A Beginner's Guide To Investing In Bitcoin

Bitcoin is a cryptocurrency that has become increasingly popular among investors in recent years. It was created to solve some of the flaws in the cryptocurrency market, such as the fraudulent duplication of coins. It uses blockchain technology, which disperses a single code over thousands of different computers, making it harder for hackers to access the code.

There are several ways to invest in Bitcoin, including through a company that utilizes Bitcoin technology, by participating in Bitcoin mining, or by purchasing standalone Bitcoin. When investing in Bitcoin, it is important to consider your risk tolerance, diversify your portfolio, and start with small investments.

Choosing a Bitcoin exchange

• Goals: First, know what you are looking to accomplish. For example, do you want to invest on a longer-term basis, or trade in and out of positions regularly? If you want to invest for the long term, you might look to spot exchanges, which are platforms on which you can buy and sell actual digital assets. If you want to trade regularly, you might be interested in derivatives – trading products such as futures and options that are based on the price action of underlying spot assets.
• Regulations and security: Different exchanges comply with different laws and regulations, based on their locations, practices and offerings. Some exchanges have Know Your Customer (KYC) and Anti-Money Laundering (AML) practices, requiring participants to submit personal information. Many crypto exchanges ban customers in certain countries. Check the security measures offered by the exchange, such as two-factor authentication (2FA).
• Reputation: As the cryptocurrency space is a new industry, it is important to be aware of the reputation of each exchange. Many exchanges have been involved in nefarious activities, hacks and exit scams. Conduct research on different exchanges, searching them on Google alongside the term “scam” and evaluating the results.
• Fiat compatibility: At some point, you will likely require a fiat-compatible exchange, allowing you to transfer national currencies (USD, CAD, etc.) into the crypto world for trading use, and out of the crypto world to cash out profits. Some exchanges have different fiat options, compatible with specific banks, and some do not.
• Volume and liquidity: Trading platforms vary based on the number of participants using them at any given time, as well as the amount of each asset being traded. If a trader wants to sell 100 BTC, they will likely be unable to do so on a low-volume exchange as not enough sellers may exist at the current listed market price. Checking volume can be difficult, as exchanges sometimes post fake volume. One method is to look at the order book on different exchanges, taking note of what amounts of each asset sit in the order book and how far the price levels are from one another.
• Fees: Most exchanges charge a small fee for each trade. These fees vary based on the platform, and are usually based on a percentage of each trade. Fees may not be as important to investors as they are to traders. Some exchanges also have withdrawal fees and limits.

Getting a Bitcoin wallet

A Bitcoin wallet is a place where you can securely store your cryptocurrency. There are several types of Bitcoin wallets, each with its own advantages and disadvantages. Here are some of the most common types of Bitcoin wallets:

Hosted Wallets

Hosted wallets are the most popular and easy-to-set-up type of Bitcoin wallet. When you buy Bitcoin using an app like Coinbase, your cryptocurrency is automatically stored in a hosted wallet. This is similar to how a bank keeps your money in a checking or savings account. One of the main benefits of a hosted wallet is that if you forget your password, you won't lose your Bitcoin. However, a drawback is that hosted wallets don't currently provide access to all the features that Bitcoin has to offer.

Non-Custodial Wallets (Self-Custody Wallets)

Non-custodial wallets, also known as self-custody wallets, give you complete control over your Bitcoin. Unlike hosted wallets, non-custodial wallets don't rely on a third party to keep your cryptocurrency safe. While they provide the software to store your Bitcoin, the responsibility of remembering and safeguarding your password or private key falls entirely on you. If you lose your private key, there is no way to access your crypto. Popular options for non-custodial wallets include the Coinbase Wallet.

Hardware Wallets

Hardware wallets are physical devices, about the size of a thumb drive, that store the private keys to your cryptocurrency offline. They are one of the most secure methods to store your Bitcoin, especially if your computer is hacked. However, hardware wallets are more complex and costly than other types of wallets, making them less popular among casual users. Examples of hardware wallets include Ledger and Trezor.

When choosing a Bitcoin wallet, it's important to consider your needs and preferences. If you prioritize convenience and ease of use, a hosted wallet or a non-custodial wallet might be a good choice. On the other hand, if security is your top priority, a hardware wallet could be the best option. Additionally, you may want to consider using multiple types of wallets to take advantage of the unique benefits each offers.

Connecting your wallet to a bank account

Choose a Crypto Exchange

Firstly, you need to select a cryptocurrency exchange that suits your needs. Popular options include Coinbase, Kraken, Gemini, and Binance, which offer a range of cryptocurrencies and follow regulatory requirements. These exchanges allow you to buy, sell, and hold cryptocurrencies. When creating an account, ensure you use two-factor authentication and a strong, unique password.

Connect Your Exchange to Your Bank Account

After setting up your exchange account, you'll need to connect it to your bank account. This usually involves providing personal identification information, such as a driver's license or Social Security card. The process is similar to setting up a typical brokerage account. You can link your bank account directly or use a debit or credit card as an intermediary. However, using a credit card may incur additional processing fees and interest charges.

Understand the Fees

It's important to note that fees vary for deposits and transactions via a bank account, debit card, or credit card. Additionally, exchanges charge fees per transaction, so be sure to review the fee structure of your chosen exchange.

Safe Storage

Once you've purchased Bitcoin, ensure you store it securely. While exchanges offer wallet services, they are not recommended for long-term or large cryptocurrency holdings due to security concerns. Consider using a hot wallet or cold wallet for better security.

• Hot Wallets: Hot wallets are online wallets or apps on your phone, computer, or tablet. They are convenient for small amounts of cryptocurrency or active trading. However, they are more susceptible to theft and require strong security measures, such as robust passwords and two-factor authentication.
• Cold Wallets: Cold wallets are offline wallets, such as hardware wallets or paper wallets, that store your private keys securely. They are less vulnerable to theft since they are not connected to the internet. Cold wallets require technical knowledge to set up but offer a higher level of security for your Bitcoin investments.

By following these steps and staying informed about the latest developments in the cryptocurrency space, you can confidently connect your wallet to your bank account and begin investing in Bitcoin.

Placing your Bitcoin order

Once you've chosen a cryptocurrency exchange, you can place your Bitcoin order. Here are the steps to follow:

Choose the type of order

Different types of orders are available, and each has its advantages and disadvantages. The most common order types are market orders, limit orders, and stop-loss orders.

• A market order is a direct buy or sell order, executed immediately at the best available price. It is the simplest type of order and is suitable when speed is more important than price. However, the execution price may differ from the expected price due to rapid changes in the market.
• A limit order is an instruction to buy or sell Bitcoin at a specific price or better. It gives more control over the price and is only executed when the market value reaches or exceeds the set limit. This type of order helps avoid unexpected costs caused by sudden price changes but may not be executed if the market price does not reach the limit.
• A stop-loss order is designed to limit losses. It is an instruction to sell Bitcoin when the price reaches or falls below a specified stop price. This type of order ensures that Bitcoin is sold before it loses more value. It also offers the advantage of automation, as it can be set up to execute automatically when the stop price is reached. However, the actual selling price can be significantly lower than the set stop price in highly volatile markets.

Place the order

After deciding on the type of order, follow the steps provided by your chosen exchange to place the order. This usually involves selecting the type of order (market, limit, or stop), choosing the amount of Bitcoin you want to buy or sell, and specifying the price (for limit and stop orders).

Store your Bitcoin in a digital wallet

Once you have purchased Bitcoin, you will need to store it in a digital wallet. This can be a wallet provided by the exchange or an independent wallet provider.

Monitor your investment

After purchasing Bitcoin, it is important to monitor your investment and review your portfolio periodically. The cryptocurrency market is highly volatile, and prices can fluctuate significantly. Regularly assessing your portfolio will help you make informed decisions about buying, holding, or selling Bitcoin.

Managing your Bitcoin investments

• Understand the risks and rewards: Before investing in Bitcoin, it is crucial to evaluate the risks involved and its potential role in your investment portfolio. Bitcoin is known for its high volatility, and its price can fluctuate significantly within short periods due to various factors such as technological developments, market sentiment, and global economic events. Therefore, it is important to have a steady hand and be prepared for potential rapid changes in investment value.
• Select a reputable platform: Choose a well-known and trusted cryptocurrency exchange or trading platform, such as Coinbase, Crypto.com, or Kriptomat. These platforms offer user-friendly interfaces, robust security measures, and a good reputation in the crypto community.
• Set up a digital wallet: A digital wallet is essential for storing, sending, and receiving Bitcoin. You can choose between a hot wallet, provided by crypto exchanges or software providers, or a cold wallet, which is an offline physical device. While hot wallets are more susceptible to hacking, cold wallets are easier to lose, so consider your priorities when making a decision.
• Decide on an investment strategy: There are several Bitcoin investment strategies to choose from, depending on your risk tolerance and investment goals. These include long-term holding (HODLing), regular buying through dollar-cost averaging (DCA), swing trading, and day trading. Diversifying your investment strategies can help manage risk and maximise returns.
• Monitor and manage your investments regularly: Keep track of the performance of your Bitcoin holdings and stay updated with the latest market trends and regulatory news. This will enable you to make informed decisions and adapt your investment strategy as needed. Utilise the performance analytics tools provided by platforms like Kriptomat to gain a clear view of your investment's performance over time.
• Consider tax implications: Remember that investing in Bitcoin can have tax consequences. The IRS treats Bitcoin as property, and transactions in Bitcoin are considered taxable events. It is important to understand the tax laws in your jurisdiction and consult with a tax advisor if necessary.
• Invest only what you can afford to lose: Bitcoin is a risky investment, and its value can fluctuate dramatically. Therefore, it is crucial to invest only what you can afford to lose and ensure that your investment aligns with your financial goals and risk tolerance.

Frequently asked questions