The Bitcoin Business: A Guide To Investing

Bitcoin is a well-known cryptocurrency that offers an alternative form of money. It is a decentralised system run by many participating computers around the world, known as miners. Bitcoin is highly volatile and susceptible to government actions, making it a risky investment. However, it has attracted many investors with its promise of market-beating returns.

There are a few ways to invest in Bitcoin. The easiest way for most people is through a brokerage account or cryptocurrency exchange account. Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi, among others. It is important to take note of the fees and reputation of the exchange when picking where to buy Bitcoin.

Once you have chosen an exchange, you will need to open an account and verify your identity. After that, you can deposit funds and place your order to buy Bitcoin.

If you acquire a significant amount of Bitcoin, it is recommended to withdraw it from the exchange to your own cold wallet, also known as a hardware wallet. This is considered safer than storing it on an exchange or in a hot wallet (software wallet).

Choosing a crypto exchange

Authenticity and Security:

Conduct thorough research to ensure the exchange is legitimate and secure. Check the platform's reputation and the security protocols they have in place to protect your data and funds. Scam platforms have resulted in significant losses for traders, so verifying the exchange's authenticity is crucial.

Payment Methods:

Different platforms support various payment methods for purchasing cryptocurrencies. Some common options include bank transfers, PayPal, credit and debit cards, or even cryptocurrency for purchases. Choose an exchange that aligns with your preferred payment method. If you're just starting, selecting a platform that accepts fiat currency is advisable, as it allows for a smoother entry into the market.

Supported Coins and Tokens:

While most exchanges support Bitcoin and Ethereum, there are thousands of other cryptocurrencies. If you're interested in investing in coins beyond Bitcoin and Ethereum, ensure the exchange offers a diverse range of cryptocurrencies. Binance, for example, provides access to a vast array of altcoins.

Transaction Fee Structure:

Understanding the fee structure of an exchange is essential. Some platforms offer flat transaction rates, while others have more flexible structures. Be cautious of hidden transaction fees and select an exchange with transparent pricing.

User Interface and Experience:

An intuitive interface and a positive user experience can significantly enhance your trading journey. Look for exchanges that offer a seamless and user-friendly platform. Additionally, consider the customer service and other customer-related functionalities provided by the exchange.

Regulatory Compliance:

Choose an exchange that complies with regulatory requirements, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) rules. This ensures the platform adheres to financial regulations and helps protect users from fraudulent activities.

Advanced Trading Features:

If you're an experienced trader, look for exchanges that offer advanced trading tools and features like margin trading, futures trading, and advanced order types. These features can provide more sophisticated strategies and potentially lower trading fees.

Customer Service:

As a beginner, having access to reliable customer support can be invaluable. Consider exchanges that offer multiple channels of customer service, such as live chat, email, or phone support, to assist you promptly if any issues arise.

• Kraken: One of the oldest and most reputable exchanges, offering a wide range of cryptocurrencies and advanced trading features.
• Coinbase: User-friendly interface, strong security, and a large number of supported cryptocurrencies.
• Gemini: Emphasizes security and compliance, with a range of security protocols in place, including hot wallet insurance.
• Crypto.com: Supports over 250 cryptocurrencies and offers unique perks, such as the Crypto.com Visa Card and rewards for users.
• Binance: Considered one of the most powerful exchanges, offering access to hundreds of coins and advanced features like staking and derivative trading.
• KuCoin: Provides a broad selection of altcoins and competitive trading fees, but it is not licensed in the U.S.

Understanding the risks

Investing in Bitcoin and other cryptocurrencies is risky and highly speculative. The market is extremely volatile, and the price of Bitcoin can fluctuate wildly over a short period. For example, in 2021, the price of Bitcoin fell more than 30% before surging to a new all-time high. This volatility can cut both ways, and there is a chance that Bitcoin's value could drop to zero.

The decentralised and unregulated nature of Bitcoin also presents several risks. The lack of central authority backing the value of Bitcoin means that investors are entirely dependent on other owners and investors ascribing value to the currency. Additionally, the absence of a central regulatory body can lead to legal complications and make it difficult to resolve issues with transactions or ownership.

Bitcoin is also susceptible to government actions and could be made illegal or severely restricted, as was the case in China. The lack of taxation and competition with government currency could also lead to problems for investors in the future.

Another significant risk is the potential for hacking and fraud. Cryptocurrency exchanges are frequently targeted by hackers, and there is usually no way to retrieve lost or stolen Bitcoins. Additionally, buyers and sellers looking to trade Bitcoins online may encounter fake exchanges designed to dupe investors out of their money.

Finally, there is the risk of Bitcoin being a bubble economy. As more people invest, a bubble forms, and when it bursts, Bitcoin's value will plummet, leaving many people holding a worthless asset.

Due to the high level of risk involved, it is generally recommended that investors only invest what they can afford to lose and treat Bitcoin as a relatively small part of their overall investment portfolio.

Payment methods

The easiest way to buy Bitcoin is through a brokerage or cryptocurrency exchange account. Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi, among others. Take note of fees and the reputation of the exchange when picking where to buy Bitcoin.

When creating a cryptocurrency exchange account, use two-factor authentication and a long, unique password that includes a variety of letters, special characters, and numbers.

Depending on the exchange, you may need to provide personal identification information, such as a picture of your driver's license or passport, as well as details about your employer and source of funds.

At most exchanges, you can connect your bank account directly or link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, the volatility of cryptocurrency prices combined with credit card interest charges could inflate the overall cost of purchasing tokens.

Some exchanges also allow you to use payment apps like PayPal. For example, you can buy Bitcoin directly through PayPal or use PayPal to purchase four cryptocurrencies: Bitcoin, Ethereum, Litecoin, and Bitcoin Cash.

Fees vary for deposits via bank account, debit, or credit card, and exchanges also charge fees per transaction.

If you are buying a small amount of Bitcoin, you may want to consider using a Bitcoin ATM. These machines allow you to insert cash and use it to purchase Bitcoin, which is then transferred to online wallets.

Another option is to use a peer-to-peer (P2P) exchange, such as LocalBitcoins, where you can post requests to buy or sell Bitcoin, including information about payment methods and prices.

Storing your bitcoin

There are several ways to store your bitcoin, each with its own pros and cons. Here are some of the most common methods:

• Hardware wallets are physical devices that store your private keys offline, offering a high level of security. Examples include Ledger, Trezor, and Coldcard. They typically have a screen that allows you to verify and manage your wallet details, such as generating a recovery phrase and confirming payment amounts and addresses. While hardware wallets are considered one of the safest options, they can be inconvenient for frequent transactions and may be more expensive, with an average cost of around $100.
• Mobile wallets are applications installed on your smartphone, allowing easy access to your bitcoin for transactions. They are typically self-custodial, giving you full control of your private keys. However, they may be less secure than cold wallets and are not recommended for storing large amounts of bitcoin due to the potential risk of loss or theft.
• Desktop wallets are programs downloaded and installed on your computer, storing your private keys on your hard drive or solid-state drive. They offer more security than online and mobile wallets but are still connected to the internet, making them vulnerable to hacks. Desktop wallets are a good option for those who trade small amounts of bitcoin from their computers.
• Web wallets or exchange wallets store your private keys on a server controlled by a third party. They offer convenience and easy access to your bitcoin but come with security risks. There have been instances of exchanges shutting down or being hacked, resulting in the loss of users' funds.
• Paper wallets are physical documents that contain your public address for receiving bitcoin and your private key for spending or transferring bitcoin. They provide offline storage, making them highly secure against hacking attempts. However, paper wallets are prone to physical damage, and if lost or stolen, your bitcoin could be at risk.

When choosing a storage method, it's important to consider your individual needs and requirements. For example, if you prioritise security and have a large amount of bitcoin, a cold wallet such as a hardware wallet might be the best option. On the other hand, if you frequently transact with bitcoin, a hot wallet like a mobile or web wallet might be more convenient. Additionally, it's crucial to enable two-factor authentication and regularly back up your wallet to ensure the safety of your bitcoin.

Tax implications

The tax implications of investing in Bitcoin depend on the nature and timing of the transaction. In the US, the Internal Revenue Service (IRS) treats Bitcoin and other cryptocurrencies as property, meaning they are taxed similarly to stocks.

Taxable Transactions

The following transactions are considered taxable events:

• Trading or selling Bitcoin for fiat currency
• Trading Bitcoin for another cryptocurrency
• Receiving Bitcoin as payment for goods or services
• Receiving Bitcoin from mining or staking activities
• Receiving Bitcoin from a hard fork or airdrop
• Gifting Bitcoin over the annual gift exclusion amount

Capital Gains Tax

Holding Bitcoin for more than a year before selling generally results in lower capital gains tax rates, ranging from 0-20% depending on total income. Selling Bitcoin within a year incurs higher rates, typically ranging from 10-37%.

Income Tax

Income from Bitcoin mining or staking activities is generally taxed as ordinary income, based on the fair market value of the Bitcoin at the time it was received.

Reporting Requirements

Accurate record-keeping is essential for reporting cryptocurrency transactions to the IRS. Form 8949 is used to report capital gains or losses from the sale or exchange of Bitcoin, while Schedule D is used to report overall capital gains or losses. Additionally, the IRS has added a question about virtual currency transactions on the front page of Form 1040.

Hard forks and airdrops that result in the receipt of new cryptocurrencies are generally taxed as ordinary income. The tax amount is determined by the quantity and fair market value of the coins received.

Tax Benefits of Losses and Donations

Capital losses from Bitcoin can be used to offset capital gains and up to $3,000 of income for the year, with additional losses carried forward to future tax years. Donating Bitcoin is also tax-deductible, similar to cash donations, with limits based on the donor's adjusted gross income.

Frequently asked questions