The Average Person's Guide To Bitcoin Investing

Bitcoin and other cryptocurrencies have a certain allure for investors, with their dramatic rises and falls. The average person can invest in Bitcoin through traditional payment apps such as PayPal and Venmo, investing apps such as Robinhood and Webull, crypto exchanges such as Coinbase, and traditional brokerages such as Interactive Brokers. However, it is important to note that cryptocurrencies are risky and volatile.

How to buy Bitcoin

Bitcoin is a cryptocurrency, a form of digital currency secured through cryptography and computer networks. It was the first cryptocurrency, launched in 2009, and remains the most valuable coin in circulation.

If you're interested in buying Bitcoin, there are several ways to do so. Here's a step-by-step guide:

Step 1: Research Bitcoin

Before investing in Bitcoin, it's important to understand the risks and potential benefits. Cryptocurrencies are highly volatile, and their value can fluctuate significantly. Bitcoin is also a relatively new form of currency, and regulations around it are still evolving. Be sure to do your research and understand the risks before investing.

Step 2: Choose a Crypto Exchange or Brokerage

You can buy Bitcoin through a crypto exchange or a traditional brokerage that offers cryptocurrency trading. Popular exchanges include Coinbase, Binance, and Kraken. Some traditional brokerages, like eToro and Robinhood, also offer cryptocurrency trading. Compare the fees, security features, and payment methods of different platforms before choosing one.

Step 3: Fund Your Account

Once you've chosen a platform, you'll need to create an account and fund it. You can typically fund your account using a bank transfer, credit or debit card, or even another cryptocurrency. Be aware that funding methods may vary depending on the platform and your location.

Step 4: Place a Bitcoin Buy Order

After your account is funded, you can place a buy order for Bitcoin. You can specify the amount of Bitcoin you want to buy, or the amount of local currency you want to spend. Review the details of your order, including any fees, before finalizing the transaction.

Step 5: Store Your Bitcoin Securely

Once you've purchased Bitcoin, you'll need to store it securely. You can store it in a wallet offered by the exchange or brokerage, or you can transfer it to a hot or cold wallet that you control. Hot wallets are online or software-based, while cold wallets are offline devices or paper printouts. Be sure to choose a secure wallet and back up your information to protect your investment.

Step 6: Monitor Your Investment

Cryptocurrencies like Bitcoin can be highly volatile, so it's important to monitor your investment. Consider setting price alerts to stay informed about significant changes in Bitcoin's value. Remember that the value of your investment can go up or down, and be prepared for potential losses as well as gains.

Step 7: Sell or Withdraw Your Bitcoin

When you're ready to sell your Bitcoin, you can place a sell order on the platform where it's stored. You can then withdraw the proceeds to your bank account or another cryptocurrency wallet. Be mindful of any taxes or fees associated with selling or withdrawing your Bitcoin.

Remember, investing in Bitcoin and other cryptocurrencies carries significant risks. Always do your own research and consider consulting a financial advisor before investing.

How much Bitcoin to buy

Before deciding how much Bitcoin to buy, it is important to understand the risks involved. Bitcoin is a highly volatile asset, and its value can fluctuate widely. For example, in November 2021, the price of Bitcoin reached an all-time high of $68,789, but by December 2022, it had decreased by 76% to $16,291.

Experts generally agree that cryptocurrencies should not make up more than 5% of an investment portfolio. This is because cryptocurrencies are extremely volatile and can be risky.

When deciding how much Bitcoin to buy, you will need to consider your financial situation and investment goals. You can purchase Bitcoin on various crypto exchange platforms, such as Binance.US or Coinbase, or through payment apps such as PayPal and Venmo. The amount of Bitcoin you can buy will depend on the current market price. For example, if the price of Bitcoin is $40,000, you would need to invest that amount to buy 1 BTC. If you invested $1,000 at this price, you would get about 0.025 BTC.

It is also worth noting that Bitcoin can be divided into smaller units called satoshis. Each satoshi is worth 0.00000001 bitcoin, so you can purchase a small fraction of a Bitcoin if you wish.

Before investing in Bitcoin, it is essential to do your research and understand the risks involved. It is also a good idea to consult with a financial planner to determine how much Bitcoin or other cryptocurrencies fit into your investment strategy.

Risks of investing in Bitcoin

Investing in Bitcoin and other cryptocurrencies is a highly risky and speculative endeavour. Here are some of the key risks that prospective investors should be aware of:

Volatile and Fluctuating Market

The price of Bitcoin is notoriously volatile and subject to rapid and significant fluctuations. For example, on November 6, 2018, one bitcoin was worth $6,461.01, but just over a year later, on December 17, 2017, the price topped $20,000. This unpredictability makes it difficult to determine whether you will generate a positive return on your investment.

Cyber Attacks and Fraud

As a technology-based investment, Bitcoin is vulnerable to cyber attacks and hacking. If your Bitcoin is stolen or lost, there is often no way to retrieve it. Additionally, the lack of security and regulation in the Bitcoin market makes it susceptible to fraud, with fake exchanges duping unsuspecting investors out of their money.

Little or No Regulation

The Bitcoin market currently operates with minimal regulation. The lack of taxation and government intervention can be enticing for investors, but it also creates uncertainty and the potential for future problems if Bitcoin were to become a competitor to government-issued currencies.

Technology Reliance and System Shutdown

As a digital currency, Bitcoin is entirely reliant on technology. Without the underlying technology, Bitcoin has no value. This reliance on technology also exposes Bitcoin owners to cyber threats, online fraud, and the risk of system shutdowns.

Block Withholding and Central Authority

Bitcoin is created through solving mathematical equations called "blocks". However, a mining pool can use computational power to mine a block and withhold it from honest miners, allowing a select few to benefit while others lose out. Additionally, the lack of a central authority backing Bitcoin means that its value is solely determined by investors' perceptions, which can be fickle and unpredictable.

Legal and Tax Implications

The legal standing of Bitcoin and other cryptocurrencies is still evolving, and investors need to be aware of potential tax implications and regulatory changes. In the US, for example, the IRS has defined cryptocurrencies as property, subject to capital gains tax laws. The lack of centralised authority and physical presence can also lead to legal complications and difficulties in recovering funds in the event of fraud or theft.

Bitcoin's correlation with stocks and bonds

Bitcoin, the first cryptocurrency, was introduced in 2009. For much of its early years, Bitcoin existed on the fringes, with only a small group of people recognising its value. As a result, there was little to no correlation between Bitcoin and other markets, including stocks and bonds.

However, as awareness and demand for Bitcoin grew, its correlation with traditional financial markets began to change. This shift became more evident in 2020 and 2021, with data indicating an increasing correlation between Bitcoin and the stock markets. Several factors contribute to this evolving relationship:

• Investor Sentiments and Expectations: Investor sentiment plays a significant role in driving prices. When investors expect prices to increase, they tend to invest more, driving up demand and prices. Bitcoin, being a highly speculative asset, is sensitive to investor expectations.
• Macroeconomic Events: Macroeconomic factors, such as interest rate changes, inflation, and economic downturns, impact both the stock market and Bitcoin prices. For example, the COVID-19 pandemic caused an economic downturn and a corresponding drop in stock market prices and a rise in Bitcoin prices as investors sought alternative investments.
• Regulatory Changes: Regulatory changes, such as the Chinese government's crackdown on cryptocurrency mining in 2021, can impact Bitcoin prices. The inflow of institutional funds into crypto and the growing participation of a new generation of digital-savvy investors who straddle the crypto and stock markets also contribute to the correlation.
• Halving Events: Bitcoin's halving events, which occur roughly every four years, influence its price. As the reward for mining new coins is reduced, the laws of supply and demand come into play, potentially affecting investor behaviour and price movements.
• Correlation with Gold: Bitcoin has been compared to gold, a traditional hedging instrument during stock market volatility. However, some analysts argue that Bitcoin behaves more like "digital copper," a "risk-on" asset, while gold is a "risk-off" hedge.

While Bitcoin's correlation with stocks and bonds is not absolute, it is clear that the cryptocurrency is becoming increasingly intertwined with traditional financial markets. This evolving relationship has implications for investors, who must now consider the potential impact of stock and bond market movements on Bitcoin prices when making investment decisions.

How to pay taxes on Bitcoin

Bitcoin and other cryptocurrencies are considered property by the IRS, and are therefore subject to tax. Here is a step-by-step guide on how to pay taxes on your Bitcoin investments:

• Keep Records: It is important to keep diligent records of your cryptocurrency transactions, including the price at which you buy and sell Bitcoin. This will help you calculate your capital gains or losses accurately.
• Calculate Capital Gains or Losses: When you spend or sell Bitcoin, you will need to calculate whether you have made a capital gain or loss. The equation for this is: Fair Market Value - Cost Basis = Capital Gain/Loss. The fair market value is the value of the goods or services you purchased with Bitcoin, and the cost basis is the price at which you originally acquired the Bitcoin.
• Report Capital Gains: If you have made a capital gain from selling or spending Bitcoin, you will need to report this on your tax return. You can use Form 8949 to report this, and include it with your tax return for the year.
• Report Capital Losses: If you have made a capital loss, you can write this off to save money on your crypto taxes. Capital losses can be used to offset capital gains, and any losses that are not used to offset gains can be deducted from other kinds of income (up to a certain limit).
• Pay Taxes on Income: If you receive Bitcoin as income, for example, if you are paid in Bitcoin or if you are a Bitcoin miner, you will need to report this as income on your taxes. Convert the Bitcoin value to U.S. dollars as of the date each payment is made and keep careful records.
• Pay Taxes on Goods and Services: If you use Bitcoin to pay for goods or services, this is considered a taxable disposal. You will need to pay taxes on the appreciation of the Bitcoin from the price at which you bought it to the price at which you spent it.

Frequently asked questions