcoin is a cryptocurrency, a virtual currency that acts as money and a form of payment outside the control of any one person, group, or entity. It was introduced to the public in 2009 by an anonymous developer or group of developers using the name Satoshi Nakamoto. It has since become the most well-known and largest cryptocurrency in the world.

Bitcoin is a risky investment due to its volatility. It is not backed by any physical asset, like gold or silver, and there is no central regulator to ensure that the value remains stable. Its value is dependent on market demand.

There are several ways to invest in Bitcoin, including through cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs, and Bitcoin exchange-traded funds (ETFs). When investing in Bitcoin, it is important to carefully consider your risk tolerance, investment strategy, and financial goals.

Bitcoin wallets

To buy, sell, trade, or invest in Bitcoin, you need a Bitcoin wallet. A Bitcoin wallet is a digital wallet that allows you to send, receive, and store your Bitcoin. There are several types of Bitcoin wallets, including:

• Mobile wallets: These are apps that can be downloaded on your mobile device, such as the Bitcoin.com App. They are convenient for making transactions and often use QR codes to facilitate seamless transactions. However, mobile wallets are susceptible to malware, spyware, and viruses, and the loss or damage of the device can potentially lead to the loss of funds.
• Desktop wallets: These wallets are designed to be used on a desktop computer and offer more security than mobile wallets. Some desktop wallets support hardware wallets or can operate as full nodes. However, they may not be as convenient for making transactions, especially when it comes to using QR codes.
• Hardware wallets: Hardware wallets are physical devices that store your Bitcoin offline, providing an extra layer of security. They are ideal for storing large amounts of Bitcoin but are less mobile-friendly and not designed for scanning QR codes. Losing the device without proper backup can make it challenging to recover your funds.
• Web wallets: These wallets are hosted on a website and can be accessed from any internet-connected device. They are convenient but generally considered less secure than other types of wallets since they are susceptible to hackers and malware.

When choosing a Bitcoin wallet, it is essential to consider factors such as security, ease of use, compatibility with different operating systems and devices, and the level of control it gives you over your Bitcoin. Additionally, some wallets offer features like two-factor authentication, support for multiple cryptocurrencies, and the ability to connect to hardware wallets.

Cryptocurrency exchanges

When choosing a cryptocurrency exchange, it is important to consider the range of cryptocurrencies offered, fees, consumer protections, and security features. For instance, Coinbase requires a minimum investment of $1 or €1, and offers insurance against security breaches and fraudulent transfers.

To buy Bitcoin on an exchange, you will need to connect your exchange account to a payment option, such as a bank account, debit card, or credit card. It is worth noting that credit card processing can result in extra charges, and some exchanges and banks may question or stop deposits to crypto-related sites.

Once you have set up your account and connected a payment method, you can place an order for Bitcoin. It is important to carefully determine your risk tolerance and review your investment strategy before purchasing any Bitcoin, as it is a highly volatile and risky investment.

Traditional stockbrokers

Fidelity, one of the world's largest brokers, is a trusted financial institution with trillions in client assets under its brokerage, making it an excellent choice for passive investors looking for a reliable crypto custodian for holding Bitcoin long-term. Trading costs for crypto are based on a bid-ask spread of 1% of the execution price, and you can trade as little as $1 worth of crypto in your Fidelity account. Fidelity has also launched its own crypto ETF, the Fidelity Wise Origin Bitcoin Fund (FBTC), which can be traded alongside the underlying crypto asset from within the web and mobile app.

In October 2023, researchers at Fidelity released a report concluding that Bitcoin was "fundamentally different than any other digital asset", and that it is the most "secure, decentralised, sound digital money". However, it is important to note that Bitcoin and other cryptocurrency investments are not protected by insurance from the Securities Investor Protection Corp. (SIPC). While regular brokerages protect against the loss of securities and cash in brokerage accounts containing up to $500,000, cryptocurrency exchanges such as Coinbase have their own crime insurance to protect their infrastructure against hacks, but this does not protect individual customers from password theft.

Before investing in Bitcoin through a traditional stockbroker, it is important to do your research and carefully consider your goals and investment strategy. Bitcoin is a risky investment, and it is generally recommended to invest no more than 10% of your portfolio in risky assets like Bitcoin.

Bitcoin ATMs

The process for buying bitcoin from a Bitcoin ATM is as follows:

• Enter the amount to purchase. Depending on local regulations and the amount being purchased, identity verification may be required.
• Provide your Bitcoin wallet address by using the Bitcoin ATM's camera to scan the QR code of your Bitcoin wallet address, which is displayed in your Bitcoin wallet app.
• Pay using cash, credit card, or payment app.
• Receive the bitcoin in your Bitcoin wallet. This generally takes a few minutes. The Bitcoin ATM will provide a transaction ID that can be used to monitor the status of the purchase.

The process for selling bitcoin from a Bitcoin ATM is as follows:

• Enter the amount to sell. Depending on local regulations and the amount being sold, identity verification may be required.
• Send bitcoin to the provided address by scanning the QR code of the provided address and sending the bitcoin to that address using your Bitcoin wallet app.
• Take your cash. Once the Bitcoin ATM receives the bitcoin, it will dispense your cash. This generally takes a few minutes, and the status of the transaction can be monitored using your Bitcoin wallet app.

There are tens of thousands of Bitcoin ATMs worldwide. As of September 2021, there were more than 24,700 bitcoin ATMs in the US, with some sources claiming 5,000 kiosks across the globe.

Bitcoin exchange-traded funds

An ETF is an investment fund that holds assets and issues securities as shares of the fund, which trade on an exchange. ETFs are traded on stock exchanges, providing investors with diversified exposure to various asset classes and the flexibility to buy or sell shares throughout the trading day at market prices.

Bitcoin futures ETFs are exchange-traded funds that aim to offer exposure to the price movements of Bitcoin. The ETFs use futures contracts to achieve this goal. Fund managers purchase these contracts and bundle them into a fund.

The first concept for a Bitcoin ETF emerged shortly after investors and brokers noticed that Bitcoin prices were trending upward and gaining popularity among investors. This signalled an opportunity to generate returns by trading Bitcoin. As Bitcoin's price rose to tens of thousands of dollars, retail and average investors lost the opportunity to invest directly in Bitcoin. Brokerages, responding to demand for investor access to Bitcoin, began to design Bitcoin exchange-traded funds. Applications with the Securities and Exchange Commission (SEC) for approval started in 2013 with the Winklevoss brothers.

The first official Bitcoin-linked ETF was the ProShares Bitcoin Strategy ETF (BITO), which mainly uses futures contracts. It was approved by the SEC in October 2021 and is listed on the New York Stock Exchange.

In January 2024, the SEC approved 11 Bitcoin spot ETFs, which hold Bitcoin as opposed to futures. These spot ETFs began trading in January 2024.

Bitcoin futures ETFs are designed to allow more people to invest in Bitcoin without the necessary expenses and hassles of buying them directly. They eliminate the need for security procedures and excessive funds while providing a familiar investment type.

Bitcoin ETFs are much better understood across the investment world than cryptocurrencies. So, if you're only interested in becoming involved in digital currency investing, an ETF lets you focus on trading an asset you already understand rather than learning about blockchain, mining, decentralised exchanges, distributed ledgers, key storage, and cryptocurrency.

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