The Ultimate Guide To Investing In Bitcoins

Bitcoin has become an increasingly popular investment option in recent years, with its value surging by 11,900% between May 2016 and May 2024. However, investing in Bitcoin is not without its risks. Before investing, it is important to understand the process and the potential benefits and drawbacks. This article will outline the steps to investing in Bitcoin and provide an overview of the key considerations for potential investors.

Choosing a crypto-trading service or venue

There are several factors to consider when choosing a crypto-trading service or venue. Here are some essential tips to help you make an informed decision:

• Security and Regulation: The security of your funds is paramount. Opt for crypto exchanges that implement robust security measures such as two-factor authentication, cold storage wallets, and encryption protocols. Ensure the exchange complies with relevant regulatory standards to protect yourself from scams, legal issues, and hefty fines.
• Reputation and Track Record: Research the exchange's reputation and history. Look for user reviews and feedback, and check for any past security breaches. Choose an exchange with a solid reputation and a proven track record of reliable service.
• Supported Crypto-assets: Different exchanges offer different cryptocurrencies. Ensure the exchange you select supports the crypto-assets you want to trade or invest in. Popular exchanges usually offer a wide range of crypto-assets, including Bitcoin, Ethereum, and major altcoins. Highly regulated crypto exchanges may have a smaller selection due to stringent listing methodologies.
• Liquidity: Liquidity refers to how easily a crypto-asset can be bought or sold without significantly affecting its price. Higher liquidity ensures smoother transactions and reduces the risk of slippage. Choose an exchange with good liquidity for prompt order execution at fair prices.
• User Interface and Experience: A user-friendly interface can be a game-changer, especially for beginners. Look for exchanges with a clean, intuitive interface suitable for your experience level. Additionally, check if the exchange offers a mobile app for trading on the go.
• Fees: Exchanges charge fees for deposits, withdrawals, and trading activities. Compare fee structures and be wary of hidden or excessive charges, as they can eat into your profits. Typically, exchanges have different fee tiers based on trading volume.
• Customer Support: Prompt and reliable customer support is crucial when you encounter issues or have queries. Ensure the exchange provides multiple support channels, such as live chat, email, or phone, for quick assistance.
• Geographical Restrictions: Some crypto exchanges have geographical restrictions. Make sure the exchange operates in your country or region and offers localized language support and compliance with local regulations.
• Trading Tools and Features: Advanced traders often require access to a range of trading tools and features, such as charting tools, order types, stop-loss options, and margin trading. Ensure the exchange provides the necessary tools to facilitate your trading strategy.
• Transparency and Reporting: Transparency is vital in the crypto space. Look for exchanges that provide regular reports on trading volume and audits. Transparent exchanges build trust and enable you to make informed investment decisions.

Connecting your exchange to a payment option

After you've created an account on your crypto exchange of choice, the next step is to link your account to a payment source, such as a debit card or bank account. Each exchange has different fees and fund settlement times depending on how you choose to fund your account, so it's important to choose the best payment option for your needs.

At most exchanges, you can connect your bank account directly or you can link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges. Bitcoin is legal in the U.S., 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's important to note that not every crypto exchange allows users to purchase cryptocurrencies using fiat currency (or vice versa), so if you are looking to buy bitcoin with fiat, be sure to select an exchange that provides this offering.

When deciding which exchange to use, it's important to choose one that is licensed to operate within your local jurisdiction. You should also consider the exchange's user features (such as minimum and maximum deposit and withdrawal limits, fee structure, and fund settlement times) and track record of security.

Placing an order

There are several ways to place an order for Bitcoin. Here are some of the most common methods:

Cryptocurrency Exchanges:

You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, Crypto.com, Binance, Bitstamp, and Uphold. These platforms offer a variety of cryptocurrencies and payment methods. However, it's important to compare the fees and consumer protections offered by each exchange before choosing one.

Traditional Stockbrokers:

Some traditional brokers, like Robinhood, Webull, TradeStation, and Fidelity, offer their customers the ability to buy and sell Bitcoin. These brokers typically charge lower fees and may be more suitable for those already familiar with stock trading.

Peer-to-Peer Money Transfer Apps:

Cash transfer services like PayPal, Venmo, or Cash App allow users to purchase, store, send, and sell Bitcoin directly through their apps. This option is convenient for those who are already comfortable using these platforms.

Bitcoin ATMs:

Bitcoin ATMs function similarly to traditional ATMs. You can insert cash into the machine, and it will allow you to buy Bitcoin, which you can then transfer to your online wallet. Bitcoin ATMs are often placed in locations such as convenience stores, and it's important to consider the associated fees before making a transaction.

Bitcoin Exchange-Traded Funds (ETFs):

Bitcoin ETFs allow investors to invest in Bitcoin without actually owning the coins. These ETFs track the price of Bitcoin and trade over major exchanges. This option became available in 2024 and provides a more regulated way to gain exposure to Bitcoin.

When placing an order, it's important to consider the amount of Bitcoin you want to purchase, the payment method you will use, and the security of your transactions. Additionally, always review the fees associated with each platform or service to make an informed decision.

Safe storage

Cold Storage

Cold storage refers to storing your Bitcoins offline, without the private keys ever being online. This method protects against theft by hackers and malware. It is considered a necessary security precaution, especially when dealing with large amounts of Bitcoin. You can use a special-purpose hardware wallet or a general-purpose computing hardware solution for cold storage.

• Set up two computers: One online computer with an internet connection and one offline computer without an internet connection. The offline computer should be a secure, air-gapped machine with Bitcoin wallet software installed.
• Generate a wallet on the offline computer: Use the installed software to generate a wallet and write down its seed phrase securely.
• Transfer the public key to the online computer: Obtain the master public key of the generated wallet and transfer it to the online computer.
• Create a watch-only wallet: Use the public key to create a watch-only wallet on the online computer. This wallet will be used for receiving money and monitoring transactions.
• Generate an unsigned transaction: To spend funds, generate an unsigned transaction on the online computer. This is similar to an unsigned check.
• Transfer and sign the transaction: Transfer the unsigned transaction to the offline computer and use the wallet software to sign it.
• Broadcast the signed transaction: Transfer the signed transaction back to the online computer and broadcast it to the Bitcoin network.

Additional Cold Storage Tips:

• For the offline computer, consider buying an old, used laptop or phone from a reputable manufacturer, wiping it, and installing only an operating system and Bitcoin wallet software from a USB drive.
• Keep the offline and online computers physically separate to reduce the risk of information transmission via side channels like RF, audio, light, or magnetic fields.
• Always double-check destination addresses when signing transactions on the offline computer to prevent malware from swapping them with an attacker's address.
• Use a wallet software that supports watch-only wallets and offline signing.
• When transferring data between offline and online computers, consider using methods like USB flash drives, QR codes, or manual transcription to avoid security risks associated with internet connectivity.

Hot Wallets

Hot wallets are digital wallets provided by trusted exchanges or third-party providers. They are connected to the internet and offer faster transactions but may be more vulnerable to theft. When choosing a hot wallet provider, consider their security measures, fees, and consumer protections.

Hardware Wallets

Hardware wallets, also known as cold wallets, are small, encrypted portable devices that allow you to download and carry your Bitcoin. They are considered highly secure and typically cost less than $100. Examples include Ledger and Trezor.

Best Practices for Safe Storage:

• Use strong passwords and two-factor authentication for your digital wallets and currency exchange accounts.
• Understand the risks: Bitcoin and cryptocurrency investments are generally not insured against exchange failures or theft, unlike traditional stock brokerage accounts.
• Only make financial transactions, including buying or storing Bitcoin, over a secure, private internet connection. Avoid public or unsecured networks.
• Be cautious of scams: Cryptocurrency scams are common, and you may be targeted through emails, fake apps, or messages congratulating you on winning cryptocurrency or non-fungible tokens (NFTs).

Understanding the risks

Bitcoin and other cryptocurrencies are high-risk investments, and it's important to proceed with caution. Here are some of the key risks you should be aware of before investing in Bitcoin:

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing and can be extremely unpredictable. There is no guarantee that you will get a return on your investment, and you could potentially lose money if the market takes a downturn. To minimise this risk, it's recommended to make small investments and keep a vigilant eye on the market.

Cyber Threats and Fraud

As a technology-based currency, Bitcoin is vulnerable to cyberattacks and hacking. There have been reports of buyers losing their investments due to hacking or fraudulent exchanges. Additionally, if you use a wallet to store your Bitcoin, forgetting or misplacing your key could result in the loss of your coins. It's crucial to carefully research and choose a secure and reliable wallet.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations. Governments and tax authorities are still figuring out how to approach cryptocurrency, and the lack of clarity could lead to future problems. For example, the lack of taxation could be an enticing factor, but it could also pose issues if cryptocurrency competes with government currency.

Technology Reliance

Bitcoin is entirely reliant on technology, and any issues or system failures could impact its value. Unlike traditional forms of currency or investment, Bitcoin has no physical collateral. This makes it more vulnerable to cyber threats and online fraud, and a system shutdown could be catastrophic.

Block Withholding

Bitcoin is created through solving mathematical equations called "blocks". However, a practice known as block withholding allows mining pools to hide these blocks from honest miners, essentially benefiting a select few while leaving others with nothing. This could impact the availability of Bitcoin and create an uneven playing field.

Legal and Tax Implications

The legal standing of cryptocurrency is still evolving, and investors need to stay updated on the latest pronouncements from tax authorities. In the US, for example, the IRS has defined cryptocurrencies as property, subjecting investors to capital gains tax laws. Failing to comply with tax requirements can result in significant fines and penalties.

Decentralized Status

The lack of a central authority backing the value of Bitcoin can be both a benefit and a risk. While it frees investors from being beholden to institutions, it could also lead to legal complications and leave investors vulnerable in the event of transaction issues or ownership disputes.

Fraud and Money Laundering

There is a perception that cryptocurrencies facilitate fraud, money laundering, and other financial crimes. While this may not directly impact most investors, it's important to be aware that victims of financial crimes involving cryptocurrency may not have the same legal recourse as traditional fraud victims.

Investor Protections

Unlike traditional stock brokerage accounts, Bitcoin and other cryptocurrency investments are generally not insured or protected against exchange failures or theft. While some exchanges provide private insurance, this typically doesn't cover individual online breaches, such as password theft.

Frequently asked questions