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Bitcoin — the world’s first and largest cryptocurrency in terms of market capitalization — has gone from an unknown digital coin worth less than a cent to highs of over $62,000. This has since translated into a global asset class that has surpassed $1 trillion in value.
If you’re thinking about allocating a small segment of your portfolio into this innovative digital currency, this guide will explain how to invest in Bitcoin as a beginner.
How to Invest in Bitcoin
By investing in Bitcoin, you are purchasing an asset class that is both speculative and volatile. As such, you’ll want to keep your stakes modest and ensure that you are well-diversified elsewhere.
There are many ways in which you can invest in Bitcoin. The avenue that you take to invest will depend on several factors, such as your prior experience with cryptocurrencies, your financial goals and tolerance for risk, and whether you see yourself as a long-term or short-term investor.
In the sections below, we discuss the many different ways of investing in Bitcoin.
Note: Investing or trading Bitcoin requires a brokerage account or an account with a cryptocurrency exchange. However, further storage practices are recommended in order to keep your holdings safe.
The most obvious way of investing in Bitcoin is to personally buy coins from an online broker or exchange. You will retain full ownership of the digital coins and thus, you will need to consider how you intend on storing your funds.
Before we get to that, here’s a basic rundown of how you would buy Bitcoin in the traditional sense:
- You choose an online broker that allows you to buy Bitcoin at competitive fees;
- You open an account and make a deposit with a debit card or bank transfer;
- You enter the amount of Bitcoin that you wish to buy; and
- At some point in the future, you sell your Bitcoin back to US dollars — hopefully at a profit.
You generally have two options once you have bought Bitcoin. The most convenient way is to keep your digital funds stored at the platform you originally purchased them from. In doing so, you don’t need to worry about understanding wallet security controls and private keys.
Alternatively, you might decide to withdraw your digital funds to a private Bitcoin wallet. This can be obtained via a mobile app, desktop software, or a hardware device. Either way, you will be 100% responsible for the safekeeping of your wallet and private keys, so do bear this in mind.
You can read our full guide on how to buy Bitcoin in the traditional sense here.
Although there are several Bitcoin ETFs in Europe, it wasn’t until February 2021 that a market opened up for North American traders. The Purpose ETF (TSE: BTCC) — which is now trading on the Toronto Stock Exchange – has already surpassed the $1 billion in Net Asset Value (NAV).
The main concept with this particular vehicle is not too dissimilar to a gold ETF. For example, by injecting money into the SPDR Gold Shares ETF, you can indirectly invest in gold without needing to worry about storage or logistics.
In the case of a Bitcoin ETF, this allows you to gain exposure to Bitcoin in a safe, regulated, and hassle-free manner.
This is because:
- Storage: You don’t need to worry about storing your Bitcoin investment in a private wallet, so the complexities of private keys and custodianship should be of no concern.
- Regulation: The vast majority of traditional cryptocurrency exchanges operate without a license. By investing in a Bitcoin ETF, you will be doing so in a heavily regulated environment.
- Liquid: Bitcoin ETFs trade on public exchanges just like stocks, so you can enter and exit the market at any time during standard hours.
- Convenient: If you have experience in buying stocks from a traditional online broker, you’ll have no issues investing in a Bitcoin ETF. Crucially, there is no requirement to use a complicated cryptocurrency exchange.
There are, however, several drawbacks that need to be considered when opting for an ETF over a conventional Bitcoin purchase. For example, ETF providers charge management fees — which can and will vary quite considerably. The Purpose Bitcoin ETF, for instance, charges 1% per year.
Additionally, there is every chance that you will find a disparity between the value of Bitcoin and your chosen ETF. This is because the ETF price will go up and down based on its NAV as opposed to the specific value of Bitcoin.
Bitcoin Trust Funds
Another option that you might consider when learning how to invest in Bitcoin is a trust fund. Perhaps the most prominent of its kind is the Grayscale Investment Trust — which was first launched in 2013. Back then, the fund was only available to accredited investors. The Grayscale Investment Trust (OTCMKTS: GBTC) has since been listed on the OTCQX — an over-the-counter marketplace.
The Grayscale Investment Trust operates much like a Bitcoin ETF. This is because you will be able to gain direct exposure to the future value of Bitcoin without needing to directly own or store it.
However, it should be noted that Grayscale Investment Trust shares will often trade at a premium when Bitcoin is on a sharp upward trajectory, which does make this option unfavorable for retail investors.
Even if you do qualify as an accredited investor, you’ll pay an annual account fee of 2%.
As an alternative, you might also consider the ARK Next Generation Internet ETF (NYSEARCA: ARKW). This ETF holds a diversified basket of cutting-edge investments, covering the likes of Coinbase, Twitter, Tesla, and a 5.2% allocation to the Grayscale Bitcoin Trust.
Pro Tip: The main advantage of investing in a trust fund like the Grayscale Trust Fundis that investors can buy and sell it like any other security in an exchange.
Bitcoin Futures & Options
If you see yourself as a seasoned short-term trader, you might also consider Bitcoin derivatives like futures and options.
Both vehicles are growing in terms of market diversity and trading volume — but you do need to have a firm understanding of how futures and/or options work before risking any money.
The benefit of trading Bitcoin futures and options is that you can speculate on the future value of the digital currency on margin. In other words, you can enter positions worth much more than you have in your trading account.
Additionally, Bitcoin futures and options allow you to go long or short. The latter means that you can speculate on the value of Bitcoin going down.
It should be noted that this is a form of Bitcoin trading as opposed to traditional investing. Among other reasons, this is because Bitcoin futures and options markets will always come with an expiration date.
Bitcoin Mining Stocks
Another way to invest in Bitcoin without directly buying coins is to purchase stocks in cryptocurrency mining companies.
For those unaware, these are firms that have the required resources to successfully mine Bitcoin consistently. This involves having a vast number of energy-hungry and powerful hardware units that can solve a complex hashing problem. In turn, the mining company will receive Bitcoin for each problem it solves.
This allows you to gain exposure to the price of Bitcoin through a conventional stock. After all, the main concept with Bitcoin mining companies is that there will be a relatively close correlation between the value of the digital currency and the stocks themselves.
Some of the most notable Bitcoin mining stocks that you can invest in today include:
- Riot Blockchain — (NASDAQ: RIOT)
- Marathon Digital Holdings — (NASDAQ: MARA)
- Bit Digital — (NASDAQ: BTBT)
Although entering and exiting the market is easy when you invest in Bitcoin mining stocks, there are drawbacks to consider.
At the forefront of this is the disparity in value between Bitcoin itself and the respective mining stock. This is especially the case if the company is involved in mining cryptocurrencies other than just Bitcoin.
Benefits of Investing in Bitcoin
If you’re still not sure whether an investment in Bitcoin is right for your financial goals and tolerance for risk, consider these pros and cons.
Let’s start with the benefits of investing in Bitcoin:
Substantial Gains Since 2009 Launch
Perhaps the obvious starting point is to look at how Bitcoin has performed since it was launched in 2009. Back then, the digital currency was only known by a small community of programmers and coders.
This meant that during the first couple of years, Bitcoin carried a value of just a fraction of a cent. Fast forward to 2021 and the crypto asset has since breached $62,000 per coin. This translates into 12-year gains in the millions of percentage points.
In more recent times, Bitcoin has enjoyed a fruitful period since it hit lows of $5,000 in March 2020. Based on its recent highs of $62,000; that’s gains of over 1,100% in 14 months of trading.
It, therefore, goes without saying that Bitcoin is the best performing asset class of the past decade.
Although not perfect, the technology that supports Bitcoin — the blockchain – is nothing short of innovative. In its most basic form, the blockchain ensures that Bitcoin remains a decentralized payments network.
This means that no single person or authority controls the network and that Bitcoin is not backed by a central bank or nation-state.
The technology also permits cross-border transfers that take just 10 minutes to process and at a transaction fee that usually sits below $1 irrespective of the amount being sent.
A Tool for Hedging and Diversification
Hedging is a crucial strategy that all investors should seek to adopt. In simple terms, hedging protects your portfolio from a potential downward market swing.
For example, if you are 100% invested in stocks and the wider markets go on a prolonged correction, the value of your portfolio will follow suit. But, hedging into an alternative asset class like Bitcoin, could help soften the blow.
Additionally, by investing in Bitcoin, you are diversifying into an asset class that sits outside of the traditional financial system. This can help mitigate the risks of being overexposed to the particular market.
Store of Value
Although Bitcoin is a medium of exchange — as the network permits sending and receiving coins from wallet to wallet — many would argue that it is more aligned with a store of value.
This is because the number of Bitcoin in circulation will eventually be capped at 21 million. In a similar nature to gold, Bitcoin is a finite asset class.
Fortunately for the average retail investor, there is no requirement to buy a full Bitcoin to gain access to this market. Instead, Bitcoin can be fractionated, which paves the way for small investments.
Many trading platforms in the US allow you to invest from just $1 into Bitcoin — which is perfect for risk-management purposes.
Downsides of Investing in Bitcoin
Much like any potential investment, you also need to consider the downsides of Bitcoin before parting with any money.
Lack of Understanding
There is still a significant lack of understanding when it comes to Bitcoin. This is because to many, the technology is overly complex. This can have the undesired effect of preventing new people from entering the market.
Although Bitcoin is the best performing asset of the past decade, it is also the most volatile. Even with a market capitalization of over $1 trillion, the digital currency can still go up or down by more than 10% in a single day of trading.
There is still a lack of solid regulation when it comes to digital currencies like Bitcoin. This will be difficult to implement on a global scale, as Bitcoin is a decentralized asset that operates in a borderless manner.
The fact that Bitcoin transactions are not tied to the sender or receiver’s real-world identity could be problematic from an anti-money laundering perspective. In turn, this could result in draconian regulation that may hinder Bitcoin’s growth potential.
Pro Tip: Keep in mind that Bitcoin’s price is solely determined by investor’s interest (supply and demand market forces) as Bitcoin is not linked to any tangible asset.
FAQ About Investing in Bitcoin
We’ve found some of the most frequently asked questions with regards to investing in bitcoin, here are our answers.
Why Should I Invest in Bitcoin?
There are several reasons why people invest in Bitcoin. Some are speculative investors that are happy to take a high-risk approach to investing with the hope of making above-average gains in a short period. After all, in just over 12 years, Bitcoin has gone from an asset worth less than a cent to $62,000.
Others will allocate a small segment of their portfolio to Bitcoin so that they can gain exposure to this innovative asset class in a risk-averse manner. Others might invest in Bitcoin as a means to hedge against the wider stock markets.
Ultimately, if you do invest in Bitcoin, it’s important to remember that the digital currency is both speculative and overly volatile.
Is Investing in Bitcoin a Good Way to Hedge Against Inflation?
There is no denying that, based on past performance, Bitcoin has outpaced the rate of inflation by a considerable amount. Although there is every possibility that this will continue to be the case, there are much more risk-averse ways to hedge against inflation.
Crucially, Bitcoin volatility levels will still see the digital currency go up or down by more than 10% in a single day, so this wouldn’t be a conducive strategy for inflation hedging.
Although Bitcoin is often referred to as a digital version of gold, there simply isn’t enough data available to say that both assets are correlated to one another. On the other hand, both Bitcoin and gold can be viewed as ways to hedge against falling stock markets.
What Is the Best Strategy for Investing in Bitcoin?
If you are looking to invest in Bitcoin in the long run, then a simple buy-and-hold strategy is best. This means that you will buy Bitcoin from an exchange or broker and then keep the funds in a wallet for many years to come.
To complement the buy and hold strategy, you might also consider dollar-cost averaging. This will see you invest small, but regular amounts in Bitcoin as a means to reduce the impact of volatility.
Why Is Bitcoin So Volatile?
One of the main reasons that Bitcoin is so volatile is because the digital currency is a speculative asset class. Many will enter the market because of a fear of missing out, which can ultimately drive prices up and down in a parabolic manner in a very short period.
How Is the Price of Bitcoin Determined?
In a similar nature to traditional stocks and shares, the price of Bitcoin is determined by market forces. When market sentiment is positive and there are more people buying Bitcoin than selling, this will drive the price of the crypto asset up. Similarly, when there are more sellers than buyers, the price of Bitcoin will go down.
In summary, Bitcoin is one of the most exciting asset classes in the global investment scene. The main attraction of this digital currency is the magnitude in which its value has grown. This now runs into the millions of percentage points since the project was launched in 2009.
If you want to invest in Bitcoin from the comfort of your home, there are many ways to do so. Bitcoin markets now include ETFs, trust funds, futures, options, and even mining stocks.
However, perhaps the best option on the table is to invest in Bitcoin by purchasing from a trusted broker or exchange. In doing so, you will retain 100% ownership of the digital coins until you decide to cash out at some point in the future.
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Kane is a highly-skilled researcher and writer with expertise in finance, trading, and cryptocurrencies. Academically, Kane holds a Bachelor’s Degree in Finance, a Master’s Degree in Financial Crime, and he is currently engaged in a Doctorate. He is passionate about researching the money laundering threats of the virtual economy — notably, cryptocurrencies and blockchain technology.