The Ultimate Guide To Investing Money In Bitcoin

Bitcoin is a cryptocurrency, a form of electronic money that uses cryptography to secure and validate transactions. It is the first decentralised digital cryptocurrency, with no physical backing, that can be sent electronically from one user to another anywhere in the world.

If you want to invest in Bitcoin, the easiest way is through a brokerage or cryptocurrency exchange account. Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi. You will need to provide valid identification to meet the exchange's know-your-customer (KYC) requirements.

Once your account is open, you can add funds, usually with an online funds transfer from a connected bank account. Depending on the exchange, you may also be able to use payment apps like PayPal.

When you're ready to buy, click the buy button to enter an order. The exchange will turn your money into Bitcoin, which will be stored in the same cryptocurrency account, similar to holding stocks in a brokerage account.

Choosing a crypto exchange

Crypto exchanges are online platforms that allow users to buy and sell various cryptocurrencies, including Bitcoin. They are the best place for most people to buy Bitcoin.

When choosing a crypto exchange, it is important to consider the following:

• Authenticity and security: Research the exchange to ensure it is legitimate and secure. Check its reputation and the security protocols it has in place.
• Payment methods: Different exchanges support different payment methods, such as bank transfers, PayPal, credit cards, and debit cards. Choose an exchange that supports your preferred payment method.
• Supported coins and tokens: If you want to invest in cryptocurrencies other than Bitcoin, check the coins and tokens supported by the exchange. Some exchanges offer a wider range of cryptocurrencies than others.
• Transaction fees: Understand the fee structure of the exchange, as fees can eat into your investment returns. Choose an exchange with transparent and competitive fees.
• User interface and user experience: An exchange with an intuitive interface and good user experience will make it easier to trade cryptocurrencies.

Some of the leading crypto exchanges include:

• Binance: Considered the most powerful cryptocurrency exchange in the world, with a daily trading volume of over $13 billion. It offers access to hundreds of coins and tokens and is available in over a hundred countries.
• Coinbase: One of the most widely used digital currency trading exchanges, especially in the United States. It offers a user-friendly platform, strong security, and advanced trading options. Coinbase also provides insured custodial wallets for investors.
• Kraken: One of the oldest crypto exchanges, Kraken has been around for over a decade and is available in many countries. It offers access to hundreds of cryptocurrencies, fiat currency funding options, and advanced trading services.
• Crypto.com: This exchange provides a vast ecosystem, including its own blockchain, a native token, a crypto visa card, and yield-generating crypto products. It supports over 350 cryptocurrencies and has a highly-rated mobile app.
• Gemini: Known for its strong security measures, Gemini is available in all 50 U.S. states and complies with regulatory requirements. It offers a professional-grade trading dashboard and supports over 70 digital currencies and tokens.

Selecting a payment method

After choosing a crypto exchange, the next step is to select a payment method. Most major platforms offer the option of linking your bank account for wire and ACH transfers, as well as the option of linking a debit card. Some also let you pay via PayPal.

Regardless of the option you choose, you will have to verify your identity when first signing up for an account and registering a payment method. In the US, you're usually required to submit a scan of a state-issued ID, such as a driver's license or identification card. Depending on where you are and on your chosen platform, you may also be required to provide scans of additional documentation (such as your passport), as well as being asked to submit a proof of address.

It is also possible to get bitcoin at specialized ATMs and via peer-to-peer (P2P) exchanges. Bitcoin ATMs act like in-person bitcoin exchanges, where individuals can insert cash into a machine and use it to purchase bitcoin, which gets transferred to online wallets for users.

Some P2P exchange services provide a more direct connection between users. After creating an account, users can post requests to buy or sell bitcoin, including information about payment methods and prices. Although P2P exchanges don't offer the same anonymity as decentralized exchanges, they allow users the chance to shop around for the best deal.

Payment Methods

• Bank transfers: At most exchanges, you can connect your bank account directly.
• Debit/credit cards: You can also link a debit or credit card. Although you can use a credit card to purchase cryptocurrency, cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges.
• PayPal: You can also use a payment processor like PayPal to buy bitcoin. There are two ways to purchase bitcoin using PayPal: by connecting your account to a debit card or bank account, or by using the balance of the PayPal account to purchase cryptocurrencies from a third-party provider.

Placing an order

Once you've chosen a crypto exchange and a payment method, you can place your order. The process for this varies depending on the exchange you use, but generally, most crypto exchanges offer at least three basic order types:

• Market order: This is the option to choose if you simply want to buy Bitcoin at its current price. This type of order is usually completed in a matter of seconds, depending on the time of day.
• Stop order: This is an order where you specify the price at which you will buy or sell Bitcoin. This type is good if you want to make sure you sell Bitcoin before it falls too sharply. This type of order can take some time to execute, depending on how quickly the market moves.
• Limit order: This instructs the exchange to execute a buy or sell order at a specific price or better. In contrast to stop orders, limit orders are visible to the market and can take longer to fill.

Again, executing any one of these options usually involves clicking a 'Buy', 'Trade', or 'New order' button on an exchange's home screen. You'll then be able to choose from the above three (and more advanced) options, before clicking a 'Submit' button or something equivalent.

All exchanges will let you buy a fraction of a bitcoin (BTC). So while the price of 1 BTC may seem prohibitively expensive right now, you will be able to choose to buy 0.1 BTC, 0.01 BTC or whatever else you type into the exchange's interface.

If you're new to investing in Bitcoin, it's recommended that you adopt a dollar-cost-averaging (DCA) strategy, which means purchasing a set amount of Bitcoin at regular intervals, regardless of price.

Safe storage

Storing your cryptocurrency safely is essential, and there are several options for doing so. Firstly, it is important to note that it is not safe to store your cryptocurrency on an exchange wallet as you do not have access to your private key. However, it is convenient for everyday trading.

One option for safe storage is to use a hardware wallet, such as TREZOR, which stores your Bitcoins in a device designed to be resistant to viruses, hackers, and keyloggers. Another option is to create a cold storage wallet, which generates and stores private wallet keys on a clean, air-gapped computer. Cold storage wallets are safe from all online threats but are still exposed to offline threats such as hardware keyloggers or people looking over your shoulder.

When using a cold storage wallet, an unsigned transaction is first generated on an internet-connected computer. This unsigned transaction is then transferred to the air-gapped computer to be verified and signed with the wallet keys. While this process may seem tedious, it is important to remember that security often comes at the cost of convenience.

Another option for safe storage is to use a live operating system as the offline computer. This method may be more convenient, but it is important to note that sophisticated malware may be able to survive the live OS boot. Additionally, other attacks such as HDD firmware reprogramming, BIOS reprogramming, or other memory persistence after a clean reinstallation of the system may be a concern for some users.

To further enhance the security of your Bitcoin storage, you can consider using a secure offline computer. This can be achieved by purchasing an old, used laptop or phone from a reputable manufacturer, wiping it clean, and installing only an operating system and Bitcoin wallet from a USB drive. By keeping the offline and online computers physically separate and unplugging the power cable to run the offline computer on battery power, you can add an extra layer of protection.

When choosing a storage method, it is important to consider the advantages and disadvantages of each option. For example, while USB flash drives offer speed and convenience, they have an attack surface that could be vulnerable to sophisticated malware. On the other hand, QR codes are believed to have a smaller attack surface, but they have size limits that may not accommodate larger Bitcoin transactions.

Another critical aspect of safe storage is backing up your private key. It is recommended to use seed phrases (possibly with encryption) to store private key backups, as they offer excellent error correction. Seed phrases should be written down and stored in a safe place, such as a safe deposit box. Additionally, you can further enhance the security of your private key by ensuring that no one else has access to it.

Understanding the risks

Investing in Bitcoin carries a number of risks that you should be aware of. Here are some of the key risks associated with investing in Bitcoin and similar cryptocurrencies:

Volatility and Market Fluctuations: The price of Bitcoin is highly volatile and subject to rapid and significant fluctuations. This makes it a speculative asset, suitable only for investors willing to accept a high level of risk. The market can be unpredictable, and there is no guarantee of a return on investment.

Cyber Attacks and Hacking: Cryptocurrency is technology-based and vulnerable to cyber-attacks and hacking. If your Bitcoin is stolen or lost, there is often no way to retrieve it. Exchanges and online wallets are common targets for hackers, and even with the protection of a smart wallet, your investment may be at risk.

Fraud and Fake Exchanges: The rise in popularity of Bitcoin has led to an increase in fraudulent activities. Fake exchanges and sellers dupe unsuspecting investors out of their money. Additionally, there is a lack of regulation in the Bitcoin market, providing limited protection for investors.

Technology Reliance: Bitcoin is entirely reliant on technology. It is digitally mined, exchanged via smart wallets, and its value is determined by various systems. Without the underlying technology, Bitcoin has no value. This also makes it vulnerable to cyber threats, online fraud, and system failures.

Block Withholding: Bitcoin mining involves solving mathematical equations called "blocks". However, a mining pool can use computational power to mine a block and withhold it from honest miners, benefiting a select few while leaving others with nothing.

Limited Acceptance: Despite its growing popularity, Bitcoin is not widely accepted as a legitimate form of currency. Only a small number of companies and businesses accept Bitcoin, and it may never gain widespread acceptance. This limited acceptance could impact its long-term viability.

Regulatory and Tax Risks: The regulatory landscape for Bitcoin is uncertain and constantly evolving. The lack of clear regulations and taxation guidelines can create legal and financial risks for investors. In the US, for example, the IRS has defined cryptocurrencies as property, subjecting investors to capital gains tax laws.

Decentralized Status: Bitcoin is decentralized, with no central authority or physical presence. This means that investors are solely responsible for the security and management of their investments. Complications with transactions or ownership may arise, and the path of legal recourse in such cases can be challenging to navigate.

Fraud and Money Laundering: Cryptocurrencies have been associated with criminal activities, including fraud and money laundering. This perception may impact the reputation and value of Bitcoin. Additionally, victims of financial crimes involving Bitcoin may have limited legal recourse and face challenges in recovering their funds.

Frequently asked questions