The Basics of Investing in Bitcoin
Bitcoin Investing Needn’t be Complicated
What Is Bitcoin?
Bitcoin is both the original, the best known and most widely used cryptocurrency in the market.
At it’s most basic level Bitcoin is both a medium of exchange and the means for transferring and tracking those exchanges – all without needing to rely on third parties.
In short it’s a money-like asset designed to be both completely private and yet fully transparent – and is held and transmitted in a form which cannot be interfered with by big banks or government.
Where money is issued by central governments and controlled by the bankers, Bitcoin is created – or “mined” – by a decentralized network of computers. It is a truly open project – all the source code is available to all and anybody with a computer can join this network and start mining Bitcoin.
The process of mining releases new Bitcoin from a pool of 21 million coins and involves miners solving complex mathematical problems. These math problems or algorithms verify, encrypt and permanently store all Bitcoin transaction records on the “Blockchain.”
Mining? Blockchain?
The Bitcoin concept is both an amazingly simple and complex system, created 11 years ago by an anonymous programmer going by the name “Satoshi Nakamoto”.
Based loosely on a gold mine, Nakamoto wanted to create a finite digital asset and so “buried” a total of ₿21,000,000 in a virtual mine. Rather than digging with pick and shovel, Bitcoin miners would need to solve increasingly complex problems, the act of which would release coins at the same time as verifying and storing Bitcoin transaction details in a cryptographic ledger – the blockchain.
Like a gold mine, the first coins would be easy to find practically laying in the virtual dirt in front of the miner – but as more coins were discovered miners would need to dig deeper and deeper where the coins would become increasingly scarce.
Again, much like gold Bitcoin won’t suffer from the devaluating effects of inflation. Unlike US dollars which can be created from thin air by the Federal Reserve “printing away problems” through Quantitative Easing, Bitcoin has a fixed total supply.
With any fixed supply, increase in demand will always result in a higher price – giving Bitcoin a built-in mechanism to maintain value against a devaluing dollar.
As Bitcoin mining becomes increasingly difficult, more and more computing power is required to extract each coin, the cost of extracting each coin becomes greater, adding to the inherent value within the currency.
As we approach the 21 million figure these problems will become extraordinarily complex and as it does Bitcoin’s intrinsic value will increase.
At time of writing we have mined a total of 18,211,425 meaning there are only 2.7 million left “in the ground” – however to mine these coins will require more computing power than we’ve seen used to this point in total and take many times longer than the 11 years for the first 18 million.
How Does Investing in Bitcoin Work?
All Bitcoin transactions rely on the Blockchain, Wallets, Private and Public Keys
The blockchain is the security, transmission and tracking system while Bitcoin are the virtual assets transmitted upon it.
To invest in Bitcoin you’ll need both a wallet and a source of Bitcoin.
All Bitcoin are held in wallets – a unique virtual address on the blockchain, and every transaction you make using this wallet will be stored on the blockchain ledger, showing the Bitcoin quantity, the originating wallet address and the receiving wallet address.
These details are fully transparent to anyone who wishes to look at them. Anybody can look online and see how many Bitcoin are stored in any wallet.
At the same time as being open, all transactions and wallets are fully private as no identifiable information is stored or transmitted – just the sum of Bitcoin sent and two wallet addresses involved in any transaction.
Security for Bitcoin investments is provided by a combination of this unhackable blockchain and your Bitcoin wallet having two keys – a public key/address and a private key.
These keys are both long strings of numbers, and your public key is then shortened to provide your wallet’s public address. With this wallet address alone, anybody can add bitcoin to your wallet – however to remove bitcoins from your wallet you’ll need the second key – the Private Key.
Your private key is just that – and must remain 100% private. This is because all it requires to access and remove your Bitcoin investment from a wallet are these two keys – and one of them is already out there.
It’s therefore essential to keep your private key completely secure.
It’s also essential that you never lose it – as without your private key, your Bitcoin investment will remain permanently inaccessible even to you.
A Word on Wallets
Bitcoin wallets can be held online and off – and can be hot or cold.
Hot wallets are live, held online and used for everyday transactions, but they are also quite unsafe seeing regular hacking attacks and theft. You should never use a hot wallet for long term storage and only keep as much in one as you feel you may need to use. A little like carrying cash in your pocket.
Cold wallets are used for longer-term storage and offer greater security, although as we cover here not all wallets are created equal. Online wallets are more at risk than offline – and wallets on your regular PC or smartphone are more at risk than paper wallets and special hardware wallets.
Paper Wallets
Because all that’s required to use a bitcoin wallet is an address, public and private keys, there are many who see the advantages and simplicity involved in using a paper wallet.
You simply write down your public address, and keep note of the private key somewhere else, preferably across multiple safe or hidden locations.
An example of a full private key is:
This isn’t exactly memorable and can be trouble to type, but thankfully longer keys can simplified and shortened by software and other applications into a Mini Key.
The above long key becomes this:
A mini key like this is always going to be easier to use.
For added security, this key can be split into sections, such as being written across several pages in a book.
Of course there’s a danger in losing the key or having it discovered by a third party – both outcomes would see you lose control of the wallet.
Hardware Wallets
A popular method used for cold storage of Bitcoin is a portable hardware wallet, such as those from market leaders Trezor and Ledger.
These devices are effectively highly encrypted memory sticks / mini computers containing a secure means to automatically enter the secret key via a connected device when wishing to extract coins.
Each device is coupled to a secret “seed phrase” a set of words which can be used to recreate the wallet and it’s contents in the event of losing or breaking the device. Even if the device manufacturers go out of business your seed phrase will still be able to provide access your wallet at any point in the future as your wallet actually exists on the blockchain.
An example seed phrase is:
Seed phrases can consist of 12 or 24 words from a specific list and must be kept completely secure – as anybody with your seed phrase will potentially have complete access to your wallet and it’s contents.
The most secure wallets of all are stored inside specialist vaults – physical Fort Knox like depositories much like those used for storing bullion bars. These are the wallets used by Bitcoin IRA companies like CoinIRA, when it’s essential that Bitcoin are not lost, mislaid or stolen such as when they are in an IRS approved retirement plan.
We carry full details of wallet storage options in our Free Bitcoin Investor Guide.
Sourcing Bitcoin: Where Can I Invest in Bitcoin?
Unless you are a Bitcoin miner, you’ll need to find a source of Bitcoin to invest in.
Bitcoin can be bought on Bitcoin Exchanges, through Peer to Peer exchanges, at Bitcoin ATMs and in person – they can also be bought through a tax-advantaged IRA using the services of a professional Bitcoin IRA specialist like CoinIRA.
#1: Bitcoin Exchanges
Bitcoin exchanges are places where investors can go online and exchange dollars for Bitcoin or any other supported cryptocurrency.
After signing up and supplying any required identification to satisfy governmental Anti Money Laundering (AML) regulations you will ether be issued a wallet to add your Bitcoin to or be asked to supply your wallet details.
After this you pay by card, bank transfer or in some cases even PayPal and Bitcoin are deposited in your wallet.
Exchanges can be expensive but more than that, they add an insecure layer to an otherwise secure product. Exchanges can and have been hacked where stored keys are stolen giving hackers access to all exchange wallets and with them all the stored Bitcoin.
Whether through internal fraud or hacking, using exchanges online or “hot” wallets carries a great risk so we always recommend transferring your investment Bitcoin out of the hot wallet and into a cold storage wallet as soon as possible.
#2: Peer to Peer Exchanges
Peer to peer (P2P) exchanges allow individual investors to offer their Bitcoin or ask for Bitcoin at any given rate of exchange.
All users are rated for trust with both buyers and sellers rating each other in every transaction, so provided you work with trusted users you should be OK (do remember trust ratings can be faked using a network of shills.)
The best P2P exchanges hold a portion of any transaction in trust – much like escrow – until both parties are happy, which is an excellent system although you will need to already have Bitcoin in your wallet to use this, making these type of exchanges unsuitable for a first buy.
#3: Bitcoin ATMS
Bitcoin ATMs work just like any ATM. You can either pay money in our take money out, the difference being balances are stored in Bitcoin wallets.
The first time you use a Bitcoin ATM it will create a paper wallet and you then add either physical dollars through a slot or virtual dollars using your bank card. This will convert the dollar amount into Bitcoin, minus a fee and add the Bitcoin to your wallet.
Although a costly way to buy or sell Bitcoin, these ATMs are very easy to use and can be found using an online locator. [link]
#4: In Person Exchanges
As the name suggests, with an in-person exchange you find someone looking to sell bitcoin, you meet them, hand over money and they will in turn transfer Bitcoin to your wallet.
There are a number of websites which set up these type of meetings, one of the most trusted sites being LocalBitcoins but as with any transaction involving large sums of cash be smart: Tell people where you’re going, always meet in a busy location and bring at least one trusted friend.
If you’re happy with the personal risk and have agreed a good exchange rate this can be an excellent method to buy with the added advantage that a cash transaction into an anonymous paper wallet is fully anonymous.
#5: Inside an IRA
The IRS now allows Bitcoin inside of a Self-Directed IRA, meaning you can buy Bitcoin in a highly tax-advantaged way.
Having the ability to make tax-deferred purchases or tax-free sales can save a 35% rate tax payer over a third at purchase or sale. You can either buy 1/3 more Bitcoin or save giving the IRS 1/3 of your profits – both of which must be excellent options in anyone’s book!
An added advantage of investing in Bitcoin through an IRA is security: All Bitcoin specialist IRA providers work with the industry’s top physical vaulting locations, IRS approved depositories and top-tier IRS vetted custodians. Your Bitcoin are not only guaranteed secure but insured against loss through some of the biggest names in specialist insurance.
Tax savings and built-in impenetrable security? What’s not to like!
Bitcoin IRAs
Investing in Bitcoin as part of your IRA is one of the easiest and safest ways to buy.
Professional Crypto IRA companies will carry out all elements of the investment on your behalf, from providing an ultra-secure wallet and full insurance of the coins to physically vaulting your encrypted private key in an IRS approved depository – all under the watch of a IRS accredited custodian. We have a whole section devoted to Bitcoin IRAs here.
How Much Can I Invest in Bitcoin?
There are no maximums for Bitcoin investments. For insured wallets such as with Bitcoin IRAs, some insurance policies may set a limit of $1m per wallet, but all this means in reality is any amount over $1m is added to a second or third wallet.
As for minimums a “Satoshi” is currently the smallest unit of Bitcoin recorded on the blockchain. One Satoshi is one hundred millionth of a single bitcoin or 0.00000001 BTC. At a Bitcoin value of $10,000 one Satoshi equals 0.01¢
Again market realities make buying such a small amount of Bitcoin near impossible especially when considering transaction fees and price spreads on exchanges. Although Bitcoins can be used for micro-transactions, holding Bitcoin for longer-term investment tends to come with greater minimums.
Specialist Bitcoin investment companies tend to work with $5,000 or $10,000 minimums as anything below this is unlikely to make the investor any worthwhile gains in a slow market, especially after transaction fees and paying secure depository and custodian fees.
This is less of a worry in a buoyant market as Bitcoin is currently enjoying.
Other than this, the decision is down to how much you have available for investing.
Bearing in mind Bitcoin is a very volatile and highly speculative market, there’s always a real danger of loss, so unless you have a very strong appetite for risk it doesn’t make sense to go all-in on Bitcoin.
For every dollar you spend on Bitcoin it may be wise to spend a dollar on a more stable asset like gold. Gold has a history of rising during financial crises and has risen 30% in value in the time that Bitcoin dropped from $20,000 in December 2017 to the $10,000 it’s at today.
With some of your pot stabilized by gold, you may be able to better afford the risks inherent in Bitcoin and enjoy it’s massive potential for life-changing gains, all while knowing you’re at least part-protected from the crypto’s occasional big drops.
Until it becomes far more stable Bitcoin as an investmnet is always going to be a bit of a gamble – albeit one where the odds are historically in your favor.
With experts predicting Bitcoin prices averaging between $50,000 and $75,000 by the end of 2020 to mid 2021 the question is how much will you risk on a possible 4000% to 6500% gain?
How Much Should You Invest in Bitcoin?
When we’re asked “How much should I invest in Bitcoin” our answer always has to be the slightly annoying “only as much as you’re prepared to lose.
Bitcoin is a volatile, speculative asset and while there are $billions worth of physical mining rigs putting very real time, money and energy into Bitcoin – it remains a fully virtual asset.
As such, unlike gold and silver, Bitcoin – could – drop to zero.
Now given the massive amount of physical infrastructure built around Bitcoin and it’s use in millions of transactions across the globe this is highly unlikely – but it’s not impossible.
Even without dropping to zero, Bitcoin has lost 50%, 60% and 70% in value many times in it’s history – and even though it’s subsequently gone higher and often far higher – if you’re one of the investors buying at a top, just before a 70% drop it’s going to sting. A lot.
December 2017 and January 2018 buyers are still on average 45% down on their investment. Granted they’re the ONLY long-term investors across Bitcoin’s history to be down, given that today’s price is higher than all other periods, but that’s still quite a lot of investors.
But provided they’re still holding their Bitcoin, even those investors will be back in the black if Bitcoin follows analyst’s predictions for 2020 and 2021+
If those chances of gain and Bitcoins history to date appeal to you, we refer you to our (still) slightly annoying answer: Only invest as much as you’re prepared to lose.
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What to Know Before Investing in Bitcoin?
Whatever you do, don’t make the same mistake as those naive investors who piled into Bitcoin in December 2017 just as the bubble burst.
Before you invest in Bitcoin you need to have a basic grasp of what Bitcoin is, how it works and a brief history of the market. You should be able to recognize an overheated, overvalued market and know a bubble when you see one.
All of this and more is available in our free Bitcoin Investor Kit.
Once you know these key facts you need to set a target value you’ll be happy selling at.
Here’s the rub. We seem “happy” with 2% we get on a high-interest bank account and the 45 year annual average of 9% on gold is considered an excellent return – but when it comes to Bitcoin we’ve seen 1000% gains and know they’re possible.
Do you put a long-term risk-it-all sum of money into Bitcoin and wait for a 1000% rise – or do you set a more immediately achievable target of say 50%?
50% is an extraordinary return on investment in any asset and it’s one which Bitcoin has regularly brought to investors in as little as a few weeks or months.
Yes you may miss out on a bigger rise, but you’ve still seen your investment grow by 50% and exited before the ever-growing risk of a correction.
Suddenly being able to buy 50% more gold or stocks or any other investment is surely a big win in anybody’s books – but perhaps you’d like to see a 100% return before leaving?
At $10,000 Bitcoin will only need to revisit it’s previous high to see you make that gain. Financial markets are always revisiting previous highs – it’s simply a mechanism of the marketplace and how new all-time-highs are created in any Bull market.
If you set a 100% increase as your target stick with it. Do not be tempted to stay in the market after your goal has been passed, because for every day that Bitcoin spends above a previous ATH, it risks a correction below it.
The only time you wouldn’t set a target is if you’re in a very-long term “lets see what happens with Bitcoin” investment. You may make a million – but if Bitcoin doesn’t end up being the new global currency, being replaced by something else your entire investment could just as easily drop to zero.
Know the asset, know the market, make rules and stick to them!
What Does it Cost to Invest in Bitcoin?
Given the wide choice of routes to investment, buying Bitcoin can cost anything from a few dollars to 20-35% of your investment.
Bitcoin ATMs can charge anything from 10-32% in transaction charges and fees and Bitcoin specialists who offer investment advice and a full white-glove concierge service can be in the same ballpark.
Meeting a random guy in McDonald’s for an in-person transfer could be as little as a few dollars provided you’re both happy at that rate, while buying on a big exchange like Coinbase or Coinmama will run you 1.5% – 7% depending on where you are in the world and how you’re paying.
Where Bitcoin costs get exciting is where you’re buying inside a tax-advantaged IRA.
For an investor in the 35% income tax bracket you could effectively save 35% in tax allowances, either on purchase or at sale.
Even if your Bitcoin IRA specialist is charging a total of 10-15% in fees for the exacting IRS-approved work they carry out on your behalf, you’re still at a 20-25% saving versus a non-IRA investment even if you’d paid zero in fees!
What are Alternatives to Bitcoin Investment?
At Investing In Gold we’re always going to say precious metals like Gold, Silver, Platinum and Palladium should be considered in any balanced and well diversified portfolio, however Bitcoin is an exciting new addition and it can pay dividends to own at least a small holding in the popular cryptocurrency.
But Bitcoin isn’t the only crypto show in town.
Although Bitcoin was the first and remains the biggest – it’s by no means the only cryptocurrency available for investors.
At any one time there are around 5,000 different alt-coins (alternative cryptocurrency coins) available. According to CoinMarketCap there are currently 5,112 different cryptos in the market with new ones appearing and smaller ones vanishing without trace almost every day.
In among those alt-coins any one of them could go on to being the next Bitcoin, but for all the thousands of alt-coins only 10-20 have any real stature. The rest are something like the digital equivalent of bad penny stocks.
The biggest alt-coins include Bitcoin Cash, Ethereum, Ripple, EOS, Tether and Litecoin – but the market is constantly changing. The top 5-10 cryptocurrencies by market cap 3 years ago bear almost no resemblance to the top cryptos today.
| February 2020 | January 2017 | ||
|---|---|---|---|
| #1 Bitcoin | $169 billion | #1 Bitcoin | $16 billion |
| #2 Ethereum | $26 billion | #2 Ethereum | $715 million |
| #3 XRP | $10 billion | #3 XRP | $231 million |
| #4 Bitcoin Cash | $6 billion | #4 Litecoin | $221 million |
| #5 Tether | $4.6 billion | #5 Monero | $190 million |
| #6 Bitcoin SV | $4.4 billion | #6 Ethereum Classic | $122 million |
| #7 Litecoin | $4.3 billion | #7 Dash | $78 million |
| #8 EOS | $3.6 billion | #8 Augur | $43 million |
| #9 Binance Coin | $3.0 billion | #9 MaidSafe Coin | $43 million |
| #10 Tezos | $1.9 billion | #10 Steem | $36 million |
One thing that’s very apparent looking at all these coins is their total market cap in 2017 versus 2020. Across the board, all coins in both lists have seen gigantic increases in market capitalization, meaning you’d have made money in any of them.
As alt-coins become more ever more stable Bitcoin IRA specialists are supporting a growing number of alt-coins within each IRA account – meaning investors can buy a basket of crypto’s helping hedge individual coins against the greater market.
For full details of the alt-coins currently allowed inside of their Bitcoin IRA, Coin IRA’s free guide looks at each coin and what they can offer an investor and their website explains the process in full.
Other Bitcoin IRA providers may provide a more limited range of coins so if there’s a specific crypto investment you’re looking for it it makes sense to work with a company who can service your needs.
Either way, all of the top 5 cryptocurrencies can combine to offer an excellent crypto basket for an investor wanting balanced gains less affected by individual coin’s turbulent prices.
Want more? Get your Free Bitcoin Investor Guide – a unique physical investor kit delivered direct to your door.
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About Tim Schmidt
Tim Schmidt is an Entrepreneur who has covered retirement investing since 2012. He's also a published author, and his views on investing have been featured in USA Today, Tech Times, The Huffington Post, Nasdaq, and many more.
