Bitcoin is one of the largest and most popular virtual currencies, also known as cryptocurrencies or simply cryptos. Unlike traditional currencies, like U.S. dollars, cryptocurrencies are not issued or backed by central governments. Are you interested in finding out the best way to invest in bitcoin? Then read on.
What is Bitcoin?
Unlike stocks and bonds, they aren’t issued by public corporations. Instead, it’s a decentralized digital currency that can be sent electronically from one person to another anywhere in the world. It was developed with the expectation of becoming a truly international currency, unconnected to any government, bank, or corporation.
Bitcoin gathered attention when its price rocketed from about $1 when it was rolled out back in 2009 to nearly $20,000 at the end of 2017. It suffered a big drop thereafter but moved back above $10,000 in 2020. That kind of price movement generates investor interest.
What You Need to Start Investing in Bitcoin
Unfortunately, you can’t invest in bitcoin through a traditional investment broker or bank. Specialized services offer trading in cryptocurrencies (crypto). These include cryptocurrency exchanges and certain limited investment apps.
You need to choose an exchange or app (Webull, for example, is one great option) where you want to buy bitcoin. You also need to select a wallet where you’ll hold them. (We discuss digital wallets as a separate topic next.) Once you have a bitcoin wallet and have chosen an exchange, give the exchange your bank account information. Then you can start trading.
Keep in mind that you may have to pay taxes on any bitcoin and other cryptocurrencies you hold.
Further reading: Tax Guide to Cryptocurrency Investments
How to Get a Bitcoin Wallet
Once you purchase bitcoins, you need a place to store them. Again, you can’t simply hold it in a brokerage account or a bank account. You purchase crypto on a platform that makes the crypto available (an exchange). But you hold your crypto in what’s known as a digital wallet.
There are two types of digital wallets: hardware wallets and software wallets.
- Software Wallets — Software wallets are sometimes referred to as hot wallets. You can access the wallet through your home computer or smartphone. Some cryptocurrency exchanges offer their own version, but you can have one that does not depend on any third party.
- Hardware wallets — sometimes referred to as cold wallets — provide a physical storage device. You can download and store your cryptocurrency on the device, which is completely portable. Popular hardware wallets include Ledger and Trezor.
Each type of wallet — software or hardware — has advantages and disadvantages. For example, software wallets are free. Software wallets offer quicker transactions than is possible with a hardware wallet. Unfortunately, they also tend to be less secure than hardware wallets since hackers can target them.
Hardware wallets have the advantage of being more secure since they are not connected to the internet all the time. These wallets cost money, though it’s often less than $100. And as a physical item, it is possible to lose a hardware wallet.
How to Choose a Bitcoin Exchange
What stock exchange is bitcoin on? Well, none! Instead, bitcoin trades on dedicated cryptocurrency exchanges.
Some popular crypto exchanges include:
- Coinbase may be the best known of all the exchanges. You can buy and sell various cryptocurrencies in addition to bitcoin. And like many crypto exchanges, it offers a free software wallet. It even allows you to trade between different cryptos.
- Coinbase Pro is a more advanced version of Coinbase designed for more active traders.
- Biance has lower trading fees than most other exchanges. It offers hundreds of different trading pairs between many different cryptocurrencies. The downside is that it doesn’t accept U.S. dollar deposits. So, you must use a credit or debit card rather than your bank account.
- Bisq is not designed for active trading, and its fees are a little bit higher than elsewhere. But it is one of the most well-known decentralized exchanges out there. And if you’re trading only bitcoin, you can link a bank account without having to provide government-issued ID documentation.
- Kraken allows you to buy and sell bitcoins using U.S. dollars, euros, Canadian dollars, British pounds, and Japanese yen. It also allows you to trade between the various cryptos. And in an almost unique feature, it offers margin trading. However, it does not accept credit cards or debit cards for funding. This is another exchange designed primarily for more advanced cryptocurrency investors.
How to Connect Your Bank Account With the Exchange
This is one of the easier aspects of bitcoin investing. You link your bank account during the setup process with your new crypto exchange. You move money from your bank onto the crypto exchange where you purchase your bitcoins. Then you transfer your bitcoins to your own wallet if you want.
One word of warning: When you use a software wallet, keep only a minimal amount of money in the wallet. Hacking of the account is possible. And be aware of your crypto exchange holds your wallet. There is a third-party risk, as well.
How to Place Your Order
Once you set up an account with a cryptocurrency exchange and connect a digital wallet — whether that’s software or hardware — you can begin placing orders.
You buy bitcoin on the exchange using your local currency. The process is generally instantaneous and not unlike that of purchasing investment securities like investing in stocks and bonds.
Your bitcoins will be stored in your exchange account or your digital wallet.
You can exchange your bitcoins for either your local currency or another crypto. Or make purchases with your bitcoins from merchants or other third parties. However, the number of merchants and vendors that accept bitcoin as a means of payment is fairly limited at the moment.
Brokers to Buy Bitcoin From
In addition to exchanges, there is also a small number of investment brokers — more accurately, investment apps — where you can invest in crypto on the same platform where you trade other investments.
Webull works similarly to Robinhood in that it’s an investing app where you can trade commission-free. That currently includes stocks, options, and ETFs. But the company allows you to sign up for its waitlist for cryptocurrency trading, which it expects to roll out soon. Webull offers traditional and Roth IRA accounts, while Robinhood is limited to taxable investment accounts.
Robinhood is an investment app and currently the only investment broker that allows you to trade bitcoin and other cryptocurrencies, in addition to stocks, exchange-traded funds (ETFs), and options. Robinhood offers Ethereum, Bitcoin Cash, Litecoin, and Dogecoin, in addition to bitcoin. In that way, it offers an opportunity to hold bitcoin and other cryptos on the same app where you hold other investments. Best of all, you can trade bitcoin commission-free on a 24/7 basis.
eToro may be the most advanced crypto investment platform. It operates globally, offering stocks, funds, and most traditional investments worldwide, but it currently allows crypto trading only in the U.S.
eToro also offers unique crypto investment options. With its CopyTrader Technology, you can copy the more successful crypto traders’ investment strategies on the platform. It also offers CopyPortfolios, which are something like crypto Robo-advisors, providing professional crypto portfolio management. And to help you learn the ropes of investing in cryptos, it offers virtual portfolios where you can trade up to $100,000 in a paper account without risking any of your own money.
Though the platform doesn’t charge commissions, it does have spreads ranging from 0.75% on bitcoin to as high as 4.50% on some other cryptos. It’s worth noting that eToro also offers its own crypto wallet.
Mining for Bitcoin
Another way to make money from bitcoin is to mine it. When bitcoin was established, a limit of 21 million bitcoins was set. Though millions are currently in circulation, there are still millions more waiting to be created, or mined.
Mining is the discovery of new bitcoins and verifying bitcoin transactions. In effect, you’re paid in bitcoins to act as something of a middleman in the bitcoin process. As you earn bitcoin, it enters production and is considered mined into existence.
This is not an activity for the average person using the average computer. The process is more complicated than it used to be as the number of bitcoins in existence steadily increases. It now requires powerful and expensive equipment to make it happen. Specifically, you need devices referred to as Application Specific Integrated Circuits. These perform the billions of “hashes” per second necessary to mine new bitcoins. These devices can cost thousands of dollars.
You receive 6.25 bitcoins for processing the right block of transactions. And this increases the number of bitcoins in circulation. As you can see, the entire bitcoin process — from mining of the crypto to the transactions — depends on the individuals’ participation within the network. Participants manage the entire process; no banks are involved.
Various Bitcoin Investment Strategies
Just as there are various investment strategies involved in investing in stocks and other securities, there are also different strategies for investing in bitcoin.
For example, just as there are day traders and swing traders with stocks, there are also active traders in bitcoin. Since the value of the currency is so volatile, it may be possible to profit from short-term swings.
Like other securities, bitcoin often holds within certain price ranges for extended periods of time. Buy on the low end of the swing and sell on the high end, and you could make a series of short-term profits. But this is probably no more likely to succeed than day trading stocks.
There’s also a buy-and-hold strategy, in which you purchase bitcoin in anticipation of the price rising to new highs. Just as you might purchase stock at $50 and plan to hold it until it reaches $500, you could buy bitcoin at $10,000 to hold until it reaches $50,000 or even $100,000.
How to Stay Safe Investing in Bitcoin
Promoters often bill crypto as completely safe, but there are risks involved, just like any other type of investment or financial activity. But by taking a few simple steps, you minimize the potential risks.
- Keep the amount of money in your digital wallet to a minimum, particularly if it’s a software wallet. The less money you have available, the less there will be to lose. Keep the rest in cold storage.
- Be careful not to disclose how much crypto you have. Thieves and hackers naturally target larger accounts. You minimize the possibility of theft by not discussing in any public forums how much you have.
- Keep your digital private key an absolute secret. If an unintended third party were to gain access to your private key, they would be able to authorize transactions. That includes partially or completely draining your digital wallet.
- If you have a hardware wallet, store it as carefully as you would your pocket wallet. Also, be sure to keep any documentation pertaining to your crypto activities or your digital wallet a complete secret. Much like proper storage of your income tax returns and other important documents, they should be stored under lock and key and never left somewhere they can be easily accessed by an unintended third party.
One more piece of advice: Remember that bitcoin is true speculation. It’s been around for only about 11 years; there are no governments or financial institutions behind it and no FDIC insurance. Price swings can be wild in either direction. So never invest more than you can afford to lose. This is truly an investment that should never be engaged in with anything other than play money.