A Beginner's Guide To Investing In Bitcoin

Investing in Bitcoin can be a daunting task for beginners. Here is a step-by-step guide to help you get started:

1. Choose a Crypto-Trading Service or Venue: Select a cryptocurrency exchange that suits your needs, such as Coinbase, Kraken, Gemini, or Binance. These platforms offer a range of features, including buying, selling, and holding cryptocurrencies, as well as transferring crypto to your online wallet.

2. Connect Your Exchange to a Payment Option: You will need to link your bank account, debit card, or credit card to your chosen exchange. Some exchanges may require personal identification, such as a driver's license or Social Security card.

3. Place an Order: Decide how much Bitcoin you want to purchase. You can buy a whole Bitcoin or a fraction of one, depending on your budget. Remember to consider the fees associated with different payment methods and transactions.

4. Safe Storage: It is essential to store your Bitcoin securely. You can use a hot wallet, which is an online wallet connected to the internet, or a cold wallet, which is an offline hardware wallet. Cold wallets are considered more secure but require technical knowledge to set up.

5. Understanding the Risks: Investing in Bitcoin carries significant risks due to its volatile nature. The price of Bitcoin can fluctuate drastically, and there is a potential for substantial gains or losses. Ensure you understand your risk tolerance and have a clear investment strategy before investing.

How to get started: The first steps to investing in Bitcoin

Investing in Bitcoin can seem complicated, but it isn't. Here are the first steps to investing in Bitcoin.

Step 1: Choose a Crypto-Trading Service or Venue

You will need to open an account at a service or a cryptocurrency exchange. There are many types of cryptocurrency exchanges, and some allow users to remain anonymous. Popular exchanges in the U.S. that follow laws that require users to submit identifying documentation include Coinbase, Kraken, Gemini, and Binance. When creating a cryptocurrency exchange account, use two-factor authentication and a long, unique password that includes a variety of letters, special characters, and numbers.

Step 2: Connect Your Exchange to a Payment Option

Depending on the exchange, personal identification may be required. At most exchanges, you can connect your bank account directly or link it to a debit or credit card. Although you can use a credit card to purchase cryptocurrency, this is not advised as cryptocurrency price volatility could inflate the overall cost of purchasing a token when combined with a credit card's interest charges. Fees vary for deposits via a bank account, debit, or credit card, and exchanges also charge fees per transaction.

Step 3: Place an Order

Cryptocurrency exchanges offer several order types and ways to invest. Almost all crypto exchanges offer both market and limit orders, and some also provide stop-loss orders. Exchanges also offer ways to set up recurring investments, allowing clients to dollar-cost average into their investments of choice.

Step 4: Safe Storage

Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Keeping crypto outside the exchange and in a personal wallet ensures that investors have control over the private key to the funds. An exchange wallet is offered, but not recommended, for large or long-term cryptocurrency holdings.

There are two types of wallets: hot wallets and cold wallets. Online wallets, also known as hot wallets, are apps on devices such as computers, phones, or tablets. These wallets generate the private keys to your coins on internet-connected devices. A cold wallet isn't connected to the internet and is, therefore, a less risky option. Offline wallets or hardware wallets store a user's private key on something that isn't connected to the internet and come with software that allows investors to view their portfolio without putting their private key at risk.

What you need: Documents, accounts and wallets

To invest in Bitcoin, you will need a few things, including personal identification documents, a secure internet connection, and a cryptocurrency exchange account. You will also need a way to store your Bitcoin safely, such as a hot or cold wallet.

Documents

When signing up for a cryptocurrency exchange account, you will need to provide personal information, such as your name, email address, and date of birth. If you are using a Know Your Client (KYC) platform, you will also need to submit personal identification documents, such as a driver's license or passport. Additionally, if you plan to connect your bank account to your exchange account, you may need to provide bank account information, such as your account number and routing number.

Accounts

To buy Bitcoin, you will need to create an account on a cryptocurrency exchange or platform. Popular exchanges include Coinbase, Binance, Kraken, and Gemini. When creating your account, it is important to use a strong password and enable two-factor authentication for added security. You may also need to connect a payment method, such as a bank account or credit card, to fund your Bitcoin purchases.

Wallets

Once you have purchased Bitcoin, you will need a secure place to store it. There are two main types of Bitcoin wallets: hot wallets and cold wallets. Hot wallets are online wallets that are connected to the internet and can be accessed through a web browser or mobile app. While hot wallets are convenient, they are more susceptible to hacking attempts. On the other hand, cold wallets are offline storage devices, such as USB drives, that keep your Bitcoin keys offline and are considered more secure. Examples of cold wallets include hardware wallets like Trezor and Ledger, and paper wallets, where your public and private keys are printed on a piece of paper.

Where to buy: Exchanges, brokers and apps

There are several ways to buy Bitcoin, and other cryptocurrencies, from stockbrokers to dedicated exchanges and even in-app purchases in some crypto-linked applications. Here are some of the most popular options:

Cryptocurrency exchanges

You can purchase bitcoin from cryptocurrency exchanges, which act as a middleman for cryptocurrency investing, similar to a stock brokerage. Many offer dozens of cryptocurrency choices, while others simply have Bitcoin and a few alternatives. They carry a variety of different fees and consumer protections, so do your due diligence before choosing. Some popular exchanges include:

• Coinbase
• Binance
• Kraken
• Gemini
• Crypto.com
• Bitfinex

Traditional stockbrokers

The choices among traditional brokers that give customers a way to buy and sell Bitcoin are few. Robinhood was the first mainstream investment broker to offer Bitcoin (Robinhood Crypto is available in most, but not all, U.S. states). Other online brokers that offer access to Bitcoin or other cryptocurrencies include Webull, TradeStation and Fidelity.

Peer-to-peer money transfer apps

Cash transfer services like PayPal, Venmo, or Cash App allow their users to purchase Bitcoin using the apps. You can purchase, store, send and sell Bitcoin directly through the apps, which is convenient if you're used to those interfaces.

Bitcoin ATMs

Bitcoin ATMs act like in-person bitcoin exchanges. These machines allow you to insert cash and use it to purchase bitcoin, which gets transferred to online wallets. Bitcoin ATMs can often be found in locations where you might find normal ATMs, such as convenience stores.

Bitcoin exchange-traded funds (ETFs)

On January 10, 2024, the Securities and Exchange Commission opened the door for spot Bitcoin ETFs, which track the price of Bitcoin and trade over major exchanges. This has made it even easier for traditional investors to gain access to Bitcoin. The spot Bitcoin ETFs are available through traditional brokerage accounts.

How much to buy: Budgeting for Bitcoin

Budgeting for Bitcoin is an important step in your investment journey. Here are some key considerations to help you determine how much Bitcoin to buy:

Determine your risk tolerance:

Before investing in Bitcoin, it is crucial to understand your risk tolerance. Bitcoin is a highly volatile and risky asset. Carefully assess your financial situation and how much risk you are comfortable taking. If you are new to investing or have a low-risk tolerance, consider starting with a small investment to gain a better understanding of the market.

Diversify your portfolio:

Diversification is a fundamental principle of investing. It is generally recommended to allocate a small portion of your portfolio to high-risk assets like Bitcoin. A common rule of thumb is to invest no more than 10% of your portfolio in individual stocks or risky assets, including Bitcoin. Diversification helps protect your overall portfolio from significant losses if Bitcoin's value declines.

Start with a small investment:

If you are unsure about investing in Bitcoin, consider starting with a small amount. You can invest as little as $25 or even set up a weekly investment of $10. This approach allows you to gain exposure to Bitcoin without committing a large sum of money. As you become more comfortable with the market and see how Bitcoin performs, you can gradually increase your investment.

Assess your financial situation:

Before deciding how much Bitcoin to buy, evaluate your financial situation and goals. Calculate your income, expenses, and savings to determine how much you can afford to invest. Ensure that your essential needs and financial obligations are met before allocating money to Bitcoin. It is generally not advisable to invest money that you cannot afford to lose.

Choose a budgeting strategy:

There are several budgeting strategies you can consider when investing in Bitcoin. Here are a few options:

• Incremental budgeting: This approach involves adjusting your budget based on the previous period's performance. You can increase or decrease your Bitcoin investment allocation based on projections, revenue growth, and your previous budget performance.
• Zero-based budgeting: This method starts with a zero budget and assigns a specific amount to each expense category. It assumes that the budget resets to zero at the beginning of each fiscal year or quarter.
• Flexible budgeting: Flexible budgeting involves adjusting your budget based on your actual expenses and accounting for inconsistent revenue. This strategy can work well with Bitcoin if you set a margin for error and prepare for potential volatility.
• Percentage-based budgeting: This strategy involves allocating a certain percentage of your income to different expense categories. For example, you might allocate 50% to needs, 30% to wants, and 20% to savings and debt repayment.
• Envelope budgeting: This strategy involves dividing your budget into envelopes or compartments for different expense categories. You put a specific amount of money into each envelope, and once the balance is exhausted, you stop spending in that category for the month or budgeting period.

Monitor and adjust your investment:

Bitcoin's value can fluctuate significantly, so it is important to monitor your investment regularly. Keep track of Bitcoin's performance and be prepared to make adjustments to your investment strategy as needed. You may need to buy more Bitcoin if its value increases or consider selling if it declines, depending on your investment goals and risk tolerance.

Remember, investing in Bitcoin carries significant risks, and there is no one-size-fits-all approach to budgeting for it. Always do your research, understand your financial situation, and seek professional advice if needed before making any investment decisions.

How to store: Hot and cold wallets

Hot wallets and cold wallets are two types of storage methods for your Bitcoin. Hot wallets are connected to the internet and are used for temporary key storage, sending and receiving cryptocurrency, and viewing your tokens. They are more susceptible to hacks and theft than cold wallets. Examples of hot wallets include MetaMask, Coinbase Wallet, and Edge Wallet.

Cold wallets, on the other hand, are offline storage methods that are considered to be one of the safest ways to secure your cryptocurrency. They are not connected to the internet and thus provide an added layer of security for your coins and private keys. Cold wallets can be hardware devices that look like USB drives, or even paper wallets that have your private and public keys printed on them. Some popular cold wallets include Ledger Nano X, Trezor Model T, and Mycelium.

When choosing between a hot wallet and a cold wallet, consider the trade-offs between convenience and security. Hot wallets are more convenient for frequent transactions but are more vulnerable to online attacks. Cold wallets offer stronger security but are less convenient as they require additional steps to access and use your cryptocurrency.

A combination of hot and cold wallets can provide a balance between functionality and security. Many people use a hot wallet for a small portion of their cryptocurrency, which they use for frequent transactions, while storing the majority of their funds in a more secure cold wallet.

Frequently asked questions