If you've been paying attention to the news at all this year, you've probably heard about Bitcoin. But like many people, you may have no idea what it is, the pros and cons, and how to invest in bitcoin. Maybe you're looking to diversify your investments. Or perhaps you don't want to miss out on the “next big thing.” Whatever your reasons, if you're new to Bitcoin, you've come to the right place.
In This Guide:
What is Bitcoin?
In the simplest definition, Bitcoin is a cryptocurrency. You can use cryptocurrencies to purchase goods like other currency types, but some things set them apart from other currencies.
First, Bitcoin was created in 2009. Unlike other currencies that have been around for dozens or hundreds of years, Bitcoin is an extremely new currency by comparison. The even crazier thing about Bitcoin? No one really knows who created the technology behind it.
The 2009 article that introduced the concept was written under the pseudonym, Satoshi Nakamoto. But who is Satoshi Nakamoto? No one knows! He could be multiple people or one person.
Another difference between other currencies is that Bitcoin is technically not legal tender. A legal tender is a form of money that can be accepted to pay off debts. However, it is becoming more widely accepted as payment. You can now use this cryptocurrency to purchase goods and services at various stores like Overstock and Tesla.
It works through a decentralized, online ledger system called blockchain. The value of Bitcoin comes because it is scarce. There is a limited supply of Bitcoin that people can ever mine.
Mining is more advanced than what we are going to dive into in this Bitcoin 101 article. But think of it like mining gold. Some people mine it, and there is only so much out there.
Big-name financial companies like PayPal have recently become more accepting of Bitcoin. PayPal now allows users to buy, sell, and hold cryptocurrencies, including Bitcoin, Bitcoin Cash, LiteCoin, and Ethereum.
Wider acceptance by several companies has made it easier to make purchases using Bitcoin in recent months. For example, through PayPal, you can make cryptocurrency purchases at over 26 million merchants.
How Does Bitcoin Work?
Bitcoin uses a technology called blockchain. It is basically a publicly shared ledger that tracks peer-to-peer Bitcoin exchanges. These exchanges are logged and protected using cryptography, which is a branch of mathematics used in online security.
Many online commerce and banking sites already use cryptography to increase security. When you exchange Bitcoin, you prove ownership with a digital signature. The data and exchanges are organized in a series or chain of “blocks” of information. These informational blocks are arranged chronologically.
So, when someone makes a purchase or exchange of Bitcoin, it shows up on the ledger. Person A paid person B 100 Bitcoin. Person B might then make a payment to Person C. No one exchanged any physical cash. But the blockchain technology keeps track of who owns what after they have completed all the exchanges.
As a beginner, the concept of Bitcoin can be hard to grasp. After all, it is unlike anything else we have dealt with before. There are some great videos out there that help summarize the concept of what Bitcoin is and how it works.
If you're still confused, definitely give these a watch!
Even if you don't understand all the technology's specifics, Bitcoin can still be worth considering for your investments. After all, I don't understand everything in the stock market, but I still invest primarily in total market index funds.
However, I recommend having a basic understanding of Bitcoin before taking the plunge! And be sure to keep reading the rest of this article to gain an even better understanding of Bitcoin and decide if it is the right investment for you.
How Can I Buy and Sell Bitcoin?
If you are interested in purchasing Bitcoin, you will do so with real US dollars. To buy Bitcoin, you'll need to go through a cryptocurrency exchange account.
You need to be careful when choosing an exchange account. There are lots of exchange accounts out there. But some are riskier because of hacking potential. Hacking is a tremendous concern for many people considering Bitcoin or other cryptocurrencies.
But if you purchase through a reputable company, you don't have as much to worry about. To increase your security even further, use a strong password and two-factor authentication. It is also advisable to avoid the dark web as you have a higher risk of your information, including Bitcoin information, being stolen.
Reputable Cryptocurrency Exchanges
The most commonly used exchange accounts are Coinbase, Gemini, and Kraken. There are also other ways to purchase crypto, including popular apps like Robinhood, SoFi, and PayPal. The main advantage of investing with Robinhood is their transaction fee trades.
Most crypto exchanges charge a fee, but Robinhood does not charge any fees to buy or sell. The major downside is you can only use Robinhood to buy and hold. You can’t actually use your crypto for making purchases or transferring to other individuals. This means if you want to use your money, you have to pull it out and pay capital gains taxes.
Robinhood has some downsides. But if you’re looking to dabble in crypto, it can be a good starting point. That way, you aren’t out any money for fees which can get relatively high for some exchanges. If you are interested in joining, be sure to use a Robinhood bonus referral link to get a free stock just for joining.
I hold most of my cryptocurrency in Coinbase. Coinbase is an extremely user-friendly app. I had no issue getting started with it. Even cooler is you can get $10 in Bitcoin after making a $100 Bitcoin purchase when using a Coinbase bonus referral link. And you can even earn free crypto for completing learning modules.
Coinbase has a web-based and app option. Once you create a Coinbase account, you'll notice there is much more than just Bitcoin on there. There are hundreds of other types of cryptocurrencies available to purchase. People sometimes call these other currencies alt-coins. That is because they are an alternative to Bitcoin.
Bitcoin is the longest-standing cryptocurrency. That, paired with the fact that many large corporations are beginning to embrace it, makes Bitcoin slightly less risky than alt-coins. Many of the smaller coins are likely to go bust, taking all your hard-earned cash with them!
Storing Your Bitcoin
Once you purchase Bitcoin, you will store it within Coinbase either in your digital wallet or digital vault.
A crypto wallet is a lot like a real wallet. With a real wallet, you have cash on hand to make purchases. But you don't want to carry your life savings in it! After all, having all your money in a wallet makes it more likely to be stolen from you.
A vault is more like a bank. It is safer for storing your assets, but you can't access them instantly. If you invest a sizeable amount of money in Bitcoin, it is wise to keep most of it in the vault. Then you can transfer it to your wallet for purchases or making sales.
To purchase Bitcoin or other cryptocurrencies on Coinbase, you can link your bank account. Once your accounts are linked, you can easily buy Bitcoin. You can use the Coinbase wallets free of charge.
Transactions will Coinbase incur a fee, though. It is a bit of a drag, but then again, many investments have some type of fees associated with buying and selling. Even credit and debit cards have fees ranging from 1.5 to 3.5% rate. Some merchants pay these fees, but others require you to pay them. Coinbase fees are 1.49% for bank drafts and 3.99% for debit card purchases.
This means the larger the purchase, the higher the fees. And since you can see how crazy high the debit card purchases are, it is worth linking your bank account. It makes the process simpler and more affordable. You also have the option to set up recurring purchases.
Recurring purchases can be a great way to dollar cost average your purchases. Dollar-cost averaging involves investing a specific amount of money each week or month at the same time. Since you can't time the market, you will sometimes buy high and sometimes buy low. In the end, these highs and lows average out, making timing the market less critical.
Ways to Make Money on Bitcoin
Now that we have covered the basics, it is time to get to the fun stuff. Making money! There are quite a few ways to make money on Bitcoin. In fact, it is more versatile than many other investments. Keep reading for all the fantastic ways to maximize your returns on Bitcoin.
Make Money on Bitcoin by Buying and Holding
Most investors make money on Bitcoin using a buy-and-hold approach. This is similar to making money on stocks. As the value of the asset appreciates, your holding value increases.
It is important to note that past performance is not a guarantee of future returns. But to give you some perspective, Bitcoin has been killing it!
Bitcoin performed better than any other asset class in both 2019 and 2020. In just 12 months, it had a 308% return. And since its inception, Bitcoin's value has increased over 50,000%. Yes, you read that right! As of this initial publication now has a total market value of around 1 trillion dollars. So the potential to make a lot of money is there if these trends continue.
Earn Money Fast with Day Trading
Another way to make money on Bitcoin is day trading. Day trading is inherently riskier than a buy-and-hold approach. It isn't something I recommend for beginners and not something I do myself. But if you want to do the research to become a skilled trader, there is potential to quickly make a lot of money. However, there is also the potential to lose just as much, just as fast.
Accept Bitcoin for Items or Services You Sell
If you provide services or sell goods, you can also make money by accepting Bitcoin as payment or tips. Then, as the value of Bitcoin goes up, you will be rolling in the dough.
More and more e-commerce systems and brick and mortar payment systems are offering this option. If you are interested in accepting Bitcoin or other cryptocurrencies as payment, check with your current payment provider.
Earn Money through Bitcoin Mining
Another way to make money on Bitcoin is mining. Miners help add to the blockchain and are rewarded with bitcoins. Like day trading, mining is a skill in and of itself. If you are computer savvy, it is an option worth considering.
As of this writing, there are only about 3 million more Bitcoins that people can mine. That is still a fair amount, all things considered, though. And since 1 Bitcoin is currently worth over $45,000 it might just be worth it.
The process can be extremely time-consuming and requires specialized computing equipment. But if you're into tech, it is a way to earn Bitcoin without having to pay for it.
Is Bitcoin a Good Investment?
It is impossible to know what will happen with Bitcoin in the future. The same is true of any investment. No investment is ever guaranteed. How I wish I could recommend to you (and myself) the perfect long-term investment!
The jury is out on the long-term performance of Bitcoin. Some people say Bitcoin is just one big scam that will crash and burn to zero. Others say Bitcoin is just getting started. These more bullish investors expect Bitcoin to double by next year to over 100,000 dollars. Some even think one Bitcoin could be worth up to $1 million in 10 or more years.
Bitcoin is a speculative investment, which means high risk with the potential for high reward. And only time will tell what turns out to be the case with Bitcoin.
So, is it a good investment? No one really knows! It depends a lot on your personal risk tolerance as well. Investing in Bitcoin is like riding a rollercoaster. It has more ups and downs than you will see in most asset classes. If you can't stomach riding out the volatility, it may not be the right investment for you.
Benefits and Risks of Investing in Bitcoin
Now let's go over the pros and cons of investing in Bitcoin. As with any investment, there are always good and bad things. Bitcoin is no different.
Benefits of Investing in Bitcoin
There are lots of benefits to investing in Bitcoin. Many people equate Bitcoin to the internet. When the internet was first invented, there were plenty of haters. People who said it was all made up and would go nowhere.
We obviously all know how that turned out. And if Bitcoin and blockchain take off similarly, the potential payout could be enormous. People who started investing even small amounts in Bitcoin when it began in 2009 are now millionaires many times over.
Many people believe Bitcoin is the currency of the future. By getting in now, you'll be ready to adapt to the financial world of the future. It is becoming increasingly more accepted as a standard payment method as well.
Another benefit to investing in Bitcoin is liquidity. You can buy and sell in seconds. And finally, it is decentralized and less regulated by the federal government. Some people like to be able to make purchases with a bit more anonymity. Bitcoin makes this easy to do. You still have to pay taxes on any gains, or the IRS will find you!
Risks of Investing in Bitcoin
While there are pros to investing in Bitcoin, it is a highly risky investment. There is no other way to say it. You have the potential to make a ton of money, but you could just as easily lose it all. That is why it is critical to only invest money you can afford to lose.
Bitcoin is not a place to invest your entire retirement savings, your emergency fund, or house down payment. If things take a turn for the worst, that money could be gone forever.
Besides being risky, Bitcoin is also volatile. This volatility means the highs and lows can swing wildly and widely. You could see 10% or more significant drops in a day. At times, Bitcoin has decreased between 20% and 30% in a matter of hours.
The price could also go up just as high. But this volatility makes Bitcoin much less predictable. If you compare this to a major stock fund like the S&P 500, things become even more noticeable. Sure, the S&P 500 can have some large drops. But it typically follows the rest of the market. It also historically bounces back. Bitcoin sometimes does whatever it wants. And there is no way to predict what you're going to get on any given day.
Another risk to investing in Bitcoin is cyber theft. If you don't purchase Bitcoin with a reliable and secure wallet, you could easily be robbed. Someone could steal all your Bitcoin, and you have no way of getting it back. That's why going with a reputable exchange agency is so important.
Finally, even though Bitcoin is becoming more widely accepted as a currency, you still can't use it everywhere. This means it limits you if you want to use Bitcoin to make purchases.
Is it Too Late to Invest in Bitcoin?
If you are considering investing in Bitcoin, you may wonder if it is too late to get in on the gains. After all, Bitcoin is at historically high levels. And it is never good to buy high and sell low. That is a recipe for losing money.
There is no way to know for sure if Bitcoin prices will continue to increase. Many reputable traders are projecting the value to continue to grow. And more institutional investors and companies are starting to put money into Bitcoin. This could be an indicator of continuing up. But on the other hand, many people also say it is overpriced and doomed to crash to zero.
It is impossible to time the market. But with some experts predicting prices of over $100,000, Bitcoin could still have a long way to go up. If you decide to invest in Bitcoin, the important thing is not to panic. If Bitcoin prices drop significantly, selling only ensures you lose your money. Like any investment, buying and holding versus day trading is usually the best way to go about it.
Whether or not you decide to invest in Bitcoin is a personal preference. I got my foot in the game, and only time will tell what that brings. This brings me to my next point. If you decide to invest in Bitcoin, how much should you put in?
How Much Should I Invest in Bitcoin?
It is important to note that I am not a financial planner. This is not investment advice, but rather a summary of my choices and personal experiences. Any investment decisions need to be your own. If you have doubts, speaking with a financial planner would be a wise decision.
That being said, here's what I have done. I currently have about 1.5% of my total portfolio invested between Bitcoin and Bitcoin Cash (another smaller cryptocurrency). My allocation is a minimal amount, but it reflects my personal risk tolerance.
Additionally, since Bitcoin is so volatile and speculative, that is money I can afford to lose. I have a long time horizon before retirement. So, if Bitcoin crashes and I lose all that money, I'll be okay.
Would it still be a huge bummer? Of course! No one likes to lose money. But would it derail my life and my retirement plans? Not in the slightest.
On the other hand, if Bitcoin increases by another 50,000%, I'll be a rich lady. Not that I expect that to happen, but it's Bitcoin. You never know what it might do!
Bitcoin Bottom Line
So, what's the bottom line on Bitcoin? In summary, Bitcoin is a cryptocurrency that uses a technology called blockchain to function. If you're still a bit confused about blockchain and how tracking Bitcoin works, check out the videos I shared earlier. They are eye-opening!
In the past year, the price of Bitcoin has skyrocketed. Hence the reason everyone in the world is talking about it now. (Okay, maybe not everyone. But it is undoubtedly a hot topic). Even people who hate Bitcoin have a lot to say about it!
Whether you want to invest in Bitcoin is a totally personal choice. There is the potential to lose or gain a lot of money. If you could predict exactly what would happen, you would be a wealthy person indeed.
But unfortunately, all any of us can do is make our best guesses. That's why it is essential to do your homework and make a plan before beginning any type of investment. And always, don't invest more than you can afford to lose!
I decided to make the jump into Bitcoin after doing my research. But if after reading this you don't think it is the right choice, that is okay! We all take different approaches to invest. The most important thing is to make a plan and stick with it.
In the long-term, your future self will thank you!
This content is for general informational purposes only and is not investment, tax, or legal advice. You should consult your own appropriately qualified and licensed tax, legal, investment, and/or accounting advisors before engaging in any transaction.
AUTHOR
Kathryn
Kathryn is a personal finance expert striving for financial independence. She and her husband paid off over $60,000 in student loan debt in under 2 years, and they have been saving ever since. She now travels the country in her RV with her husband while they both work remotely. You can see more about her financial and travel journey on her blog, Money and Mountains. Her writing has been featured on many top financial websites including Yahoo Finance, MSN Finance, AOL, Bankrate, LendEDU, Rockstar Finance, and many more!