The Ultimate Guide To Investing In Bitcoin

Bitcoin is a cryptocurrency, a form of digital money that uses encryption to secure transactions and control the creation of new units. It has become an increasingly popular investment option, with its value soaring to nearly £30,000 in January 2021. However, it is important to approach investing in Bitcoin with caution. In this article, we will discuss the risks and potential rewards of investing in Bitcoin, as well as some practical steps for getting started. We will also hear from Money Saving Expert Martin Lewis, who has some words of warning for prospective investors.

Understand the risks of investing in Bitcoin

Bitcoin is a very risky investment due to its volatile and fluctuating market. The price of bitcoin is constantly changing, and there is no way 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, it is recommended to keep a vigilant eye on the market and make small investments.

Another risk to consider is the lack of regulation in the bitcoin market. Currently, there are no major regulations governing bitcoin, and the government doesn't have a clear stance on cryptocurrency. While this lack of taxation can make bitcoin an enticing investment opportunity, it also means that there is no guarantee that your investment will be protected or that you will be able to recover your money if something goes wrong.

Additionally, bitcoin is a technology-reliant investment. It is digitally mined, exchanged via smart wallet, and kept secure through various systems. This reliance on technology makes bitcoin vulnerable to cyber threats and online fraud. If you choose to invest in bitcoin, carefully research and select a reliable cryptocurrency wallet to protect your investment as much as possible.

Furthermore, there is a risk of fraud and scams in the bitcoin market. The lack of central authority and the anonymous nature of transactions make it easier for scammers and criminal organizations to take advantage of unsuspecting investors. Be cautious when choosing a bitcoin seller, and avoid companies that you've only seen advertised on social media platforms like Facebook, which is known for hosting scam adverts.

Finally, remember that investing in bitcoin is a form of gambling. While you could make a significant profit, you could also lose everything you invest. Only invest money that you can afford to lose, and be prepared to accept the uncertainty that comes with this type of investment.

Research how to buy Bitcoin

MoneySavingExpert Martin Lewis has some advice on how to buy Bitcoin. Firstly, he recommends that you should not invest in something you do not understand. While you don't need to be an expert in the technical details, you do need a thorough understanding of what you're getting into. You need to understand how it works as an investment, how liquid it is, the level of risk, and what can drive the price up and down.

Lewis also warns against falling for Bitcoin seller scams. He says that Bitcoin isn't the easiest thing to invest in, and that there are many dodgy people looking to take advantage. He recommends that if you're going to buy, you should do your research and go to a legitimate Bitcoin seller.

There are several ways to buy Bitcoin. You can use a cryptocurrency exchange such as Coinbase, Kraken, Gemini, Crypto.com, or Binance. You can also use a traditional stockbroker such as Robinhood, Webull, TradeStation, or Fidelity. Bitcoin ATMs are another option, as well as peer-to-peer money transfer apps such as PayPal, Venmo, or Cash App.

Before buying Bitcoin, you'll need to set up an account with your chosen platform and fund your account. You'll also need to provide some personal identification information, such as a driver's license or Social Security card.

When buying Bitcoin, it's important to consider the fees involved. Different platforms will charge different fees for deposits and transactions. For example, Coinbase charges a minimum investment of $1 or €1. Bitcoin ATMs also charge fairly steep fees, with an average purchase fee of 8.4% and a 5.4% conversion fee for sales.

It's also important to consider the tax implications of buying Bitcoin. In the U.S., Bitcoin is legal, but some banks may question or stop deposits to crypto-related sites or exchanges. Be sure to check out the legal, regulatory, and tax status of purchasing Bitcoin in your country or state.

Finally, when buying Bitcoin, you'll need to think about how you're going to store it. You can use a hot wallet, which is an online wallet connected to the internet, or a cold wallet, which is an offline wallet that is not connected to the internet. Hot wallets are typically offered for free by cryptocurrency exchanges, but many users prefer to use a third-party hot wallet provider for added security. Cold wallets can cost less than $100 and are considered much more secure, but they require technical knowledge to set up.

Learn about the history of Bitcoin's value

Bitcoin's value has fluctuated since its introduction in 2009. In its early days, the cryptocurrency's value was less than $0.10. Bitcoin's first significant price increase occurred in October 2010 when its value jumped from $0.10 to $0.20, and by the end of the year, it had reached $0.30.

Bitcoin's price continued to grow in 2011, surpassing $1,000 and reaching a peak of $29.60 in June. However, this was followed by a sharp recession in the cryptocurrency market, and Bitcoin's price dropped to around $5 by the end of the year.

The year 2012 was relatively uneventful for Bitcoin, with only minor price changes. In contrast, 2013 witnessed strong gains, with Bitcoin starting the year at $13, crossing $100 by April, and $200 by October. By the end of 2013, Bitcoin had crossed $1,000 again and closed the year at $732.

Bitcoin's price slowly climbed through 2016, surpassing $900 by the end of the year. In 2017, Bitcoin's value hovered around $1,000 until mid-May when it broke $2,000 and then skyrocketed to close at $19,188 in December. This surge caught the attention of mainstream investors, governments, economists, and scientists, and other entities began developing competing cryptocurrencies.

Bitcoin's price moved sideways in 2018 and 2019, with occasional bursts of activity. For example, in June 2019, the price surpassed $10,000 but fell to $6,612 by mid-December.

The COVID-19 pandemic and subsequent government policies in 2020 fuelled investors' fears about the global economy and accelerated Bitcoin's rise. It opened the year at $7,161 and closed at $28,993 on December 31, 2020, a 416% increase.

In 2021, Bitcoin's price smashed its 2020 record, surpassing $40,000 by January and reaching new all-time highs of over $60,000 in April. Institutional interest further propelled its price, and Bitcoin peaked at $64,895 on April 14, 2021.

However, by the summer of 2021, prices had dropped by 50%, closing at $30,829 in July. The following months saw bull runs and drawdowns, with prices scraping $52,956 in September but falling to $40,597 by the end of the month.

Bitcoin reached another all-time high of $69,000 in November 2021 before closing at $64,921. In December 2021, uncertainty about inflation and the Omicron COVID-19 variant spooked investors, and Bitcoin fell to a close of $46,211.

Between January and May 2022, Bitcoin's price continued to gradually decline, falling below $30,000 in May for the first time since July 2021. Crypto prices plunged further in June, with Bitcoin dropping below $23,000 and ending 2022 below $20,000.

Fortunes changed for Bitcoin in 2023, which saw a stellar rise in its price. It opened the year at $16,530 and consistently rose throughout the year, ending at $42,258.

In January 2024, the SEC was forced by courts to review its denial of certain Bitcoin-related investment products, leading to a marketwide rebalancing. Bitcoin's price quickly climbed, once again breaching $60,000 in late February and early March. It set a new all-time high of $75,830 on March 14, 2024.

Bitcoin's price history has been characterised by volatility, reflecting investor enthusiasm, demand, and supply. Its value has soared and plunged, creating a significant amount of financial risk.

Find out how to store Bitcoin

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

• Hardware wallets: These are physical devices that store your private keys offline, making them less susceptible to hacking attempts. Examples include Ledger, Trezor, and Coldcard.
• Mobile wallets: These are apps on your smartphone that store your private keys and allow you to pay, trade, and store crypto. While convenient, they are more vulnerable to malware and hacking attempts.
• Web/Exchange wallets: These wallets are hosted by crypto exchanges like Coinbase, Binance, and Kraken. They are convenient but carry a higher risk of being hacked.
• Desktop wallets: These are software programs that you download and install on your computer. They are more secure than web and mobile wallets but still connected to the internet, making them vulnerable to attacks.
• Paper wallets: Paper wallets involve printing your private and public keys on a piece of paper, which is then stored in a safe place. This method is highly secure but carries the risk of physical damage or loss.

When choosing a storage method, consider your needs for security, convenience, and accessibility. If you plan to access your Bitcoin frequently, a hot wallet (like a mobile or web wallet) may be more suitable. On the other hand, if you want to focus on security and store Bitcoin for the long term, a cold wallet (like a hardware or paper wallet) is a better option. Additionally, it's important to enable security features like two-factor authentication and back up your wallet regularly to protect your Bitcoin from loss or theft.

Recognise common Bitcoin scams

Scams are rife in the cryptocurrency world, and fraudsters are incredibly creative when it comes to luring you into a trap. Here are some common Bitcoin scams to watch out for:

• Blackmail and extortion scams: Scammers claim to have embarrassing personal information about you, such as photos or videos, and threaten to make it public unless you pay them in Bitcoin.
• Business opportunity scams: Scammers contact you with promises of helping you get rich, often by guaranteeing huge returns on your investment.
• Fake job listing scams: Fraudsters create fake job listings or send unsolicited job offers related to crypto, such as crypto mining or recruiting investors. They ask for an upfront payment in crypto to get started.
• Giveaway scams: Scammers promise free crypto or prizes if you follow certain steps, such as signing up for a new coin offering or providing personal information.
• Impersonation scams: Scammers pretend to be someone you trust, such as a celebrity, government official, or love interest, to convince you to send them Bitcoin.
• Investment scams: Fraudsters pose as investment managers and promise high returns on your crypto investments. They may set up legitimate-looking websites and use complicated investing jargon to seem real. However, if you try to withdraw your money, you may be blocked or forced to pay high fees.
• Phishing scams: Scammers send official-looking emails pretending to be from a company and asking you to log in to your crypto account, with the aim of stealing your private information.
• Pump and dump schemes: A group of people work together to hype up a particular coin on social media, driving up its price. They then cash out simultaneously, leaving new investors with worthless investments.
• Romance scams: Scammers pretend to be interested in a romantic relationship with you online and gain your trust over time. Eventually, they ask for money or convince you to invest in crypto with them.
• Fake cryptocurrency exchanges: Scammers lure investors with promises of great cryptocurrency exchange opportunities and may even offer additional Bitcoin. However, the exchange is fake, and investors lose their deposits.
• Employment offers and fraudulent employees: Scammers impersonate recruiters or job seekers to gain access to cryptocurrency accounts. They may offer jobs that require an upfront payment in crypto for training or target remote workers by posing as impressive candidates.
• Flash loan attack: Attackers take advantage of the lack of collateral and credit checks in flash loans to manipulate pricing on a decentralised finance platform. They place multiple buy and sell orders to create the impression of high demand, causing the price to increase. The attacker then cancels the orders and profits by buying the asset at a lower price on a different platform.
• AI-enabled scams: With the rise of AI, attackers are using chatbots to engage with users and promote fake tokens. They may also use deepfakes to impersonate celebrities and business professionals, promising high returns on fake endorsement schemes.

To protect yourself from these scams, it is essential to do your research, verify contact information, and never send Bitcoin to someone you don't know or trust. Remember, if it seems too good to be true, it probably is.

Frequently asked questions