How to Invest in Bitcoin

How to Invest in Bitcoin

Other ways to invest in cryptocurrency

While investing directly in cryptocurrency may be the most popular way to do so, traders have other ways to get into the crypto game, some more directly than others. These include:

  • Crypto futures: Futures are another way to wager on the price swings in Bitcoin, and futures allow you to use the power of leverage to generate massive returns (or losses). Futures are a fast-moving market and exacerbate the already volatile moves in crypto.
  • Crypto funds: A few crypto funds (such as the Grayscale Bitcoin Trust) also exist that allow you to wager on the price swings in Bitcoin, Ethereum as well as a few other altcoins. So they can be an easy way to buy crypto through a fund-like product.
  • Crypto exchange or broker stocks: Buying stock in a company that’s poised to profit on the rise of cryptocurrency regardless of the winner could be an interesting option, too. And that’s the potential in an exchange such as Coinbase or a broker such as Robinhood, which derives a huge chunk of its revenues from crypto trading.
  • Blockchain ETFs: A blockchain ETF allows you to invest in the companies that may profit from the emergence of blockchain technology. The top blockchain ETFs give you exposure to some of the key publicly traded companies in the space. But it’s important to note that these companies often do much more than crypto-related business, meaning your exposure to cryptocurrency is diluted, reducing your potential upside and downside.

Each of these methods varies in its riskiness and exposure to cryptocurrency, so you’ll want to understand exactly what you’re buying and whether it fits your needs.

Step 2: Choose a payment method

Exchanges also vary in terms of the payment methods they support. Most major platforms do offer the option of linking your bank account for wire and ACH transfers, as well as the option of linking a debit card. Some also let you pay via PayPal, with Coinbase also supporting Apple Pay .

Regardless of the option you choose, you will have to verify your identity when first signing up for an account and registering a payment method. In the US, you’re usually required to submit a scan of a state-issued ID, such as a driver’s license or identification card.

Depending on where you are and on your chosen platform, you may also be required to provide scans of additional documentation (such as your passport), as well as being asked to submit a proof of address.

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How To Invest In Bitcoin

Investing in BTC is similar to investing in stocks, except far more volatile because of the daily swings in BTC. Here are the steps to invest in stocks from the beginning:

  1. Open a brokerage account at a firm that allows crypto investments
  2. Deposit funds from your bank into the brokerage account.
  3. Buy a stock using deposited funds (cash balance).
  4. Later sell the stock for a gain or loss. Funds are returned to your cash balance.

The main difference with BTC is for step three; you buy BTC or another cryptocurrency instead of stock.

With BTC, the above flow is similar in most cases but it depends on the exchange or trading platform. In some cases, you can buy BTC using your credit card or by transferring funds from your bank account.

For other platforms, you must transfer BTC directly. This is known as a direct deposit of BTC.

We’ll discuss how to invest in BTC for US citizens. The methods vary across countries because of differences in laws and regulations. Some countries require more private information than others to verify you are legitimate.

How Much Should I Expect to Pay to Purchase Bitcoin?

Typically, the price for purchasing bitcoin consists of a fee per trade plus the cost to convert a fiat currency (generally dollars) to bitcoin. (Cryptocurrency exchanges and payment services make money off of this conversion spread.) The fee per trade is a function of the dollar amount of the trade. A higher trade amount will carry higher fees. The overall purchase cost also depends on features offered by the venue. For example, Robinhood does not currently offer an online wallet for storing bitcoin. Therefore, you will need to budget for online wallet costs for your purchase.  

Pros and Cons of Investing in Bitcoin

Pros
  • Relatively easy to buy

  • Offers an alternative currency and investment strategy

  • Secure

Cons Highly risky and volatile Potential for hacks and other losses Requires some level of technical knowledge

Pros Explained

  • Relatively easy to buy: You can easily buy Bitcoin using a cryptocurrency exchange, brokerage, or another account with Bitcoin support. It’s as easy as buying stock and other common investments.
  • Offers an alternative currency and investment strategy: Bitcoin can act as a hedge against inflation and other currency risks. It also offers a unique investment outside of traditional financial markets.
  • Secure: The blockchain technology behind Bitcoin makes it very secure and difficult to hack. All coins are tracked from inception through current ownership in a public ledger.

Cons Explained

  • Highly risky and volatile: Bitcoin’s value is very volatile. The currency lost about half of its value over about three months in the first half of 2021.
  • Potential for hacks and other losses: If you don’t keep your Bitcoin access information secure, hackers may be able to access and steal your currency. In some cases, even large exchanges have experienced losses.
  • Requires some level of technical knowledge: While you don’t need advanced computer or programming skills, you’ll need to use a computer and the internet to buy, sell, and exchange Bitcoin and other cryptocurrencies.

3. Purchase Your Bitcoin

Once you have linked your wallet to the exchange, you must select the number of Bitcoins you want to purchase. One Bitcoin costs about $40,000, making it difficult for everyone to purchase a round-number amount.

You can buy the cryptocurrency in fractions, allowing you to purchase exactly the amount you want.

Top cryptocurrencies to consider as a beginner investor

As a beginning cryptocurrency investor, you shouldn’t try to find a diamond in the rough. You should get your feet wet with more established cryptocurrencies that have built-out networks to support them. That will allow you to get more familiar with the mechanics of cryptocurrency investing, as well as how it fits into your portfolio.

Bitcoin (CRYPTO:BTC) is an easy place to start. Every cryptocurrency exchange will support trading in Bitcoin. It’s well-established, and you know what you’re getting with Bitcoin. It’s nothing fancy, just digital cash, but it has a first-mover advantage that had made it widely adopted. That gives Bitcoin a competitive advantage when it comes to being actually usable as a medium of exchange.

Ether (CRYPTO:ETH) is also a good choice for beginner investors. Ethereum’s technology is behind most DeFi projects, which use the Ethereum blockchain to execute smart contracts and provide financial services without a central authority. Anytime a user wants to write a smart contract to the blockchain, they’ll have to pay Ether to do so. Increased adoption of DeFi applications will lead to greater demand for Ether.

A third option for beginner investors is Cardano (CRYPTO:ADA). Cardano offers an alternative to Ethereum that’s designed to be more energy efficient by using a proof-of-stake system to verify blocks on the blockchain. As such, it currently has much lower transaction fees than Ethereum. Additionally, Cardano has a hard cap on the total supply of the token similar to Bitcoin. That means the supply could become constrained in the future, which will drive the price higher.

How to Invest in Bitcoin: Different Methods

There are several different ways to invest in Bitcoin, both directly and indirectly.

First, you can invest in a company that utilizes Bitcoin technology. Although Bitcoin is a risky investment, plenty of companies sell successful products that incorporate Bitcoin and blockchain technologies. You can find several exchange-traded funds (ETFs) that include shares from various blockchain-related companies, like the Amplify Transformational Data Sharing ETF (BLOK). You’re not directly investing in cryptocurrency but in corporate stocks of companies that utilize Bitcoin. It’s safer, and most ETFs in this category outperform the market.

Second, you can participate in Bitcoin mining. Bitcoin mining is simply allowing your computer to be used as a node for the public ledger. It’s a topic worthy of its own blog post, but you should know that Bitcoin miners are rewarded with actual Bitcoin for their contributions. You could receive free Bitcoin without actually ever purchasing it.

Outside of what was just discussed, let’s take a look at some of the most popular ways people are investing in Bitcoin today and what they mean for investors.

Purchasing Standalone Bitcoin

The most obvious Bitcoin investment strategy is purchasing standalone Bitcoin. Buying Bitcoin directly from an app like Coinbase allows investors to take “physical” ownership of the asset. That’s an important distinction to make, as Coinbase allows investors to actually buy Bitcoin and store it in their own encrypted wallets. In doing so, investors will simultaneously gain access to the asset’s price performance and use it as a currency to make subsequent transactions. Owning standalone Bitcoin isn’t all that different from owning any other currency, less the incredibly volatile swings in value.

It is important to note that not every online platform or application allows investors to own standalone Bitcoin. Online trading platforms like Robinhood, for example, allow people to invest in Bitcoin, but they do not go as far as to let investors own Bitcoin (or its respective keys). Whereas Coinbase grants investors the “keys” to their own Bitcoin holdings so that they may transfer the assets to their own wallets, Robinhood does not. As a result, investing in Bitcoin on Coinbase will allow investors to own the asset and treat it like a currency. On the other hand, Robinhood investors can only take advantage of the price movements in their accounts and can’t transfer holdings to an encrypted wallet. Investors who intend to purchase standalone Bitcoin need to know their trading platforms’ limitations before committing capital to any cryptocurrency.

Greyscale’s Bitcoin Investment Trust (GBTC)

Founded in 2013, Greyscale’s Bitcoin Investment Trust has become a leader in the cryptocurrency industry. In becoming a trusted name in a rapidly growing sector, Greyscale emphasized democratizing Bitcoin for the masses. While Bitcoin is already decentralized, Greyscale gives more people more access to the up-and-coming digital currency. More specifically, Greyscale is an investment platform on the capital market that builds transparent, familiar investment vehicles for a growing asset class with unlimited upside.

Greyscale owes its current success to making Bitcoin more accessible to everyone. In fact, Greyscale helped bridge the gap between the informed and the uninformed. To do so, Greyscale made it easier than ever to invest in Bitcoin. For example, Greyscale allows investors to hold Bitcoin in certain IRA, Roth IRA, and other brokerage and investor accounts.

Amplify Transformational Data Sharing ETF (BLOK)

As its name suggests, the Amplify Transformational Data Sharing ETF is an exchange-traded fund traded on the stock market. Investors may purchase shares of BLOK on the secondary market and increase their exposure to Bitcoin. More specifically, however, BLOK is an actively managed ETF that specializes in blockchain technology. That means fund managers constantly seek out businesses that focus on blockchain technology and investing in them. Therefore, anyone investing in BLOK is invested in a basket of blockchain technology companies. While BLOK may not give investors access to standalone Bitcoin, it does give them access to the companies which use blockchain and its transformational data-sharing technologies.

Bitwise 10 Private Index Fund (BITW)

An investment in the Bitwise 10 Private Index Fund is an investment in the Bitwise 10 Large Cap Crypto Index. For those unfamiliar with the Bitwise 10 Large Cap Crypto Index, it tracks the return of the 10 largest cryptocurrency assets on the market. Therefore, investors who buy shares in this particular fund will be investing in the 10 largest “crypto-assets,” as measured and weighted by free-float market capitalization. When the assets perform well, investors will realize gains proportionate to the shares they own.

How Much Does Bitcoin Cost?

It may seem surprising that Bitcoin has reached a five-figure value. One bitcoin costs about $40,000 as of Mar. 7, 2022.

However, the value of Bitcoin varies from time to time. This happens due to several factors that affect the rate of Bitcoin.

Do I need a lot of money to invest in bitcoin?

While the value of a single bitcoin may be in the tens of thousands of dollars, you don’t need nearly that much money to invest in Bitcoin. At Coinbase, for example, you can buy as little as $2 of Bitcoin at a time. If you’d like to test out investing in Bitcoin with a small amount, perhaps $10 or $20, that’s certainly an option. You don’t need to be wealthy or have a lot of money to invest in Bitcoin.

How to Invest in Bitcoin in 5 Steps

Are you ready to dive into cryptocurrency? You’re in luck, as buying Bitcoin is simpler than you might think. Here’s how to invest in Bitcoin, in 5 easy steps:

  1. Join a Bitcoin Exchange

  2. Get a Bitcoin Wallet

  3. Connect Your Wallet to a Bank Account

  4. Place Your Bitcoin Order

  5. Manage Your Bitcoin Investments

2. Get a Bitcoin Wallet

When you purchase a coin, it’s stored in a “wallet,” which is where all your cryptocurrency is stored. There are two types of wallets you can get: a “hot wallet” or a “cold wallet.”

A hot wallet is a wallet that’s operated by either your cryptocurrency exchange or by a provider. Some exchanges will automatically provide you with a hot wallet when you open your account. In any case, hot wallets are convenient because you’ll be able to access your coins through the internet or a software program.

Some notable hot wallets are:

However, hot wallets are not the most secure form of coin storage. If the hot wallet provider is hacked, then your coin information may be at risk.

A cold wallet is the safest storage method for your coins. A cold wallet is an actual piece of hardware that stores your coins, usually, a portable device that’s similar to a flash drive. Most cold wallets cost between $60 to $100. Some popular cold wallets are:

  • Trezor

  • Ledger Nano

If you’re only going to purchase small amounts of coin, then you might be fine using a hot wallet with an insured crypto exchange. But if you’re going to be trading large amounts of coin, then a cold wallet would be well worth your investment.

Need help deciding which wallet is right for you? Take a look at our picks of the best bitcoin wallets.

3. Connect Your Wallet to a Bank Account

When you’ve obtained your wallet, you’ll need to link it to your bank account. This enables you to purchase coins and sell coins. Alternatively, your bank account may be linked to your cryptocurrency exchange account.

4. Place Your Bitcoin Order

Now you’re ready to purchase Bitcoin. Your cryptocurrency exchange will have everything you need to buy. The big question is, how much Bitcoin should you purchase?

Some coins cost thousands of dollars, but exchanges often allow you to buy fractions of a single coin—your initial investment could be as low as $25.

Investing in Bitcoin is very risky, and it’s important that you carefully determine your risk tolerance and review your investment strategy before you purchase any Bitcoin. We’ll go over this in the next section.

5. Manage Your Bitcoin Investments

After you’ve purchased bitcoin, you can:

  • Use your coins to make online transactions

  • Hold your coins for a long period in the hopes it’ll appreciate in value

  • Perform day trading with your coins—that is, buying and selling coins with other Bitcoin owners, which can be facilitated on the cryptocurrency exchange

Your cryptocurrency exchange will provide you with everything you need to buy and sell coins.

[ Want to learn how to safely invest in Bitcoin & other crypto assets? Take a 60-minute online training class today! ]

How to pick a cryptocurrency to invest in

Before you go ahead and buy some coins or tokens just because somebody says it’s a good investment, it will pay to do some research.

First of all, it’s important to understand that picking a good cryptocurrency is not like picking a good stock. A stock represents ownership in a company that creates profits for its shareholders, or at least has the potential to do so. Owning a cryptocurrency represents ownership in a digital asset with zero intrinsic value.

What makes a cryptocurrency increase or decrease in price is simple supply and demand. If there’s increased demand and a limited supply increase, the price goes up. If supply becomes constrained, price goes up, and vice versa. So, when evaluating a cryptocurrency, the most important questions to answer are how the supply increases, and what will drive demand for the coin higher.

You can answer those questions by reading the white paper that a cryptocurrency team publishes to attract interest in their project. Look at the roadmap for a project and see if anything could spark an increase in demand. Research the team behind a project and see if they have the skills to execute their vision. Try to find a community of people already investing in the cryptocurrency and gauge their sentiment.

It’s also important to consider how much money has already flowed into a cryptocurrency. If the market cap is already very high, there may not be much potential growth left. A high price will curb demand and increase supply as early investors look to take money off the table.

Image source: Getty Images.

Image source: Getty Images.

Does Bitcoin Make Sense for You to Invest In?

As with any investment, it’s important to do your research first and understand what you’re getting into. Make sure any crypto investments you make do not get in the way of other goals like funding your retirement accounts and paying off high interest debt. Experts recommend keeping your cryptocurrency investments to less than 5% of your portfolio. 

Bitcoin is a good place for beginner crypto investors to start, according to the experts we’ve talked to. As the first cryptocurrency, Bitcoin has the longest record for investors to consider. Since its creation in 2009, Bitcoin has exponentially risen in value over the past decade. Many experts liken it to “digital gold” as a long-term store of value. 

While Bitcoin’s recent massive price swings highlight its volatility, many experts say a small holding of cryptocurrency like Bitcoin can be a healthy (if speculative) diversifier in your overall investment strategy.

(Read More: What is Bitcoin – The First Cryptocurrency

Is My Bitcoin Purchase Protected by SIPC?

No, your bitcoin purchase is not protected by SIPC. At certain exchanges, like Coinbase, fiat balances in individual accounts may be FDIC-insured to the tune of $250,000 per account.

Break into bitcoin

Try out bitcoin or add to an existing trove. Buy and sell, send some to friends and family, or transfer your funds to another digital wallet on the blockchain.

Step 4: Store your crypto in a safe place

While bigger exchanges are becoming safer, hacks and fraud remain a big problem for the industry. This is why investors with significant sums in Bitcoin are advised to consider storing their cryptocurrency themselves.

“Experienced traders that are very good with cybersecurity might prefer to own their wallets, as this gives you the ability to move your cryptocurrencies whenever you want to and not be subject to an exchange. The saying ‘Not your keys, not your coins’ was popular last year, as many exchanges got hacked or shut down,” says Moya.

This means transferring your Bitcoin from the exchange you use to your own cryptocurrency wallet. Such wallets come in two forms:

  • Cold wallets: also known as hardware wallets, these are small devices that store your Bitcoin address’ private key, which is necessary to transfer Bitcoin out of the address. They do not connect to the internet and are therefore considered safer than online, software-based alternatives.
  • Hot wallets: also known as software wallets, these are apps that can be used through your phone, desktop computer, or web browser. They also store the private key of your Bitcoin address, but because they do connect to the internet, they aren’t considered quite as safe as hardware/cold wallets.

Software wallets aren’t quite as secure as hardware wallets, but the leading varieties do still offer a range of security features, such as two-factor authentication and compatibility with hardware wallets.

Final Thoughts

Investing in BTC isn’t much different from investing in stocks. With BTC, you need to open an account with an exchange. With stocks, you open an account with a brokerage. Then you deposit funds. 

The only difference with investing in BTC is that you have to purchase BTC, first using deposited funds, before you can trade BTC. Although, your initial purchase of BTC is your first opening trade.

Have you ever used any of these sites?

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