The Fundamentals Of Investing In Bitcoin

Bitcoin is a cryptocurrency that has become increasingly popular among investors. It was created by a programmer or group of programmers using the name “Satoshi Nakamoto,” and it is one of the most widely used types of cryptocurrency. It is a virtual currency that is secured by blockchain technology. Bitcoin's blockchain-based, decentralized transaction verification and public ledger system revolutionized the world of digital security.

There are several ways to invest in Bitcoin, both directly and indirectly. You can purchase standalone Bitcoin from an app or website such as Coinbase, Robinhood, or Binance. You can also invest in a company that utilizes Bitcoin technology, such as Greyscale's Bitcoin Investment Trust or Amplify Transformational Data Sharing ETF. Additionally, you can participate in Bitcoin mining, which involves allowing your computer to be used as a node for the public ledger and can result in rewards in the form of Bitcoin.

Before investing in Bitcoin, it is important to understand the risks involved. Bitcoin is a very high-risk and volatile investment, and its value may rise or fall dramatically in a short period. It is not backed by any physical asset or central regulator, and its value is dependent on market demand. As such, it is crucial to carefully consider your risk tolerance, investment strategy, and financial goals before investing in Bitcoin.

Choosing a Bitcoin exchange

• Goals: First, know what you are looking to accomplish. For example, is the goal to simply invest on a longer-term basis, or to trade in and out of positions regularly?
• 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 residing in certain countries.
• Reputation: As the cryptocurrency space is still largely 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, so it is important to conduct research on different exchanges.
• Security: Each exchange has its own chosen security methods. Check to see if the exchange offers two-factor authentication (2FA). Additionally, look to see what type of 2FA is compatible. Google Authenticator, Authy, and Yubikey are three common avenues for 2FA as they arguably offer better security than mobile text-based 2FA.
• Fiat compatibility: At some point, traders and investors will likely require a fiat-compatible exchange, allowing them 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.
• Trading volume: 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. This aspect can be important as it affects how easily users can enter or exit positions. Checking volume can be difficult sometimes, due to exchanges posting fake volume.
• Asset prices: Crypto assets might trade higher or lower on one exchange versus another due to participant location, volume, and other factors. Noting these discrepancies can factor into choosing an exchange, especially when altcoins are concerned.
• Supported coins and tokens: Virtually all crypto exchanges support Bitcoin and Ethereum. However, there are thousands of cryptocurrencies, and some investors want to gain exposure to others aside from BTC and ETH. Thus, you have to know the coins and tokens supported by a crypto exchange before you choose one.
• Transaction 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.
• User interface and user experience: This criterion is very important to your success as a cryptocurrency trader or investor. An exchange with an intuitive interface and good user experience makes it easier to trade the cryptocurrencies available. However, user experience is subjective, and people enjoy various interfaces. Furthermore, ensure to check the customer service and other customer-related functionalities offered by a crypto exchange. The easier to access the platform, the better.

Getting a Bitcoin wallet

Once you've decided to invest in Bitcoin, you'll need to get a Bitcoin wallet to store your cryptocurrency. There are several types of crypto wallets, each with its own pros and cons. Here's a detailed guide to getting a Bitcoin wallet:

Hosted Wallets

Hosted wallets are the most popular and easy-to-set-up type of crypto wallet. When you buy crypto through an app or platform, your cryptocurrency is usually held in a hosted wallet. This is similar to how a bank keeps your money in a checking or savings account. The main benefit of a hosted wallet is that if you forget your password, you won't lose your crypto. However, a drawback is that hosted wallets don't give you access to all the features that cryptocurrencies have to offer. To set up a hosted wallet:

• Choose a platform you trust, considering factors like security, ease of use, and compliance with government and financial regulations.
• Create your account by entering your personal information and choosing a secure password. It is recommended to enable two-factor authentication (2FA) for added security.
• Buy or transfer crypto. Most platforms allow you to buy crypto using a bank account or credit card, or you can transfer crypto you already own to your new wallet.

Non-Custodial Wallets (Self-Custody Wallets)

Non-custodial wallets, also known as self-custody wallets, give you complete control over your crypto. With this type of wallet, you don't rely on a third party to keep your crypto safe. While the wallet provider supplies the software to store your crypto, you are solely responsible for remembering and safeguarding your password or private key. If you lose your private key, there is no way to access your crypto. To set up a non-custodial wallet:

• Download a wallet app. Popular options include Coinbase Wallet.
• Create your account. You typically don't need to share any personal information, not even an email address.
• Write down and securely store your private key, which is usually presented as a random 12-word phrase.
• Transfer crypto to your wallet. You may not be able to buy crypto with traditional currencies like US dollars or euros, so you'll need to transfer crypto from another source.

Hardware Wallets

Hardware wallets are physical devices, similar in size to a thumb drive, that store your private keys offline. They are more complex and costly than software wallets, but they offer enhanced security. Even if your computer is hacked, your crypto remains secure. To set up a hardware wallet:

• Buy the hardware from a reputable brand, such as Ledger or Trezor.
• Install the software provided by the brand. Download it from the official website and follow the instructions to create your wallet.
• Transfer crypto to your wallet. Similar to non-custodial wallets, hardware wallets typically don't allow purchases with traditional currencies.

Choosing the Right Wallet for You

Just as there are many ways to store cash, there are multiple ways to store crypto. You can opt for the simplicity of a hosted wallet, take full control with a non-custodial wallet, add extra security with a hardware wallet, or even use a combination of these options. Consider your needs and preferences when choosing the best Bitcoin wallet for your investment journey.

Connecting your wallet to a bank account

Choose a Crypto Exchange

Firstly, you need to select a crypto exchange that suits your needs. Popular options include Coinbase, Kraken, Gemini, and Binance, each offering various features and cryptocurrencies for trading. It is essential to choose a reputable and well-known exchange that provides a wide selection of currencies.

Create an Account

Once you have chosen your preferred crypto exchange, you will need to create an account. This typically involves providing personal information and verifying your identity, similar to setting up a brokerage account. Some exchanges may require additional information, such as a driver's license or Social Security card.

Connect Your Bank Account

After creating your account, it's time to connect your bank account. Most exchanges allow you to link your bank account directly, providing a seamless way to fund your crypto purchases. Alternatively, you can also choose to link a debit or credit card to your crypto exchange account. However, using a credit card may result in additional interest charges, impacting the overall cost of your cryptocurrency purchases.

Understand the Fees

It is important to note that fees are associated with deposits and transactions when using a bank account or debit/credit card. These fees can vary depending on the exchange and payment method. Be sure to review the fee structure of your chosen exchange before proceeding.

Ensure Safe Practices

When connecting your wallet to a bank account, it is crucial to prioritize safe practices. Always use a secure connection when accessing your crypto exchange account and enable two-factor authentication for added security. Additionally, create a strong and unique password to protect your account. Remember that privacy and security are of utmost importance in the world of Bitcoin and cryptocurrencies.

Be Aware of Bank Policies

It is worth mentioning that some banks may question or even stop deposits to crypto-related sites or exchanges. Therefore, it is advisable to familiarize yourself with your bank's policies regarding cryptocurrency transactions to avoid any unexpected issues.

Placing your Bitcoin order

Once you've chosen a cryptocurrency exchange, you will need to establish an account and verify your identity. Before you can buy any crypto, you will need to fund your exchange account with another currency, such as US dollars.

Different types of orders allow traders to buy or sell a cryptocurrency with a lot of flexibility. A market order will execute immediately at the best available current market price. It is considered the simplest and most basic type of crypto order.

A stop order lets you specify the price at which the order should execute. If it falls to that price, your order will trigger a sell. Stop orders are usually set to minimize losses if the price of an asset drops considerably.

A limit order lets you set a minimum price for the order to execute—it will only execute at this price or higher. Limit orders are only fulfilled if the designated price is reached, and even then, execution is not guaranteed.

A stop-limit order is a combination of a stop order and a limit order. It is not instantly executed and involves two layers of prices: a stop price converts the order to a buy or sell order, and a limit price defines the highest price traders are willing to pay to buy the cryptocurrency or the lowest they are willing to sell for.

After you've placed your order, you will need to store your cryptocurrency in a digital wallet. This can be hosted either by the cryptocurrency exchange or an independent wallet provider.

Managing your Bitcoin investments

• Understanding the Risks and Rewards: Before investing in Bitcoin, it is crucial to evaluate the risks and potential rewards. Bitcoin is known for its high volatility, and its price can fluctuate significantly over short periods. Therefore, it may not be suitable for risk-averse investors. Carefully consider how large price swings could impact your finances and long-term investment strategy.
• Selecting a Reputable Platform: Choose a well-known and reputable cryptocurrency exchange or trading platform, such as Coinbase, Crypto.com, or Kriptomat. These platforms offer user-friendly interfaces, robust security measures, and positive reputations in the crypto community.
• Setting up a Digital Wallet: You need a digital wallet to store, send, and receive Bitcoin. There are two main types of wallets: hot wallets (online wallets provided by exchanges or software providers) and cold wallets (offline hardware devices). Hot wallets are more susceptible to hacking, so selecting an insured and well-regulated provider is essential.
• Diversifying your Investment Strategies: Consider implementing different investment strategies to manage your Bitcoin investments effectively. This can include long-term holding (HODLing), regular buying through dollar-cost averaging (DCA), swing trading, or day trading. Diversifying your strategies can help you manage risk and take advantage of different market opportunities.
• Monitoring Market Trends and Regulatory Changes: Stay updated with the latest market trends, global economic factors, and regulatory changes. The cryptocurrency market is highly responsive to these factors, and being aware of them can help you make informed investment decisions.
• Managing your Investments with Analytics Tools: Utilize comprehensive performance analytics tools provided by platforms like Kriptomat to track your Bitcoin investment's performance over time. These tools provide clear insights that can help you make informed decisions and adapt your strategy as needed.
• Adopting a Long-Term Perspective: While short-term price movements can be tempting for day traders, a long-term investment strategy may be more rewarding for patient investors. Remember that Bitcoin taxes follow long-term capital gains rules, which can impact your overall returns.
• Maintaining Emotional Discipline: Investing in Bitcoin can be an emotional rollercoaster due to its volatility. It's essential to make investment decisions based on research and analysis rather than impulsive reactions to market fluctuations. Keep your emotions in check and stick to your investment plan.
• Regularly Reviewing and Rebalancing your Portfolio: Periodically review your entire investment portfolio to assess the need for rebalancing. This may involve increasing or reducing your crypto exposure based on your investment goals and financial needs. Diversification across different asset classes can help manage risk effectively.
• Security and Password Management: Prioritize the security of your Bitcoin investments by using strong passwords, two-factor authentication, and a secure, private internet connection when conducting transactions. Additionally, ensure you have a backup of your digital wallet passwords and private keys in a safe location.
• Understanding Investor Protections: Unlike traditional stock brokerage accounts, Bitcoin and cryptocurrency investments are not insured by the Securities Investor Protection Corporation. Some exchanges provide private insurance, but it's important to recognize the risks of individual online breaches and platform failures.

Remember, investing in Bitcoin carries substantial risks, and it's crucial to thoroughly research and understand this asset class before committing your capital. Always invest within your risk tolerance and ensure that your investment decisions align with your financial goals and long-term strategy.

Frequently asked questions