How to Invest in Bitcoin: Everything to Know
By Beluga Research October 9, 2023
- Before investing in bitcoin, it is essential to understand the basics, risks and steps involved in buying, holding and profiting from the world's most popular cryptocurrency
- Bitcoin is a decentralized digital currency that operates on blockchain technology
- Investors must educate themselves about bitcoin and associated technology, choose a reliable exchange and prioritize security measures to protect funds
- Advantages of bitcoin include potential high returns and global accessibility, while disadvantages include volatility and regulatory uncertainty
Before investing in bitcoin, it is essential to understand the basics, risks and steps involved in buying, holding and profiting from the world's most popular cryptocurrency. Investing in bitcoin typically involves a few key steps. Investors should choose a reputable cryptocurrency exchange to buy and store bitcoin securely. After creating an account on the chosen platform and completing the necessary verification processes, funds can be deposited into an account. Investors can then place an order to buy bitcoin at the current market price or set a specific price at which they want to buy.
A Brief History
Bitcoin was created by an anonymous individual or group known as "Satoshi Nakamot.." The associated white paper titled Bitcoin: A Peer-to-Peer Electronic Cash System was published in October 2008, outlining the principles and mechanisms of the cryptocurrency. In January 2009, the Bitcoin network was launched, and Nakamoto mined the first block, called the "Genesis Block."
Initially, bitcoin had little value, with few recognizing the potential. However, over the years, it gained traction among tech enthusiasts, libertarians and investors. In 2011, bitcoin achieved parity with the U.S. dollar, reaching a price of $1 per bitcoin (BTC). Since then, the price of bitcoin has experienced significant fluctuations, reaching an all-time high of almost $70,000 in November 2021.
How to Invest in Bitcoin: Everything to Know
- Research - It is important for potential investors to gain a solid understanding of Bitcoin's workings, risks and factors influencing BTC price. Research to learn about wallets, private keys, public keys and blockchain technology is suggested for this step. It is important for all investors to stay informed about the latest news and developments in the cryptocurrency space to make informed investment decisions.
- Choose a Reliable Exchange - Investors should find a reputable cryptocurrency exchange with a strong track record, robust security measures and user-friendly interfaces. Popular exchanges include Coinbase, Binance and Kraken. Investors should also ensure the exchange supports their country of residence and offers convenient deposit and withdrawal methods.
- Set Up a Wallet - To keep funds safe, investors should obtain a secure bitcoin wallet to store investments. Wallets come in various forms, such as "software wallets," which are installed on computers or smartphones, "hardware wallets," which have offline storage for enhanced security and "paper wallets," which include keys and QR codes printed on a physical piece of paper.
- Decide on Investment Strategy - Investment strategies should be decided based on individual goals and risk tolerances of investors. Common strategies include long-term holding, often referred to as "hodling," dollar-cost averaging, which are regular fixed investments and active trading. Investors should consider investment horizons, financial situations and personal willingness to actively manage portfolios.
- Mitigate Risks - It is essential for investors to evaluate and carefully consider the risks associated with bitcoin investment. The cryptocurrency market is highly volatile, and bitcoin's price can fluctuate significantly in short periods. Additionally, regulatory changes may impact the value and legality of cryptocurrencies in certain jurisdictions. It is advised that investors allocate only a portion of investment portfolios to cryptocurrencies and be prepared for potential losses.
- Security Measures - It is important for investors to protect bitcoin holdings from unauthorized access or theft by implementing strong security measures like two-factor authentication (2FA), setting up complex passwords and regularly updating wallet software. Investors may also consider offline storage options like hardware wallets for enhanced security.
- Portfolio Diversification - While bitcoin has shown significant growth, it is suggested that investors diversify investment portfolios to mitigate risk. For example, investors may allocate funds to other cryptocurrencies or traditional assets like stocks and bonds. Diversification helps balance potential losses and maximize overall returns.
To get started with bitcoin investing, a potential investor should first research the cryptocurrency and associated technology. After choosing a secure wallet to store bitcoin holdings, the investor can select a reputable exchange and complete the necessary identity verification. Funds can be deposited into the chosen exchange account through bank transfers or other accepted methods, after which the investor can purchase bitcoin either at the current market price or by setting a specific price limit.
Investors can prioritize the security of bitcoin funds by enabling 2FA and considering moving said funds to a secure wallet for added protection. It is also essential for investors to stay informed about the cryptocurrency market's news and trends. Diversification of investment portfolios is key to managing risk effectively, and investors should only invest what they can afford to lose due to bitcoin's price volatility.
- Decentralized Network - Bitcoin operates on a blockchain, which is a decentralized network where transactions are verified and recorded by computers. This removes the need for intermediaries like banks, providing security and trust.
- Limited Supply - The maximum supply of bitcoin, which is twenty-one million coins, contributes to value appreciation over time. However, bitcoin's price can be highly volatile, presenting opportunities and risks for investors.
- Pseudonymity - Bitcoin transactions are recorded on the blockchain without directly linking participants to real-world identities. This appeals to individuals seeking privacy and financial autonomy, but additional privacy measures may be necessary.
- Potential for High Returns - Significant growth has been shown with bitcoin, providing substantial returns for early investors.
- Decentralization - Bitcoin operates on a decentralized network, making it resistant to government interference or manipulation.
- Security - Transparency and tamper-proof transactions are ensured with bitcoin transactions, as they are secured using cryptography and blockchain technology.
- Global Accessibility - Anyone with an internet connection can access bitcoin, opening up investment opportunities globally.
- Liquidity - Bitcoin is highly liquid, easily bought, sold or traded on cryptocurrency exchanges.
- Diversification - Investing in bitcoin allows for portfolio diversification, reducing the risk associated with traditional investments.
- Volatility - Bitcoin's price can fluctuate significantly within short periods, leading to substantial gains or losses.
- Regulatory Uncertainty - The regulatory environment for cryptocurrencies is evolving, creating uncertainty for bitcoin investors.
- Lack of Regulation - Bitcoin's decentralized nature means a lack of investor protection and recourse in cases of fraud or theft.
- Technical Complexity - Understanding bitcoin and managing a bitcoin wallet can be complex for beginners, requiring knowledge of blockchain technology and cybersecurity practices.
- Market Manipulation - The cryptocurrency market is susceptible to manipulation by large investors, influencing bitcoin's price.
- Environmental Impact - Bitcoin mining requires significant computational power and energy consumption, raising concerns about associated environmental impact.