Getting Started With Bitcoin: How Much Do You Need?

Bitcoin is a popular type of cryptocurrency that utilizes a large chain of interconnected computers to store and protect your digital assets. Before investing in Bitcoin, it is important to understand the risks and potential rewards. Bitcoin is a very high-risk investment because it is a volatile asset. That means that Bitcoin values may rise or fall dramatically in value over a very short period—even as quickly as a few hours or days.

There is no minimum amount of Bitcoin that needs to be purchased, but it is recommended to invest a minimum of $50. When deciding how much to invest, it is important to consider factors such as risk tolerance, profit tolerance, timing, change of mind, and diversification. It is also crucial to have all your finances in order, including an emergency fund and a manageable level of debt.

There are several ways to invest in Bitcoin, including purchasing it directly from an app or trading on cryptocurrency exchanges, traditional brokers, or financial apps. It is important to research the different platforms and their fees before deciding where to invest.

How to buy Bitcoin

There are several ways to buy Bitcoin, each with its own advantages and disadvantages. Here is a step-by-step guide on how to get started:

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase Bitcoin through a cryptocurrency exchange, such as Gemini, Kraken, Coinbase, or Crypto.com. These exchanges offer a variety of features and cryptocurrencies to choose from. Alternatively, you can use a traditional stockbroker like Robinhood, Webull, TradeStation, or Fidelity. However, the options for buying and selling Bitcoin through traditional brokers are limited.

Step 2: Connect Your Exchange to a Payment Option

Most exchanges will require you to connect a payment method such as a bank account, debit card, or credit card. It is important to note that using a credit card may incur additional processing fees and interest charges. Additionally, some banks may question or block deposits to crypto-related sites.

Step 3: Place an Order

Once you have set up your payment method, you can place an order for Bitcoin. Almost all crypto exchanges offer market and limit orders, and some provide stop-loss orders as well. You can also set up recurring investments to dollar-cost average into your chosen cryptocurrency.

Step 4: Safe Storage

After purchasing Bitcoin, you will need to store it securely. You can use a hot wallet or a cold wallet. Hot wallets are online wallets that are connected to the internet and are typically used for small amounts of cryptocurrency or active trading. Cold wallets, on the other hand, are offline wallets that are considered more secure but require technical knowledge to set up. Examples of cold wallets include paper wallets and hardware wallets.

Step 5: Understand the Risks and Regulations

Before buying Bitcoin, be sure to research the legal, regulatory, and tax status of purchasing cryptocurrency in your country or region. Additionally, keep in mind that Bitcoin is a risky investment, and its value can fluctuate dramatically. It is generally recommended to invest no more than 10% of your portfolio in risky assets like Bitcoin.

Other Ways to Buy Bitcoin:

• Bitcoin ATMs: These act as in-person bitcoin exchanges, allowing you to insert cash and receive Bitcoin transferred to your online wallet.
• Peer-to-peer money transfer apps: Services like PayPal, Venmo, or Cash App allow you to purchase, store, send, and sell Bitcoin directly through their apps.
• Bitcoin exchange-traded funds (ETFs): These ETFs track the price of Bitcoin and trade over major exchanges, making it easier for traditional investors to gain access to Bitcoin.

How much Bitcoin to buy

Bitcoin is the world's first and largest cryptocurrency. It was created in 2009 and has seen meteoric growth since then. In May 2016, 1 BTC was worth about $500. As of August 2024, 1 BTC is worth about $58,000.

Due to its high value, you can buy less than 1 BTC. The minimum order size varies depending on the platform you use. For example, bitFlyer allows you to trade as little as 0.00000001 BTC, while Kraken lets you get started with just $10 worth of Bitcoin.

Experts generally agree that cryptocurrencies shouldn't make up more than 5% of your portfolio. Given its position as the largest cryptocurrency, Bitcoin could easily make up a sizable portion of those holdings.

When deciding how much Bitcoin to buy, it's important to keep in mind that it is a highly volatile asset. Investors who purchased Bitcoin in the bull market of 2021 will have experienced a loss, while those who bought before late 2020 could be looking at decent gains.

How to store Bitcoin

Once you've decided to invest in Bitcoin, you'll need to think about how to store it. There are several options for storing Bitcoin, each with its own pros and cons. Here are some detailed instructions on how to store your Bitcoin safely:

Hot Wallets vs. Cold Wallets

The first thing to know about Bitcoin storage is the difference between hot wallets and cold wallets. Hot wallets are connected to the internet, while cold wallets are offline and not connected to the internet. Hot wallets are typically considered less secure than cold wallets because they are more vulnerable to hacking attempts. However, hot wallets are more convenient for frequent transactions. Examples of hot wallets include online or mobile wallets, which are often apps on your phone or computer. Cold wallets, on the other hand, are typically hardware devices that store your Bitcoin offline.

Types of Hot Wallets

Online Wallets

Online wallets, or hot wallets, are usually apps provided by exchanges where you purchase your Bitcoin. While convenient, these wallets are less secure because they are connected to the internet. It's recommended that you only keep small amounts of Bitcoin in hot wallets for frequent transactions. Examples of hot wallet providers include Coinbase, PayPal, and Robinhood.

Mobile Wallets

Mobile wallets are programs hosted on your mobile device, such as your phone. These are usually self-custodial, meaning you control your private keys. While mobile wallets are great for sending or paying with Bitcoin, they may be less secure than cold wallets and are not recommended for storing large amounts.

Types of Cold Wallets

Hardware Wallets

Hardware wallets are small, encrypted devices that allow you to store your Bitcoin offline. They are considered much more secure than hot wallets. Examples include the Ledger Nano X or Trezor Model T, which are typically USB drives. These wallets can be connected to your device when you need to access your Bitcoin and then disconnected and stored in a safe place when not in use.

Paper Wallets

Paper wallets are one of the original ways to store Bitcoin. They involve printing out your public and private keys, usually as QR codes, and storing them in a safe place. While paper wallets are affordable and secure, they have a high risk of user error or wallet damage.

Security Precautions

Regardless of the type of wallet you choose, there are some general security precautions you should follow:

• Back up your Bitcoin wallet regularly to prevent loss due to computer failure.
• Keep your software and operating systems up to date to patch security vulnerabilities.
• Use a strong password and two-factor authentication to protect your wallet.
• Use a seed phrase or recovery phrase to back up your wallet in case you lose your device or forget your password.
• Physically record and securely store your recovery phrases in a location that only you can access.
• Never share your recovery phrase or private keys with anyone.

In summary, the best way to store your Bitcoin depends on your individual needs. For most people, a combination of hot wallets for frequent transactions and cold wallets for secure storage is a good option. Always prioritize security and back up your wallets to prevent loss or theft.

Risks of investing in Bitcoin

Bitcoin is a risky investment, so it's important to carefully consider your goals and strategy before you decide. Here are some of the key risks of investing in Bitcoin:

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing, and it is challenging to predict whether you will get a return on your investment. For example, on November 6, 2018, one bitcoin was worth $6,461.01, but just days later, on December 24, buyers could not sell their investment for more than $14,626. To avoid massive losses, investors are advised to keep a vigilant eye on the market and make small investments.

Cyberattacks and Fraud

Bitcoin is vulnerable to cyberattacks and hacking due to its technology-dependent nature. There is no way to retrieve lost or stolen bitcoins, and many buyers lose their investments on exchanges and mining losses. Additionally, the lack of security in the Bitcoin market creates a significant risk for investors.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations, as the government doesn't have a clear stance on cryptocurrency. While the lack of taxation makes it enticing, it could also lead to problems if Bitcoin competes with government currency. The future of the Bitcoin market is uncertain, and investors could potentially lose everything they invest.

Technology Reliance

Bitcoin is entirely reliant on technology, and without it, cryptocurrency is worthless. Unlike other investments such as gold or real estate, there is no physical collateral backing up Bitcoin. This makes Bitcoin owners more vulnerable to cyber threats and online fraud.

Block Withholding

Bitcoin is created by solving "blocks," or mathematical equations. However, a mining pool can use computational power to mine a block and hide it from honest miners, allowing a select few to benefit while others lose out. This practice can create a bubble economy, and when the bubble bursts, Bitcoin may become useless, resulting in significant financial losses for investors.

Legal and Tax Implications

The legal standing of cryptocurrency is still evolving, and individual investors must keep themselves informed of the latest developments. In the US, the IRS has defined cryptocurrencies as property, subjecting investors to capital gains tax laws. Additionally, the lack of a centralized authority can create legal and financial risks for cryptocurrency owners.

Other ways to invest in cryptocurrency

Investing in cryptocurrency is risky, so it's important to do your research and not invest more money than you can afford to lose. Here are some ways to invest in cryptocurrency other than just buying Bitcoin directly:

• Invest in cryptocurrency companies: You can invest in companies with a partial or total focus on cryptocurrency, such as cryptocurrency mining companies, mining hardware makers, or companies that support cryptocurrency, like Robinhood Markets Inc. (HOOD) and PayPal Holdings Inc. (PYPL). You can also invest in companies that hold large amounts of cryptocurrency on their balance sheets, like MicroStrategy Inc. (MSTR).
• Invest in cryptocurrency-focused funds: If you don't want to choose individual companies, you can invest in a cryptocurrency-focused fund, such as exchange-traded funds (ETFs), index funds, futures funds, or cryptocurrency investment trusts. The first Bitcoin Spot ETFs were approved in January 2024.
• Invest in a cryptocurrency Roth IRA: You can invest in a cryptocurrency Roth IRA to get the tax advantages of an individual retirement account (IRA) while investing in cryptocurrency. A crypto IRA provider can also offer more secure storage for your cryptocurrency holdings.
• Become a crypto miner or validator: You can mine cryptocurrency or act as a validator in a crypto network. Miners and validators can earn rewards in crypto, which they can hold as investments or exchange for another currency.
• Use a crypto exchange: A crypto exchange allows you to buy and sell cryptocurrency. Examples of popular exchanges in the US include Coinbase, Gemini, Kraken, and Binance. When choosing an exchange, consider factors such as security, fees, trading volume, minimum investment requirements, and the types of cryptocurrency available.
• Use a peer-to-peer money transfer app: Apps like PayPal, Venmo, or Cash App allow users to purchase, store, send, and sell Bitcoin directly within the app.
• Use a crypto wallet: A crypto wallet holds the private keys that allow you to access your crypto by unlocking its digital identity on the blockchain. There are "hot" wallets, which are accessible via the internet and generally more convenient, and "cold" wallets, which are physical storage devices that keep your crypto keys completely offline and are considered more secure.

Frequently asked questions