Smart Bitcoin Investing: Making Money Strategies

Bitcoin is a highly volatile cryptocurrency, making it a risky investment. However, it can be a profitable one. For example, if you had invested $1,000 in bitcoin five years ago, it would have grown by 1,352% and be worth around $14,524 as of February 14, 2024.

There are several ways to make money with Bitcoin, including trading it, lending it, holding it, or earning it through rewards programs or payments. The returns are not guaranteed, and prices can be extremely volatile.

Bitcoin investors need to keep a close eye on their profits and manage their risk, as the price of Bitcoin can fluctuate significantly.

Bitcoin's volatility

Bitcoin is considered a volatile investment. Its value is based on speculation, with investors betting on its price going up or down. This causes sudden price increases or decreases, leading to volatility. Volatility is a measure of how much the price of a financial asset varies over time.

Bitcoin's daily volatility can be calculated using the following formula: Bitcoin's standard deviation = √(∑(Bitcoin's opening price – Price at N)^2 /N). For a general timeframe volatility calculation, you can use the formula: √timeframe * √Bitcoin's price variance.

Volatility is important because it indicates the level of risk associated with holding an asset. A volatile asset is likely to experience substantial price changes, making it riskier to hold. Additionally, volatility increases the cost of hedging, which is a significant factor in the price of merchant services. If Bitcoin volatility decreases, the cost of converting into and out of Bitcoin will also decrease.

Despite its volatility, Bitcoin has delivered impressive returns for investors. For example, if you had invested $1,000 in Bitcoin five years ago, your investment would have grown by 1,352%, amounting to around $14,524 as of February 14, 2024.

How to invest in Bitcoin

Choose a Crypto-Trading Service or Venue

There are several types of cryptocurrency exchanges, and they offer different features and cryptocurrencies for trading. Some allow users to remain anonymous and are decentralised, not requiring personal information. However, popular exchanges in the U.S. are not decentralised and follow laws that require users to submit identifying documentation. These include Coinbase, Kraken, Gemini, and Binance. When creating an account, use two-factor authentication and a strong password.

Connect Your Exchange to a Payment Option

You will likely need to provide personal identification, and you can connect your bank account directly or link a debit or credit card. Although a credit card is an option, it is not recommended due to the high-interest charges.

Place an Order

Cryptocurrency exchanges have evolved to mimic stockbrokerage features, offering several order types and ways to invest. Almost all crypto exchanges offer market and limit orders, and some also provide stop-loss orders.

Safe Storage

You will need a digital wallet to store your Bitcoin. Online wallets, also known as hot wallets, are apps on internet-connected devices. They are best for small amounts of cryptocurrency or cryptocurrency that is actively trading. Cold wallets, on the other hand, are not connected to the internet and are considered much more secure. These include paper wallets and hardware wallets.

Track Your Finances

Once you have set up your exchange and wallet, you can start to track your finances and make investments.

What to Do with Your Bitcoin

Bitcoin can be spent, traded, or held as an investment. If you are spending Bitcoin, there are a handful of retailers and digital services that accept it as payment. If you are investing, consider what kind of investor you want to be. Day trading is a risky strategy that involves frequent buying and selling, trying to buy Bitcoin low and sell high. Alternatively, you may want to buy and hold for the long term if you believe in the future of Bitcoin as a digital currency.

Understand the Risks

Before investing in Bitcoin, be aware that it can be a risky investment due to its volatility. It is important to carefully research any digital coin before buying it and to only invest an amount you can afford to lose.

Do Your Research

It is important to understand what cryptocurrencies are and how they work before investing. Cryptocurrencies are digital assets that can be bought and sold. When you own a cryptocurrency, you do not have legal ownership of a company; instead, you are buying a digital asset that you hope will rise in value.

Other Ways to Invest in Crypto

There are other ways to gain exposure to the crypto market without buying Bitcoin directly. You can invest in crypto-focused funds, such as exchange-traded funds (ETFs) and investment trusts, or you can invest in companies with a partial or total focus on cryptocurrency, such as mining companies or companies that support cryptocurrency.

Bitcoin wallets

Hot wallets are on a device that is connected to the internet. They are often free to use and offer add-on services such as trading or staking in exchange for fees. However, they may be more vulnerable to hackers. Examples of hot wallets include Crypto.com Defi Wallet, Zengo Wallet, Guarda, Exodus, Coinbase Wallet, Trust Wallet, and MetaMask.

Cold wallets are on a device that is disconnected from the internet. They tend to cost money as you have to buy a piece of hardware to store your crypto. They may be harder for other users to reach but if you lose the device, recovery could be difficult. Examples of cold wallets include Ledger and Trezor.

When choosing a wallet, it is important to consider the number of digital assets supported, the ease of moving crypto offline, and the availability of resources for in-app staking or rewards programs. It is also crucial to prioritize security features and ensure that your private keys are protected.

Bitcoin ATMs

The process for buying Bitcoin from a Bitcoin ATM typically involves the following steps:

• Enter the amount to purchase.
• Provide your Bitcoin wallet address by scanning the QR code of your Bitcoin wallet address using the ATM's camera.
• Pay using cash, credit card, or payment app.
• Receive the Bitcoin in your Bitcoin wallet.

The process for selling Bitcoin from a Bitcoin ATM is similar:

• Enter the amount to sell.
• Send Bitcoin to the provided address by scanning the QR code of the provided address.
• Collect your cash from the ATM.

There are tens of thousands of Bitcoin ATMs worldwide, with the majority located in the United States. The two largest Bitcoin ATM networks are Coinhub and Coinme.

It is important to note that Bitcoin ATMs have been criticised for charging high transaction fees, with some reports claiming that fees can be as high as 20%. Additionally, they are a frequent target for scams, with the FBI noting an increase in scammers directing victims to use Bitcoin ATMs under false pretenses.

Bitcoin's tax implications

Investing in Bitcoin can be lucrative, but it's important to be aware of the tax implications. Here are some key points to consider:

Taxation of Bitcoin

The Internal Revenue Service (IRS) in the US treats Bitcoin and other cryptocurrencies as property, specifically a capital asset, rather than a currency. This means that buying, selling, or trading Bitcoin can trigger capital gains taxes. The tax consequences depend on how you acquired and disposed of the Bitcoin.

Timing of Taxation

If you acquired Bitcoin through mining, payment for goods or services, or purchasing it, and then later sold it, exchanged it for another cryptocurrency, or used it to buy goods or services, you will likely owe taxes on any profits or gains. The timing of taxation depends on how you obtained and disposed of the Bitcoin. For example, if you mined Bitcoin or received it as payment, the value is immediately taxable as income. On the other hand, if you bought Bitcoin and later sold or traded it, you will owe taxes if the value has increased, and you realise a gain.

Tax Rate Determination

The tax rate you pay on Bitcoin gains depends on two factors: the duration you held the Bitcoin before selling or disposing of it, and your total income for the year. If you owned the Bitcoin for one year or less, your gains will be taxed at higher short-term capital gains rates, ranging from 10% to 37%. If you held the Bitcoin for more than a year, your gains will be taxed at lower long-term capital gains rates, ranging from 0% to 20%. Additionally, the highest tax rates apply to individuals with the largest incomes.

Record-Keeping and Reporting

It is essential to maintain careful records of your Bitcoin transactions, including the dates and values when you acquired and disposed of the Bitcoin. The IRS has added a question about crypto activity on tax return forms, and crypto exchanges are required to report certain transaction information to the IRS. You will need to report your crypto gains and losses on Form 8949 and other relevant tax forms.

Deducting Losses

If you incur losses on your Bitcoin investments, you may be able to deduct these losses on your tax return, up to a maximum of $3,000 per year. This can help offset other capital gains and reduce your overall tax liability.

Non-Compliance Consequences

Failure to report and pay taxes on your Bitcoin transactions can result in penalties and interest charges from the IRS. The IRS actively monitors the crypto industry and has the authority to enforce collection through various means, such as liens against property or levies on income and bank accounts. Therefore, it is crucial to comply with tax regulations and consult a tax professional if needed.

Frequently asked questions