A Beginner's Guide To Investing In Hitcoin

Investing in cryptocurrency is a hot topic. With thousands of cryptocurrencies to choose from, it can be daunting for a beginner to know where to start. The most well-known cryptocurrency is Bitcoin, which was created in 2009 and remains the most valuable. Other popular cryptocurrencies include Ethereum, Binance Coin, and Dogecoin.

There are several ways to invest in cryptocurrency, from buying it directly to investing in crypto funds and companies. Crypto exchanges such as Coinbase, Binance, and Kraken allow users to buy and sell cryptocurrencies. Crypto wallets can be used to store and manage cryptocurrencies, and some exchanges provide users with a hot wallet when they open an account.

It's important to remember that investing in cryptocurrency is risky, and it's recommended not to invest more money than you can afford to lose. The prices of cryptocurrencies are highly volatile, and regulatory changes could affect their value in the future.

Choosing a Bitcoin exchange

• Goals and objectives: Before choosing an exchange, it's important to know what you want to achieve. For example, do you want to invest for the long term or trade in and out of positions regularly? If you're an investor, you might look for spot exchanges, which allow you to buy and sell actual digital assets. If you're a trader, you might be interested in derivatives exchanges, which offer trading products such as futures and options 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 in place, requiring participants to submit personal information. Many exchanges also ban customers from certain countries. It's important to research the reputation of each exchange, as the cryptocurrency space is still largely a new industry, and some exchanges have been involved in nefarious activities, hacks, and scams.
• Fiat compatibility: At some point, you'll likely need a fiat-compatible exchange, which allows you to transfer national currencies (USD, CAD, etc.) into and out of the crypto world. Some exchanges have different fiat options and work with specific banks, so check which banks and fiat currencies are supported.
• Leverage trading: Derivatives exchanges often offer leverage trading, which allows traders to borrow funds for trades based on the amount of money they hold on the exchange. This may be important for traders looking to enter short-term positions with larger sizes.
• Trading volume: Trading platforms vary based on the number of participants and the amount of each asset being traded. This is important because it affects how easily users can enter or exit positions. Low-volume exchanges may not have enough sellers or buyers to match your desired trade size and price.
• Asset prices and availability: Crypto asset prices can vary across exchanges due to factors such as participant location, volume, and other factors. Top digital assets like Bitcoin, Ethereum, and Litecoin are widely available, but smaller-cap coins and tokens may not be available on certain exchanges.
• Transaction fees: Most exchanges charge a small fee for each trade, and these fees can vary based on the platform. Some exchanges also have withdrawal fees and limits. It's important to understand the fee structure of an exchange before choosing it.
• User interface and experience: An exchange with an intuitive interface and good user experience can make trading cryptocurrencies much easier. Additionally, consider the customer service and other customer-related functionalities offered by the exchange.

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 Bitcoin wallets, including hosted wallets, self-custody wallets, and hardware wallets.

Hosted Wallets

Hosted wallets are the most popular and easy-to-set-up option. When you buy crypto using an app like Coinbase, your crypto is automatically held in a hosted wallet. It's called hosted because a third party, like a bank, keeps your crypto for you. 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 currently allow access to all crypto features.

Self-Custody Wallets

Self-custody wallets, also known as non-custodial wallets, put you in complete control of your crypto. They don't rely on a third party to keep your crypto safe. While the wallet provider supplies the software, the responsibility of remembering and safeguarding your password or private key falls on you. If you lose your private key, there's no way to access your crypto. Popular options for self-custody wallets include Coinbase Wallet.

Hardware Wallets

Hardware wallets are physical devices, about the size of a thumb drive, that store your private keys offline. They are one of the most secure methods to store large amounts of Bitcoin but are less user-friendly for mobile use. They can be difficult to set up and typically cost over $100 to buy. The two most well-known brands are Ledger and Trezor.

Choosing a Bitcoin Wallet

When choosing a Bitcoin wallet, consider your needs and preferences. If you want something simple and convenient, a hosted wallet might be best. If you want full control over your crypto and access to advanced features, a self-custody wallet is a better option. For added security, especially if you plan to store large amounts of Bitcoin, a hardware wallet is ideal.

Additionally, consider the security, ease of use, and compliance with government and financial regulations of the wallet provider. It's also essential to back up your wallet and enable two-factor authentication for extra security.

Connecting your wallet to a bank account

Step 1: Choose a Cryptocurrency Exchange

Firstly, you need to select a suitable cryptocurrency exchange that suits your needs. Popular options include Coinbase, Kraken, Gemini, and Binance, which offer a range of cryptocurrencies for trading. These platforms often require personal identification and follow regulatory laws, providing a more secure environment for your transactions.

Step 2: Create an Account and Verify Your Identity

Once you've chosen an exchange, you'll need to create an account. This typically involves providing personal information, such as your name, email address, and sometimes even a picture of your driver's license or Social Security card. The verification process helps ensure the security and legitimacy of transactions on the platform.

Step 3: Connect Your Bank Account

After your account is set up, 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. You may also have the option to use a debit or credit card, but be mindful of the additional processing fees and interest charges associated with credit card transactions.

Step 4: Understand Transaction Fees

When connecting your bank account, it's essential to consider the fees involved. Deposits via bank accounts, debit cards, or credit cards may incur varying fees, and exchanges also typically charge fees per transaction. Be sure to review the fee structure of the exchange to make informed decisions.

Step 5: Make Your First Purchase

With your account funded, you can now place your first order for the cryptocurrency of your choice. Different exchanges will offer various order types, such as market orders, limit orders, or stop-loss orders, allowing you to tailor your investment strategy accordingly.

Step 6: Store Your Cryptocurrency in a Digital Wallet

After purchasing your chosen cryptocurrency, you'll need to store it securely in a digital wallet. You can choose between an exchange wallet, which is provided by the exchange, or a personal wallet, which gives you more control over your private keys. Exchange wallets are not recommended for large or long-term holdings due to the risk of hacking.

Important Considerations:

• Security: Always prioritize the security of your funds. Use strong passwords, two-factor authentication, and safe internet browsing practices to protect your wallet and personal information.
• Transaction Fees: Pay close attention to transaction fees, as they can vary widely among currencies and exchanges. These fees can impact your overall investment and returns.
• Volatility: Cryptocurrency prices are highly volatile, and your investments could experience significant gains or losses. Always invest an amount you are comfortable with and be prepared for potential price swings.
• Regulation and Taxes: Stay informed about the legal, regulatory, and tax status of cryptocurrency in your region. The IRS, for example, treats cryptocurrency as property, and transactions may be subject to capital gains taxes.

By following these steps and considerations, you can confidently connect your wallet to a bank account and begin your journey into the world of cryptocurrency investing.

Placing your Bitcoin order

Once you have chosen a cryptocurrency exchange, you will need to establish an account and provide your personal information to verify your identity. Before you can buy any crypto, you will need to fund your exchange account with fiat money.

When you are ready to buy Bitcoin, you will need to decide how much you want to buy. You can choose to invest in one or many cryptocurrencies. Research your options to help you decide.

You can then place a buy order for your chosen cryptocurrency. Follow the steps required by the exchange to submit and complete a buy order for one or more cryptocurrencies.

Different types of orders will be available to you, and each has its advantages and disadvantages. Here are some of the most common order types:

• Market order: This is the simplest type of crypto order. It is an instruction to buy or sell a cryptocurrency at the best available price in the crypto market and provides instant execution. Market orders are perfect for traders who do not wish to wait for a target price. They are guaranteed to be fulfilled but cannot be cancelled because they are filled immediately. They are also susceptible to slippage, which is when an order fills at a price lower than expected.
• Limit order: This is an instruction to buy or sell a cryptocurrency only at a price specified by you. It is best suited for traders who can patiently wait for a price target to be reached. Limit orders give more flexibility with the asset price and amount. They let traders set a minimum price and will only perform at that price or higher. Limit orders are only fulfilled if the designated price is reached, and even then, execution is not guaranteed.
• Stop order: This lets you specify the price at which the order should execute. If it falls to that price, your order will trigger a sell. A stop order is set to buy or sell a cryptocurrency at the market price once it has hit the stop price. In that case, the order becomes a market order and is filled at the next available market price. This order type helps traders protect profits and limit losses.
• Stop-limit order: This is a combination of a stop order and a limit order and is used to minimise risk. It 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 eager to pay in the case of a sale.

After your purchase is complete, the information you need to access your cryptocurrency is held in a digital wallet. That crypto wallet can be hosted either by the cryptocurrency exchange or an independent wallet provider.

Managing your Bitcoin investments

Understanding the Risks and Rewards

The first step to investing in Bitcoin is to evaluate its risks and role in your portfolio. All cryptos, including Bitcoin, carry a substantial risk of loss. Due to its volatility, Bitcoin may not be suitable for risk-averse investors. Consider what large price swings could mean for your current finances and long-term investment strategy.

Choosing a Platform

Once you've weighed the risks, it's time to find a platform that offers crypto trading. Cryptocurrency exchanges like Coinbase, Crypto.com, and Kraken, traditional stockbrokers like Robinhood, Webull, TradeStation, and Fidelity, and robo-advisors may all provide crypto access.

When choosing a platform, consider its minimum investment requirements, security, and liquidity risks. Opt for a reputable platform to mitigate these risks.

Weighing your Storage Options

You'll need a crypto wallet to store your Bitcoin. You have two basic options: hot or cold wallets.

Hot wallets are online wallets provided by crypto exchanges or software providers. While convenient, they are susceptible to hacking. Therefore, selecting an insured, well-regulated provider is essential.

Cold wallets, on the other hand, are encrypted devices that store your crypto passkeys offline, protecting against hackers. However, they are easier to lose, especially if you frequently misplace your keys.

Deciding How Much to Invest

After linking your Bitcoin wallet to your chosen platform, determine how much Bitcoin to buy. While a single token may run into the thousands of dollars, you can buy Bitcoin in fractional shares, investing as much or little as you're comfortable with.

Remember to invest only what you can afford to lose, given the asset's volatility and newness. Some experts recommend limiting your investment to under 5% of your net worth.

Managing your Investments

You can choose to day-trade Bitcoin and attempt to profit from short-term price movements. However, a long-term investment strategy may be more rewarding, especially considering the tax implications of short-term capital gains.

Weigh the benefits of diversification that Bitcoin brings to your portfolio. Remember, investing in cryptocurrencies is risky, so don't invest more than you can afford to lose.

Frequently asked questions