Bitcoin has gained popularity among investors in recent years, leading to debates about its value and potential as a currency and investment. Its proponents believe in its future potential, while its detractors view it as a risky investment with uncertain returns. To understand its true market value, we can examine its recent movements. In the past year, Bitcoin’s valuation has increased by more than 763%, outpacing traditional stock market gains. This has led to more people buying into Bitcoin as a decentralized, global currency.
The acceptance of Bitcoin by high-profile individuals and businesses, such as Elon Musk’s Tesla and SpaceX, has further boosted its credibility. The recent IPO of Coinbase Global, Inc., the leading cryptocurrency exchange platform, is also a significant development. These developments suggest that momentum is building for Bitcoin, and its proponents believe this is just the beginning. To determine whether Bitcoin is the right investment for you, check out our beginner’s guide on how to invest in Bitcoin.
Bitcoin was developed by an individual or group of programmers known as “Satoshi Nakamoto,” but their true identity remains unknown to the public. As a type of cryptocurrency, Bitcoin is widely used and operates without physical cash, using virtual “coins” or “tokens” instead. These coins have no inherent value and are not backed by precious metals like gold or silver.
Bitcoin was created to address significant flaws in other cryptocurrencies. For instance, it was designed to prevent fraudulent duplication of digital coins. If anyone could duplicate a cryptocurrency and create an unlimited amount of currency for themselves, the entire system would be vulnerable to abuse. Similarly, as with physical cash, there is a need to prevent the reproduction of crypto coins to ensure the integrity of the currency.
Bitcoin utilizes a digital technology known as “blockchain,” an advanced coding mechanism that distributes a single code across thousands of computers. For instance, if your coin is made up of the code “XDA146DDS,” blockchain divides the code into smaller fragments and stores them across multiple computers. This makes it nearly impossible for a hacker to access the code since they would have to hack various computers to obtain the entire code.
Blockchain also features a “public ledger,” which employs thousands of computers or “nodes” to keep track of coins and their owners. If any coin’s data is altered, the nodes will cross-reference their records to verify whether the change is accurate and initiated by the coin’s owner.
Every time money moves from one Bitcoin wallet to another, it is recorded. Bitcoin wallets store a private key or seed that is encrypted and used to sign transactions, proving their origin mathematically. The signature also prevents anyone from altering the transaction once it is issued. All transactions are broadcasted to the network, and within 10-20 minutes, “mining” begins to validate them.
Mining ensures a chronological chain, network neutrality, and allows multiple computers to agree on the system state, according to Bitcoin.org. To be validated, transactions must be enclosed within a cryptographic block. Changing previous blocks invalidates all succeeding blocks, making it impossible to alter earlier blocks. Mining also creates a competitive lottery, preventing anyone from adding new blocks to the network consecutively. As a result, no single group or individual controls the blockchain.
After purchasing coins, you can use them in online transactions wherever they are accepted. It’s important to note that when you make a transaction with a coin, no money is directly deducted from your bank account. The money is only withdrawn from your account when you purchase the coins themselves, not when you use them for transactions.
Similar to cash currency, the value of a coin may fluctuate, which is why some investors are interested in Bitcoin and other cryptocurrencies. Investors believe that if there’s a surge in the market, the value of Bitcoin could increase significantly. Later on, I will explain the arguments for and against investing in cryptocurrency.
For now, investors should closely monitor the adoption rate of Bitcoin and other relevant cryptocurrencies. Similar to traditional equities, Bitcoin’s value increases when there is more interest, and more people are interested in buying Bitcoin today than ever before. Trading volume has been steadily increasing for almost a year, and as a result, Bitcoin is frequently reaching new highs. This is likely due to either a strong belief in its value or a fear of missing out on what many predict to be the biggest wealth transfer in American history.
Investing in Bitcoin requires minimal documentation. You will only need the following:
However, if you purchase coins through a stockbroker, your personal and financial information may not be required as your stockbroker likely has this information on file.
Interested in investing in Bitcoin? The good news is that the process is straightforward. Here are five simple steps to get started:
Choose a Bitcoin Exchange
To begin investing in Bitcoin, you will first need to determine where you want to make your purchase. Many Bitcoin investors use cryptocurrency exchanges to buy and sell their coins. These exchanges act as intermediaries for cryptocurrency investing, much like a stock brokerage. Since Bitcoin is an open-source technology and not an official company, there are many exchanges available to facilitate transactions.
If you decide to purchase from an exchange, you will need to choose which one you want to buy from. Some of the most popular options include RobFi, Sanitatis, Coinbase, Binance, Kraken, Gemini, and Bitfinex. Each exchange has its own unique features and benefits, so it’s essential to do your research to find the right one for you.
However, with so many exchanges available, choosing the right one can be a challenging task for investors. You can compare the features and services of various exchanges such as Binance vs. Coinbase to determine which one suits your needs best and start investing in Bitcoin today.
Set up a Bitcoin Wallet
When you buy a cryptocurrency, it’s stored in a digital wallet where all your digital assets are kept. There are two types of digital wallets: “hot wallets” and “cold wallets.”
A hot wallet is a digital wallet that’s operated by your cryptocurrency exchange or a provider. Some exchanges will provide you with a hot wallet when you create your account. Hot wallets are convenient since you can access your assets through the internet or a software program. However, they are less secure than cold wallets since they’re connected to the internet, which makes them more vulnerable to hacking.
Some examples of hot wallets are:
On the other hand, a cold wallet is the safest way to store your digital assets. It’s a physical device, usually a portable hardware similar to a USB drive, that stores your assets offline. Cold wallets are more expensive, usually between $60 to $100, but they offer a higher level of security.
Some popular cold wallets are:
If you’re going to invest in a small amount of cryptocurrency, a hot wallet with an insured exchange might be suitable. However, if you’re going to trade large amounts of cryptocurrency, a cold wallet would be a better investment to keep your assets safe.
Link Your Wallet to a Bank Account
After acquiring your preferred wallet for storing your cryptocurrency, the next step would be to connect it to your bank account. By linking your bank account to your wallet, you can easily purchase and sell coins as you wish. Moreover, you may also have the option to connect your bank account directly to your cryptocurrency exchange account, making the transaction process even more straightforward. This allows you to quickly transfer funds from your bank account to your exchange account and vice versa, providing you with the necessary liquidity to make trades whenever you need to. It’s important to note that the process for linking your bank account to your cryptocurrency account may vary depending on the specific exchange or wallet provider you choose to use. Therefore, it’s essential to follow the instructions provided by the service provider to ensure a seamless and secure transaction process.
Purchase Your Bitcoins
At this point, you are all set to buy Bitcoin. Your chosen cryptocurrency exchange will provide you with all the necessary tools to make the purchase. The question now is, how much Bitcoin should you invest in?
While some coins can be quite expensive, most exchanges allow you to purchase fractions of a single coin. This means that you can make an initial investment for as little as $25.
However, investing in Bitcoin can be highly risky, and it’s crucial to evaluate your risk tolerance and carefully review your investment strategy before making any purchase. We’ll discuss this in the following section.
Monitor Your Bitcoin Investments
Once you have successfully bought bitcoin, you have several options on what to do with it. You can use your coins to make purchases online, hold onto your coins for a long time in the hope that their value will increase, or engage in day trading by buying and selling coins with other bitcoin holders. Your cryptocurrency exchange will provide you with all the necessary tools and resources to execute these transactions.
A common question that arises about Bitcoin is whether it’s a good investment or not. However, the answer isn’t straightforward as no investment can be inherently deemed as “good” or “bad.” It all depends on your investment strategy, financial goals, and risk tolerance. Before you consider Bitcoin as an investment option, it’s crucial to determine what you want to achieve through your investment activities, whether it’s to develop a passive income, become a full-time investor, or save for retirement.
Bitcoin is known to be a high-risk investment because it’s a volatile asset. The value of Bitcoin can increase or decrease dramatically in a short period, even within a few hours or days. Moreover, Bitcoin has no intrinsic value and isn’t backed by any physical asset like gold or silver. There’s no central regulator to ensure the stability of Bitcoin’s value, and its worth is solely dependent on market demand. When the demand for Bitcoin increases, its value will rise, and when demand decreases, its value will decrease as well.
Timing the market is a challenging and generally ill-advised investment strategy, but it may be necessary to make a significant profit on Bitcoin. Although there’s a potential for profit, investing in Bitcoin requires a cautious approach and thorough research.
Making investment decisions can be confusing and critical, as it can make or break your financial future. With Bitcoin being one of the hottest topics in the investment world, it is important to evaluate how it stacks up against other investment options. While Bitcoin is its own investment vehicle, it has the potential to transcend investing borders and work concurrently with other assets, such as real estate. In fact, tokenization, which is the process of creating a virtual token representing ownership of an interest in real estate on a blockchain, could revolutionize the global real estate market and offer investors many advantages over existing investment options. However, the comparison of Bitcoin and real estate by themselves remains an important consideration for investors.
Bitcoin Investing Pros
Investing in Bitcoin offers the potential for significant returns on investment, potentially as high as 200% or more. Although achieving such returns is challenging, it is possible with proper market timing. Buying a large amount of Bitcoin when prices are low and selling them when prices are high can generate substantial returns. However, Bitcoin’s value tends to decrease each year.
There is also the possibility that Bitcoin may become the currency of the future or a more widely traded asset, which could lead to long-term returns from holding Bitcoin. But, Bitcoin’s value is highly volatile, and its value is dependent on market demand.
High-risk investors who closely monitor the market may be able to capitalize on market trends and generate significant returns. Unlike traditional investments like stocks or bonds, Bitcoin is highly liquid, meaning that profits can be realized almost immediately. Shaun Heng, VP of growth and operations at CoinMarketCap, states that “Bitcoin is one of the most liquid investment assets you can have and is more liquid than any other cryptocurrency.”
Cons of Bitcoin Investing
Regrettably, investing in Bitcoin can be risky due to its high volatility, and you may incur losses if you’re not careful.
“Bitcoin may seem like one of the most promising investments, depending on what you’ve seen in recent months,” according to Jim Pendergast, SVP of altLine, “but the implementation of government regulations is currently causing the value of Bitcoin to decrease.”
Bitcoin and other cryptocurrencies are also vulnerable to “pump-and-dump” schemes. Unscrupulous investors will target novice or unsuspecting investors and persuade them to invest a large amount of money in Bitcoin. The resulting increase in demand causes Bitcoin prices to soar, allowing the predatory investors to sell their holdings and make a huge profit before the buying surge ends. When the buying frenzy subsides, the value of the coins drops to extremely low levels. A coin purchased for $200 could ultimately be worth just $30. This could result in unsuspecting investors losing their money.
You could potentially make a profit by selling your coins before the price falls, but it’s impossible to predict when the buying surge will end. Prices could plummet by 50% in a matter of hours. That is why volatile assets like cryptocurrency and penny stocks are considered high-risk investments.
It’s also important to note that pump-and-dump schemes and pyramid schemes are illegal. While it’s not necessarily illegal to take advantage of a natural or artificially created market surge, you may not want to be associated with such practices. Even if you have done nothing wrong, you could be the subject of an IRS audit or a criminal investigation.
There exist various methods for investing in Bitcoin, both directly and indirectly.
One way is to invest in a company that employs Bitcoin technology. Though Bitcoin is a risky investment, numerous companies offer successful products that incorporate Bitcoin and blockchain technologies. Several exchange-traded funds (ETFs), like the Amplify Transformational Data Sharing ETF (BLOK), contain shares from different blockchain-related companies. By investing in these ETFs, you are not investing directly in cryptocurrency but in corporate stocks of companies that utilize Bitcoin, which is safer and more profitable.
Another method is to engage in Bitcoin mining. Bitcoin mining involves permitting your computer to be used as a node for the public ledger, and Bitcoin miners are rewarded with actual Bitcoin for their contributions. Consequently, you could earn free Bitcoin without buying it.
Apart from the above methods, let’s explore some of the most popular ways that people are investing in Bitcoin today and what they entail for investors.
Buying Stand Alone Bitcoin
The most straightforward way to invest in Bitcoin is to buy it directly through a platform like Coinbase. This method grants investors actual ownership of the asset, which is an important distinction. With Coinbase, investors can purchase Bitcoin and store it in their own encrypted wallets, allowing them to access the asset’s price performance and use it as a currency for future transactions. Owning Bitcoin is similar to owning any other currency, with the exception of its highly volatile value fluctuations.
It’s worth noting that not all online platforms permit investors to own standalone Bitcoin. For instance, while platforms like Robinhood enable individuals to invest in Bitcoin, they do not allow them to own the asset or its respective keys. Coinbase, on the other hand, grants investors access to their Bitcoin holdings’ keys, allowing them to transfer their assets to their wallets and use Bitcoin as a currency. Robinhood investors, on the other hand, can only benefit from price fluctuations in their accounts and are unable to transfer their holdings to an encrypted wallet. Before investing in any cryptocurrency, investors should be aware of their trading platform’s limitations, particularly if they want to buy standalone Bitcoin.
Greyscale’s Bitcoin Investment Trust (GBTC)
Greyscale’s Bitcoin Investment Trust, founded in 2013, has established itself as a prominent figure in the cryptocurrency industry. By emphasizing the democratization of Bitcoin for the masses, Greyscale has become a trusted name in a rapidly expanding field. While Bitcoin is already decentralized, Greyscale’s goal is to provide more individuals with greater access to the emerging digital currency. As an investment platform in the capital market, Greyscale constructs transparent, familiar investment vehicles for an asset class with unlimited potential for growth.
Greyscale’s current success is largely attributed to its efforts to make Bitcoin more accessible to a wider audience. In particular, Greyscale has played a crucial role in bridging the gap between the informed and uninformed. To achieve this, Greyscale has made investing in Bitcoin easier than ever before. For example, investors can now hold Bitcoin in certain IRA, Roth IRA, and other brokerage and investor accounts through Greyscale.
Bitwise 10 Private Index Fund (BITW)
Investing in the Bitwise 10 Private Index Fund means investing in the Bitwise 10 Large Cap Crypto Index, which tracks the returns of the 10 largest cryptocurrency assets available on the market. By purchasing shares in this fund, investors will be investing in the 10 largest crypto-assets, as determined and weighted by their free-float market capitalization. As a result, when these assets perform well, investors will profit proportionally to the shares they own.
Amplify Transformational Data Sharing ETF (BLOK)
The Amplify Transformational Data Sharing ETF, as its name implies, is an exchange-traded fund that can be traded on the stock market. By purchasing shares of BLOK on the secondary market, investors can increase their exposure to Bitcoin. However, BLOK is primarily an actively managed ETF that specializes in blockchain technology. This means that the fund managers continuously seek out businesses that focus on blockchain technology and invest in them. Therefore, anyone who invests in BLOK is investing in a basket of companies that utilize blockchain and its revolutionary data-sharing technologies. While BLOK may not provide investors with direct access to standalone Bitcoin, it does give them access to companies that use blockchain technology.
If you’re considering investing in Bitcoin, it’s important to take note of the following advice to make informed decisions:
Evaluate your risk tolerance: As mentioned previously, Bitcoin investment carries a high level of risk. Therefore, you need to carefully assess your capacity for risk before committing any funds. If you’re not comfortable with investing in volatile assets or have a limited budget, it may be worth exploring alternative investment options.
Diversify your portfolio: To safeguard yourself from significant losses, it’s wise to spread your investment portfolio across various asset classes. Begin with low-risk investments, such as government bonds or index funds, followed by medium-risk options, such as real estate or corporate stocks. High-risk investments, such as penny stocks or Bitcoin, should be kept to a minimum and only considered after investing in safer options. Bitcoin is like the “cherry on top” – an investment that could yield considerable returns, but not one that should be your primary focus.
Start with small investments: If you’re uncertain about Bitcoin investment, start with smaller amounts. Cliff Auerswald, the President of All Reverse Mortgage, recommends investing $10 per week. “Many people remain undecided about cryptocurrencies’ future prospects. However, with all the hype surrounding crypto, a lot of people remain curious and don’t want to miss out,” he says. “One of the best ways to invest in BTC is to invest only $10 each week. It’s not a substantial risk if things don’t work out, but eventually, you’ll have a healthy investment.”
While purchasing Bitcoin is distinct from purchasing traditional equities such as stocks, there are some fundamental similarities that require attention. The approaches for investing in Bitcoin are not vastly different from those employed when investing in stocks. However, Bitcoin investment strategies tend to revolve more around the duration of the investment. Investors often adopt one of the following three well-known Bitcoin investment strategies:
Buy and ‘Hodl’ Bitcoin
Investors who are familiar with Bitcoin are likely to have heard of the “Buy and ‘Hodl'” concept. For those who haven’t, it’s a simple philosophy that can be grasped quickly. “Hodl” is a term intentionally misspelled for “hold” and is essentially an investment strategy. It suggests that the most effective way to invest in Bitcoin is to hold it indefinitely, even through market turbulence. Supporters of this strategy are aware of the asset’s volatility but have confidence in its long-term potential. As a result, this approach necessitates investors’ endurance of Bitcoin’s price fluctuations, without succumbing to the urge to sell.
Hold Bitcoin for the Long Term
Investors who choose to hold Bitcoin for the long term share a similar viewpoint to the first strategy, believing that the asset will appreciate significantly over extended periods. However, unlike the ‘hodl’ philosophy, long-term holders may choose to sell their holdings once they are content with the returns they’ve gained. While they are confident that Bitcoin will appreciate in value and become a new store of value like gold, they are not averse to selling when it is profitable to do so.
Trade Bitcoin Based on Short-Term Volatility
One of the widely used investment approaches for Bitcoin revolves around the asset’s volatility. Bitcoin is renowned for its rapid fluctuations in value, which makes it ideal for short-term traders. By examining a one-year chart, one can easily see the extent of Bitcoin’s volatility. This particular strategy requires investors to navigate through the price swings and capitalize on selling at peaks and buying during dips. Although this is the most challenging approach and exposes investors to more risk, it can generate profits at a faster rate than the other strategies mentioned earlier.
Bitcoin is a well-known cryptocurrency that relies on a network of interconnected computers to safeguard and store your digital assets. Bitcoin’s value is highly volatile, and it is susceptible to significant and rapid fluctuations, offering potential for high returns but also poses a substantial risk. It is essential to invest in Bitcoin responsibly and gain knowledge on the subject before making any decisions. It is also crucial to diversify your investment portfolio to mitigate the impact of market instability.
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I'm Carina, a passionate crypto trader, analyst, and enthusiast. With years of experience in the thrilling world of cryptocurrency, I have dedicated my time to understanding the complexities and trends of this ever-evolving industry.
Through my expertise, I strive to empower individuals with the knowledge and tools they need to navigate the exciting realm of digital assets. Whether you're a seasoned investor or a curious beginner, I'm here to share valuable insights, practical tips, and comprehensive analyses to help you make informed decisions in the crypto space.