The Ultimate Guide To Investing Money In Bitcoin

Bitcoin is a well-known cryptocurrency that offers an alternative form of money. It is a decentralised digital currency that operates without a central bank or single administrator, making it a peer-to-peer electronic currency system.

Investing in Bitcoin can be done in several ways, including through cryptocurrency exchanges, investment funds, and self-custody. Each method has its own advantages and disadvantages, and it is important to carefully consider your risk tolerance, investment strategy, and financial goals before investing.

- Cryptocurrency Exchanges: These are online platforms that allow users to buy and sell Bitcoin and other cryptocurrencies. They provide a convenient way for investors to purchase and store Bitcoin, and they offer a range of trading features and tools. Examples include Coinbase, Robinhood, and Binance.

- Bitcoin Investment Funds: These funds are managed by professionals who invest in Bitcoin on behalf of their clients, aiming to generate returns that outperform the market. They can be Exchange-Traded Funds (ETFs), which are traded on exchanges like stocks, or Trusts and Mutual Funds, which hold Bitcoin as their underlying asset.

- Self-Custody: This option gives you complete control over your Bitcoin and other digital currencies, as you are your own bank. It requires a certain level of technical knowledge and responsibility, as there are risks involved in managing your own private keys. Hardware wallets are recommended for maximum security.

Choosing a crypto-trading service or venue

The first step to investing in Bitcoin is to choose a crypto-trading service or venue. There are several options available, including cryptocurrency exchanges, traditional brokers, money transfer apps, Bitcoin ATMs, and Bitcoin exchange-traded funds (ETFs). Here are some factors to consider when selecting a crypto-trading service or venue:

• Reputation and security: It is important to choose a reputable and secure platform that has strong security measures in place to protect your investments. Look for platforms that have been in the industry for a while and have a good track record.
• Fees and consumer protections: Different platforms charge different fees, so it is essential to compare the fees and consumer protections offered by each platform before making a decision.
• Cryptocurrency options: Consider the range of cryptocurrencies offered by the platform. Some platforms offer dozens of options, while others focus primarily on Bitcoin. Choose a platform that aligns with your investment goals and interests.
• Ease of use and features: Look for a platform with a user-friendly interface and a range of features that meet your needs, such as two-factor authentication and a variety of order types.
• Regulatory compliance: Ensure that the platform complies with regulatory requirements and has the necessary licenses and registrations. This can provide an extra layer of protection for your investments.
• Cryptocurrency exchanges: These are specialised platforms that allow you to buy, sell, and trade cryptocurrencies. Examples include Coinbase, Binance, Kraken, and Gemini. Cryptocurrency exchanges usually offer a wide range of features and cryptocurrencies to choose from.
• Traditional brokers: Some traditional brokers, such as Robinhood, Webull, TradeStation, and Fidelity, now offer crypto trading options. This can be a good option if you already have an account with one of these brokers and want to add crypto to your portfolio.
• Money transfer apps: Cash transfer services like PayPal, Venmo, and Cash App also allow you to purchase, store, send, and sell Bitcoin directly through their apps. This option may be convenient if you are already familiar with these interfaces.
• Bitcoin ATMs: These work like regular ATMs and allow you to buy and sell Bitcoin with cash. However, it is important to consider the fees and have a plan for where to send the Bitcoin after purchasing.
• Bitcoin ETFs: A Bitcoin ETF, or exchange-traded fund, tracks the price of Bitcoin and trades on major exchanges. This option became available in 2024 and allows investors to gain exposure to Bitcoin through traditional brokerage accounts.

When choosing a crypto-trading service or venue, it is important to do your research and consider your investment goals, risk tolerance, and level of comfort with different platforms. Each option has its own advantages and disadvantages, so it is essential to understand the pros and cons before making a decision.

Connecting your exchange to a payment option

At most exchanges, you can connect your bank account directly or link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, the combination of cryptocurrency price volatility and credit card interest charges could inflate the overall cost of purchasing a token. Bitcoin is legal in the US, but some banks may question or even stop deposits to crypto-related sites or exchanges.

Fees vary for deposits via a bank account, debit, or credit card, and exchanges also charge fees per transaction. It is important to note that while you can use a credit card to buy Bitcoin, it is not recommended to take on high-interest debt to invest in a risky asset.

Placing an order

Once you've chosen a cryptocurrency exchange, you can place an order for Bitcoin. The amount of Bitcoin you can buy will depend on the exchange and your budget. 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.

When you think the moment is right, click the buy button to enter an order. The exchange will turn your dollars into Bitcoin, stored in the same cryptocurrency account, similar to holding stocks in a brokerage account. Once your trade executes, you are officially a Bitcoin owner.

If you are using a brokerage account, you can enter the amount of Bitcoin (BTC) in your exchange's trading tool. You will need enough of your local currency for the transaction to go through once you click the button to submit.

Bitcoin transactions occur instantly on some exchanges, while others may process a transaction on the Bitcoin blockchain that takes some time to complete. Standard Bitcoin transactions require four confirmations and can take about 40 minutes to complete, according to the exchange Kraken. However, you can choose to pay higher transaction fees for faster processing times with some exchanges.

Tips for Placing an Order

• Do your research: Before placing an order, be sure to research the exchange you are using, including its fees and features.
• Consider the timing: The price of Bitcoin can be volatile, so consider the timing of your order. Keep in mind that it's nearly impossible to find the "right time" to buy or sell.
• Start small: If you're new to Bitcoin investing, consider starting with a small amount to get a feel for how it works.
• Understand the risks: Bitcoin is a high-risk and volatile investment. Carefully consider your risk tolerance and investment strategy before placing an order.
• Diversify your portfolio: Bitcoin and other cryptocurrencies should be a small part of a diversified portfolio that includes low- and medium-risk investments.

Safe storage

Once you've bought your Bitcoin, you'll need to store it in a digital wallet. There are two main types of digital wallets: hot wallets and cold wallets.

Hot wallets are connected to the internet and are typically in the form of apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices. While hot wallets are convenient for small amounts of cryptocurrency or cryptocurrency that is actively trading, they are vulnerable to hacking. To protect your Bitcoin, it's recommended that you use strong passwords, two-factor authentication, and safe internet browsing practices.

Cold wallets, on the other hand, are offline wallets that are not connected to the internet. They are considered to be more secure than hot wallets since they are less vulnerable to hacking. Cold wallets can be in the form of hardware wallets or paper wallets. Hardware wallets are typically USB-drive devices that store your private keys securely offline. Paper wallets, on the other hand, are wallets generated at certain websites that produce both public and private keys printed on paper. These paper wallets can then be laminated and stored in safe deposit boxes or safes.

When choosing a wallet, it's important to consider the level of security you need and your comfort with different types of technology. Additionally, always use strong passwords and two-factor authentication when creating accounts for your digital wallets and currency exchanges.

Understanding the risks

Bitcoin is a relatively new and risky asset. While it is possible that Bitcoin could double, triple, or even 10x in value over a short period of time, it could also drop to zero. It is important to be aware of the risks before investing in Bitcoin.

One of the biggest risks of investing in Bitcoin is its volatile and fluctuating market. The price of Bitcoin is constantly changing and can drop or increase in value very quickly, sometimes with little notice. For example, in 2018, the price of Bitcoin dropped from $20,000 to $14,626 within days. With such an unpredictable market, there is no guarantee of getting a return on your investment. To avoid massive losses, it is recommended to make small investments and keep a vigilant eye on the market.

Another risk to consider is the potential for hacks and cyberattacks. Bitcoin is susceptible to certain forms of hacking, and if someone gains access to your Bitcoin wallet address and password (private key), they can take your Bitcoin, and you may not have any way to recoup your losses. Additionally, cryptocurrency exchanges are often targeted by hackers, and there is no way to retrieve your lost or stolen Bitcoins.

Fraud is also prevalent in the Bitcoin market. With the rise in popularity of Bitcoin, some exchanges can be fake, and unsuspecting investors can be duped out of their Bitcoins in fraudulent exchanges. This lack of security creates a big risk for investors.

The lack of regulation in the Bitcoin market is another concern. Currently, the Bitcoin market operates without any major regulations, and the government doesn't have a clear stance on cryptocurrency. The lack of taxation could also lead to problems if Bitcoin poses competition for government currency. As a result, there is no telling what the state of the Bitcoin market could be in a few years.

Investing in Bitcoin also carries the risk of block withholding. New Bitcoins are created by solving mathematical equations called "blocks," but a mining pool can use computational power to mine a block and hide it from honest miners. This allows a select few to reap the benefits while others are left with nothing.

Finally, it is important to consider the risk of Bitcoin becoming obsolete or illegal. As a relatively new technology, there is no guarantee that Bitcoin will develop into something solid and widely accepted. It is also susceptible to government actions and could be made illegal or severely limited, as recently happened in China.

Frequently asked questions