Bitcoin: Buy, Invest, Or Both?

Bitcoin is a decentralised digital currency that operates without the oversight of banks and governments. It is prone to price volatility, with wide swings to the upside and downside. The most recent upswing comes alongside growing institutional demand for the cryptocurrency as an attractive asset class.

Bitcoin's value has rallied over the last few quarters, increasing from about $26,000 in mid-September 2023 to an all-time high of around $73,000 in mid-March 2024. However, there have been bumps in the road, including the collapse of crypto exchange FTX in 2022.

There are several ways to invest in Bitcoin, including cryptocurrency exchanges, traditional stockbrokers, money transfer apps, Bitcoin ATMs and Bitcoin exchange-traded funds.

Before investing in Bitcoin, it is important to understand the risks involved. Bitcoin is a risky and volatile investment, and it is recommended that it should not make up more than 10% of your portfolio.

How to buy Bitcoin

There are several ways to buy Bitcoin, each with its own pros and cons. Here is a step-by-step guide on how to buy Bitcoin:

Step 1: Choose a Crypto-Trading Service or Venue

You can purchase Bitcoin from cryptocurrency exchanges such as Gemini, Kraken, Coinbase, Crypto.com, and Binance. These exchanges offer a range of cryptocurrencies and features, so it is important to research and choose one that suits your needs.

Step 2: Connect Your Exchange to a Payment Option

At most exchanges, you can connect your bank account directly or link a debit or credit card. While it is possible to use a credit card, be aware that credit card issuers treat crypto purchases as cash advances, which often incur high fees and interest rates. Additionally, using a credit card to buy crypto can be risky due to price volatility.

Step 3: Place an Order

Once your payment method is connected, you can place an order to buy Bitcoin. Depending on the platform, you may be able to purchase Bitcoin by tapping a button or entering its ticker symbol, BTC. Remember that the price of Bitcoin is highly volatile, so be cautious when investing.

Step 4: Safe Storage

After purchasing Bitcoin, you will need to store it securely. You can use a hot wallet, which is an online wallet connected to the internet, or a cold wallet, which is an offline storage option. Hot wallets are convenient for small amounts of crypto or active trading, but they are more vulnerable to theft. Cold wallets, such as hardware wallets or paper wallets, are considered more secure but may require technical knowledge to set up.

Additional Ways to Buy Bitcoin

Aside from cryptocurrency exchanges, there are alternative ways to buy Bitcoin:

• Bitcoin ATMs: These act like in-person exchanges, allowing you to insert cash to purchase Bitcoin, which is then transferred to your online wallet.
• Peer-to-peer (P2P) exchanges: These provide a direct connection between users, allowing you to shop around for the best deal. Examples include LocalBitcoins and eToro.
• Payment processors: Services like PayPal allow you to buy Bitcoin directly or through third-party providers. However, purchasing crypto through PayPal limits your ability to transfer it to other accounts or wallets.
• Traditional stockbrokers: Robinhood was the first mainstream investment broker to offer Bitcoin trading, and other options include Webull, TradeStation, and Fidelity.

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:

Cold Wallets

Cold wallets are offline crypto wallets that are considered one of the safest options for storing Bitcoin. They are not connected to the internet, making them highly secure against hacks and theft. Cold wallets can be further categorised into hardware wallets and paper wallets.

Hardware Wallets

Hardware wallets are small, portable devices similar to USB drives that store your private keys. Examples include Ledger, Trezor, and Coldcard. They are convenient and easy to use, allowing you to connect to your computer and access your funds whenever needed. However, they can be expensive, with an average cost of around $100. Additionally, there is a risk of losing or misplacing the device.

Paper Wallets

Paper wallets are a simple and affordable way to store Bitcoin. They involve printing out your private and public keys, usually in the form of QR codes. Paper wallets offer strong security as they are completely offline, but they are vulnerable to physical damage, theft, and natural wear and tear.

Hot Wallets

Hot wallets are online crypto wallets that provide easy access to your Bitcoin. They can be further categorised into mobile wallets, desktop wallets, and web-based wallets.

Mobile Wallets

Mobile wallets are applications installed on your smartphone, allowing you to send, receive, and store Bitcoin on the go. They are convenient and user-friendly but may be less secure than cold wallets. Additionally, there is a risk of losing funds if the device is not properly secured or backed up.

Desktop Wallets

Desktop wallets are programs downloaded and installed on your computer. They offer more security than online and mobile wallets as they don't rely on third parties for data storage. However, they are still connected to the internet, making them vulnerable to hacks.

Web-Based Wallets

Web-based wallets are hosted by a web service and can be accessed from any device with an internet connection. They are convenient but less secure as you rely on a third party to store your private keys. There is also a risk of the service being hacked or shutting down.

Custodial Wallets

Custodial wallets are managed by a third party, such as an exchange platform, which holds your private keys for you. They are convenient, especially if you plan to trade frequently, but they give you less control over your Bitcoin. There is also a risk of the exchange being hacked or going out of business.

Non-Custodial Wallets

Non-custodial wallets give you full ownership of your private keys, and no third party is involved. This option provides more security and privacy but requires you to take full responsibility for storing and safeguarding your keys.

Risks of investing in Bitcoin

Bitcoin is a type of cryptocurrency, a digital currency that is issued and transmitted through an online, peer-to-peer user network. It is a new frontier in the world of finance and has become increasingly popular in recent years. However, with any new technology, there are bound to be some obstacles and risks associated with its use. Here are some of the key risks of investing in Bitcoin:

Volatile and Fluctuating Market

The price of Bitcoin is constantly changing and can be extremely volatile. This volatility makes it challenging for investors to build confidence and secure gains. The unpredictable nature of the market means that there is no guarantee of a return on investment, and investors could potentially lose money if they are not vigilant in monitoring the market. Small investments are generally recommended to minimize risk.

Cyber-Security Risks and Fraud

Bitcoin is a technology-based currency, which makes it susceptible to cyberattacks and hacking. If an investor loses their Bitcoin or it is stolen, there is often no way to retrieve it. Additionally, there have been reports of buyers losing their investments through exchanges and mining losses. Fraud is also prevalent in the Bitcoin market, with fake exchanges duping unsuspecting investors out of their Bitcoins. The lack of security and the prevalence of cyber threats pose significant risks to investors.

Little or No Regulation

The Bitcoin market currently operates with little to no major regulations in place. Governments and financial authorities are still trying to understand and adapt to this new technology, resulting in a lack of clear guidelines and policies. The lack of regulation creates uncertainty and may lead to future restrictions or even a ban on cryptocurrencies. Additionally, the absence of taxation on Bitcoin could pose problems if it is seen as competition for government currency.

Technology Reliance and Digital Security

Bitcoin is entirely reliant on technology, and without it, the currency becomes worthless. It is vulnerable to cyber threats, online fraud, and system failures. Unlike traditional forms of currency or investment, Bitcoin is not backed by any physical collateral. Investors are more exposed to risks associated with technology failures or cyberattacks. The digital nature of Bitcoin also makes it challenging to recover funds in the event of theft or fraud.

Loss of Private Key

Bitcoins are typically stored in a digital wallet and can only be accessed with a unique private key. If this private key is lost, destroyed, or compromised, the investor may lose access to their Bitcoins permanently. Additionally, if a third party gains access to the private key, they could potentially steal the Bitcoins.

These risks highlight the importance of conducting thorough research and exercising caution when investing in Bitcoin or any other cryptocurrency. While it may offer potential opportunities, it is a relatively new and unstable market with unique challenges and risks that investors should be aware of.

Bitcoin's value and trajectory

Bitcoins Value and Trajectory

Bitcoin's value comes from its store of value and payment system, as well as its finite supply. Its value is also influenced by five factors: supply and demand, the cost of production, competition, government legislation, and public interest and media coverage.

Supply and Demand

It is known that no more than 21 million Bitcoins can be produced, and this is unlikely to happen before 2140. Only a certain number of Bitcoins are released each year, and this rate is reduced every four years by halving the reward for Bitcoin mining. The last of these "halvings" occurred in May 2020, and the next is due in April 2024.

Cost of Production

Bitcoin is said to benefit from minimal production costs. However, solving even a single hash requires immense processing power, and it is believed that crypto mining uses more electricity than some small countries. The complexity of Bitcoin's hashing algorithms and the fact that they can vary wildly in complexity have a far more significant impact on its value.

Competition

Bitcoin's cryptocurrency market share has sharply declined over the years. In 2017, it maintained a market share of over 80%. Bitcoin's current market share is just over 52%. The most significant competition comes from Ethereum, which currently accounts for roughly 16% of the crypto market.

Government Legislation

Bitcoin may be unregulated, but it is not immune to the effects of government legislation. For example, China's 2021 ban of the cryptocurrency caused a sharp price drop. A ban in either the European Union or the US would be devastating for Bitcoin's overall value.

Public Interest and Media Coverage

As with any speculative commodity, Bitcoin is greatly influenced by the court of public opinion. For example, in 2021, a tweet from Elon Musk caused Bitcoin's price to drop by 30% in a single day, wiping about $365 billion off the cryptocurrency market.

Trajectory

Bitcoin is notoriously volatile, making it difficult to predict its trajectory. In April 2024, its price was roughly $62,800, a drastic improvement from December 2022 when it fell to $17,000. Its dramatic fall was caused by harsh economic conditions, aggressive interest rate hikes, the war in Ukraine, and the catastrophic failure of the crypto exchange FTX.

Despite this, Bitcoin didn't take long to recover and experienced one of its most promising years in 2023. Its volatility has even dropped to its lowest level since 2020. However, there is no guarantee that its value will continue to climb.

Some analysts believe that Bitcoin could reach a new record of $200,000 by September 2025, while others predict a value of over $75 trillion by 2030. On the other hand, some are concerned about Bitcoin's future in the context of continued geopolitical upheaval and economic uncertainty.

Bitcoin is more stable than it has been in years, and the next halving is fast approaching, which could increase demand. However, it is a high-risk asset, and investors should be aware of the risks and never invest more than they are willing to lose.

Indirect ways to invest in Bitcoin

There are several ways to invest in Bitcoin without buying it directly. Here are some of the most common indirect ways to invest in Bitcoin:

Exchange-Traded Funds (ETFs)

Exchange-traded funds (ETFs) are investment funds that trade on stock exchanges and hold multiple underlying assets. Bitcoin ETFs allow investors to gain exposure to Bitcoin without actually owning the cryptocurrency. These ETFs can be categorised into two main types:

• Futures-based Bitcoin ETFs: These invest in futures contracts rather than holding Bitcoin directly. They speculate on the future price of Bitcoin, providing an investment pathway tied to its future market expectations.
• Spot Bitcoin ETFs: These aim to track the current market price of Bitcoin by holding the cryptocurrency directly. They offer a more direct exposure to Bitcoin's price movements.

Crypto-Related Stocks

Another way to indirectly invest in Bitcoin is by purchasing stocks of companies closely associated with Bitcoin and the broader cryptocurrency market. These include:

• Bitcoin mining companies: Companies like RIOT and MARA that are involved in the process of mining Bitcoin. Their stock prices are influenced by the price of Bitcoin as well as their operational performance and broader stock market trends.
• Cryptocurrency exchanges: Investing in companies like Coinbase (COIN), a well-known cryptocurrency exchange, provides exposure to the growth of the crypto market while also being influenced by the company's business performance and investor sentiment.

Bitcoin Futures

Bitcoin futures are contracts that allow investors to buy or sell Bitcoin at a predetermined price at a future date. They are an indirect way to invest in Bitcoin as they allow investors to profit from Bitcoin price movements without actually owning the cryptocurrency. While they can magnify gains and losses, they also expose investors to high levels of risk.

Bitcoin Trusts

A Bitcoin trust is an investment vehicle where investor money is pooled together to invest in Bitcoins collectively. Investors in the trust do not own Bitcoins directly but instead own shares of the trust and are entitled to a portion of the profits and incomes it generates. Shares of Bitcoin trusts can be traded on online exchanges like regular stocks, providing a convenient and familiar investment structure for investors.

Bitcoin-Related Companies

Investors can also indirectly invest in Bitcoin by purchasing stocks of companies that are closely related to the Bitcoin ecosystem, such as graphics card manufacturer stocks. For example, Nvidia, a producer of high-quality graphics cards used in Bitcoin mining, has seen increased sales and profits due to the rise in Bitcoin. As a result, its share price has risen alongside Bitcoin prices.

Frequently asked questions