How to Invest in Bitcoin
Here’s a wake-up call if you need one: Cryptocurrency is here to stay.
If you have been ignoring the crypto trend up until now, it’s time to start paying attention. Even if you ultimately decide that you don’t have the risk appetite for crypto, you still need to understand the promise of blockchain technology and learn why more and more Bitcoin investors are popping up every day.
While you should certainly learn about the myriad cryptocurrencies that are available, the most important one is Bitcoin. In February 2021, Bitcoin eclipsed $57,000 — an all-time high. And while there are big swings in both directions, the premier cryptocurrency shows no sign of slowing down any time soon.
If you’re looking to dip your toes into the world of cryptocurrency trading as part of your investment strategy, you’ve come to the right place. Keep reading to learn about what Bitcoin is and why more and more investors are adding it to their portfolios.
Bitcoin: An Overview
What is Bitcoin?
Bitcoin is a cryptocurrency, i.e., a digital currency that uses peer-to-peer technology as a basis for transactions. A Bitcoin is essentially a block of code that is stored across an open, distributed computer network called a blockchain. Bitcoins are encrypted and tamper-proof.
While a number of other cryptocurrencies have emerged in recent years, Bitcoin was the first. It was invented in 2009 by an anonymous person or group using the pseudonym Satoshi Nakamoto, who also came up with the first blockchain database.
Bitcoin took a few years to get off the ground. But by 2017, it was clear that the asset was for real when it climbed to $2,000 in May and approached $20,000 by the end of that year.
But what goes up must come down, and that’s exactly what happened with Bitcoin, which crashed below $4,000 in 2018, making many investors question its legitimacy, and drawing the ire of regulators.
Fast forward to 2020, and things took off again in a big way. Following the outbreak of the pandemic, Bitcoin swelled from roughly $3,800 in March to over $57,000 in February 2021 — a massive bull run that captivated the public and restored faith in Bitcoin’s potential.
(Disclaimer: Suffice it to say that Bitcoin is volatile. If you’re thinking about putting money into Bitcoin for the first time, buckle up and get ready for massive swings in both directions.)
How Much Will Bitcoin Grow?
Looking forward, it’s impossible to tell what’s in store for Bitcoin. Ultimately, it’s a guessing game trying to determine which way the cryptocurrency will trend. And for some, that’s enough reason to avoid it as an investment.
History suggests that Bitcoin almost certainly is going to crash again at some point. But what’s not clear is how much it will fall. Some analysts predict it will fall back to early 2020 levels while others predict a major crash would send the coin closer to the $10,000 range.
At the same time, Bitcoin’s recent backing by large financial institutions and hedge funds suggests that the asset could keep trending up, and that crashes may be less severe. For example, the coin recently saw its biggest drop in history, plummeting from $34,000 to below $29,000.
Before that, Bitcoin had never dropped by more than $4,000 in a few hours. Then, just a few days later, the coin was back with a vengeance, roaring to $40,000 and proving just how difficult its future value is to predict.
Welcome to the crazy world of cryptocurrency. If you’re jumping into Bitcoin, you’ll have to scope out the market and think for yourself about how you want to proceed.
Is Bitcoin a Good Investment?
If Bitcoin is so risky, is it a good investment? And is it better than a traditional investment — like opening an IRA and buying regular securities?
Ultimately, it’s impossible to say whether Bitcoin is better than the stock market. It’s an entirely different animal that involves buying a digital currency instead of pieces of publicly traded companies.
If you’re thinking about scooping up some Bitcoin, use it to diversify your portfolio. Buy Bitcoin just like you’d buy a “risky” stock and build your overall portfolio. That way, you’ll be able to absorb risks from different areas while maintaining liquidity.
One of the major reasons investors are so high on Bitcoin is that there’s a finite supply. In other words, the code was created in such a way that only 21 million Bitcoin can ever be created. So as more and more Bitcoin is mined and more and more people buy it, supply could very well outpace demand.
Should this happen, the price of bitcoin is likely to continue to increase.
How to Invest in Bitcoin
Investing in Bitcoin is very easy, and doesn’t take long. You could even start buying Bitcoin today if you want to.
If you’re thinking about getting involved, the first thing you need to do is sign up for a crypto exchange with a provider like Coinbase, Binance, Kraken, or eToro. Just keep in mind that most cryptocurrency exchanges charge withdrawal fees, so it’s a good idea to shop around for a low-cost provider.
If you’re already using a brokerage account from a provider like Robinhood or Schwab to invest, you can use these platforms to buy Bitcoin as well. Not all brokerage firms offer cryptocurrency access yet, but it’s worth looking into.
One of the best new platforms for crypto investing is called eToro and gives you the ability to trade the most popular digital currencies.
If you want to buy Bitcoin directly, an exchange is probably your best bet. Once you’re set up there, you need to link your crypto account with your bank account or PayPal account. After that, you can buy Bitcoin directly, and the funds will instantly transfer to your account (i.e., your digital wallet).
Hot Wallets vs. Cold Wallets
A hot wallet is a storage account that is connected to the internet. If you use a site like Coinbase, your funds are on the exchange, and you can buy and sell just like you would on a brokerage site.
A cold wallet or hardware wallet is a device that stores crypto offline, making them harder to hack and less vulnerable to government regulation.
Buying Bitcoin in an IRA
If you want to invest in Bitcoin outside of an exchange or brokerage, one of the newest options is through an IRA. Companies like Bitcoin IRA are now making it possible to invest in crypto assets within your retirement account.
Taxes work the same as a traditional IRA, but instead of buying stocks, bonds, ETFs, and mutual funds, you can invest directly into mainstream cryptocurrencies.
When to Buy and Sell Bitcoin
Determining when to buy and sell an asset is one of the hardest parts of investing, and it’s something that investors of all levels struggle with. And with its unpredictability, that decision is even harder with Bitcoin.
If you are trying to wait until the price drops to a certain threshold to buy low, Bitcoin is just as likely to spike in the opposite direction. Some of the recent trends show that Bitcoin can jump a few thousand dollars in just a couple of hours, meaning if you wait too long you could miss a valuable buy-low opportunity.
It’s even harder to determine when — or even if — you should sell Bitcoin. Oftentimes, investors wait too long to dump their Bitcoin, only to regret their decision as the value plummets substantially.
That said, some analysts believe that it’s better to hold Bitcoin long-term and ride out market trends regardless of the price. The thought is that the value of Bitcoin is going to keep growing over time — much like the stock market has over the course of its history, despite booms and busts — making daily price movements less relevant in the grand scheme of things.
All this said, only you can figure out whether it makes sense to invest in bitcoin. Spend some time researching the asset and, if it appeals to you, pick a strategy, and stick to it.
Tips for Investing in Bitcoin
Separate Emotions from Investing
An age-old adage about investing is that you should separate all emotion from the process. This is especially true when it comes to Bitcoin, which by nature is extremely volatile and subject to frequent price swings in both directions.
Beginners often make the mistake of investing in Bitcoin based on what the coin has done recently. For example, you may get excited seeing that the asset has jumped in value over the last week and rush to make a quick transaction to capitalize on the trend. However, it could be more strategic to watch the market and wait for a dip to buy more at a lower price.
Whatever you do, keep a clear head when investing in Bitcoin. Be patient and avoid making rash decisions based on gut feeling. Form a strategy, and stick to it. Lots of first-time investors lost fortunes after the 2017-2018 Bitcoin crash. But some kept buying, and they’re getting the last laugh… for now, at least!
Protect Yourself from Volatility
Best practices suggest you should avoid putting all of your funds in something as risky as Bitcoin. Remember that Bitcoin is still an unregulated currency, and there’s no telling what its true long-term value is. Right now, all we can do is speculate because the asset has been around for less than 15 years.
If you’re thinking about investing in crypto, you should also continue investing in things like index funds, mutual funds, stocks, bonds, and real estate to avoid exposing yourself to too much risk. The more you spread your investments around, the better off you are going to be.
Make Sure to Pay Taxes on Bitcoin
The IRS now mandates that you report all Bitcoin transactions when tax season rolls around. So if you buy any Bitcoin — or if you make any transactions with your cryptocurrency — you’re going to have to let the IRS know about it.
You also have to pay taxes on any gains that you make. Failure to do so could result in fines and penalties.
Frequently Asked Questions
Is it better to sell or hold Bitcoin?
Only you can determine whether you want to sell or hold Bitcoin long term. If you’re looking to make a few quick bucks, you could certainly buy some, sell it high, and escape with your money — if you’re lucky to time the market right. Just remember that you’ll have to pay taxes on any gains that you make.
If you don’t need the money, it may be better to treat Bitcoin like a commodity, the same way you might treat gold or silver. Think long term, and don’t get too upset when the price takes a tumble. It might just mean it’s a good time to buy more.
Whatever you do, you need to be sure of your motives and why you’re investing in Bitcoin in the first place. That way, you’ll be able to determine which course of action you should take. There are no right or wrong answers here. It all depends on your situation and what you’re comfortable with.
Is Bitcoin volatile?
Bitcoin is extremely volatile and subject to wild price swings with little to no notice. If you invest in Bitcoin, make sure you go in ready to experience all kinds of emotions. But like with any other investment, you have to separate them from the financial element in order to be successful.
If you’re interested in getting involved, you might want to think long-term with Bitcoin. Dollar cost average into the market instead of dumping too much cash in at one time.
Can you use Bitcoin with a debit card?
There are many services available now that let you use a debit card for cryptocurrency transactions, making it possible to use cryptocurrency at retailers, restaurants, and online merchants. You can even use cryptocurrency debit cards at some ATMs.
If you’re interested in using Bitcoin to buy things in the real world, Bitpay and Paxful are two cryptocurrency debit cards to consider.
Is there a Bitcoin ETF?
There isn’t one yet, but that could soon become a reality. Just recently, VanEck filed for a Bitcoin exchange-traded fund (ETF) with the Securities and Exchange Commission (SEC).
If this is approved, it could give investors an opportunity to passively invest in BTC, benefitting from the market’s overall growth. In other words, you could soon be able to invest in Bitcoin through the stock market, with a regulated fund. Plus, you can always put some money into the Grayscale Bitcoin Trust ETF ($GBTC).
What is the point of Bitcoin?
Bitcoin is an alternative to bank-controlled fiat — or government-issued — money. Since it’s decentralized, cryptocurrency is not regulated by any particular body. Bitcoin lets you send money to any global location at any time. And, as an added bonus, you can buy and sell Bitcoin after the stock market closes because it trades 24/7.
What’s more, Bitcoin is fully encrypted. Transactions are completely anonymous and private. You can make Bitcoin payments without having to divulge any private information, making it a safer and more private way to transfer funds online.
Bitcoin has been in existence since 2009, and all signs indicate that it’s here to stay. in the United States and around the world.
Is Ethereum a solid investment?
Ethereum is the second-largest cryptocurrency in terms of market cap. It’s a decentralized, open-source blockchain that is used to power applications. Ethereum is fundamentally different than Bitcoin, as its purpose is to enable those on the Ethereum network to make smart contracts without having to use a middleman to facilitate the transaction.
Some analysts predict that Ethereum could be on the verge of a major breakout, making it a cryptocurrency to watch moving forward. However, it’s also a very risky play, like all other coins. Your best bet is to research Ethereum and determine for yourself whether you should pass or buy.
Can Bitcoin make you rich?
Bitcoin can make you rich if you are able to buy enough at a reasonable price and hold on to it until the price goes up. Many people got rich off Bitcoin during the pandemic when the price of Bitcoin was hovering in the $3,000 to $4,000 range.
The tricky part becomes determining what to do with your funds if you strike it rich. You have the option to cash out and trade your Bitcoin for USD — paying a hefty tax and other fees in the process. Or you can take a gamble on the long-term value of the asset for more than its present return.
Your best bet is to do your own research and talk to a trusted financial advisor who will be able to guide you through the Bitcoin market. Just make sure you talk to someone who is savvy about Bitcoin — and not an old-school investor who might not be up on the latest trends in the cryptocurrency market.
Remember that not everyone is a fan of Bitcoin, and some people are going to discourage you from investing in it.
At the end of the day, you have to determine your level of comfort in the cryptocurrency market and make your own choices.
The Bottom Line
While there are tons of different coins on the market, Bitcoin is the oldest, most well-known asset and has the highest demonstrated return on investment. None of the other cryptocurrencies have even come close to touching Bitcoin, and many believe they never will.
And the best part of all this is that Bitcoin’s best days could very well be ahead. It’s possible that we have only seen a small glimpse into what this asset is capable of producing.
Of course, there is no way to predict the future. As such, it’s important not to get too worked up over Bitcoin. Proceed with caution, but don’t be afraid to explore your options.
Remember, the key to getting ahead in personal finance is to take calculated risks. Young investors are encouraged to think about their personal risk tolerance, i.e., their ability to withstand negative investments. Making a Bitcoin investment today could set you up for tremendous success down the line.
Of course, it could also backfire. But it’s still one of the best digital assets you can buy. And if you jump in, you might want to hold on for dear life.