How to Buy Bitcoin Safely and Securely
Buying Bitcoin as an Investment and Storing it Without Risk
How to Invest in Bitcoin
Ways of Investing in Bitcoin
Where to Start Investing in Bitcoin
How to Buy Bitcoin: Basics
As with any transaction how to buy Bitcoin relies on two parties, a seller who owns the Bitcoin and a buyer who wants the Bitcoin.
The exact details of the process can vary but thanks to the hard-wired simplicity of the Bitcoin system we only require a buyer and seller for the transaction to take place.
This is because Bitcoin transactions are decentralized and direct Peer to Peer (P2P). They don’t use any third parties, meaning no banks, or payment facilitators like Visa, Mastercard or Paypal and they don’t rely on a central clearing house or central authority to authorize them.
Instead your transaction is encrypted, verified and permanently stored upon a vast network of independent computers – the blockchain.
If you want to send someone Bitcoin, all they need give you is their unique wallet address – and getting your own Bitcoin wallet can take a matter of seconds and is completely free.
As we cover here in more detail here buying Bitcoin requires a wallet, a source selling the Bitcoin and some funds. Bitcoin are typically sourced on Bitcoin exchanges, on peer to peer exchanges, at Bitcoin ATMs, through in-person exchanges and through Bitcoin IRA providers.
Each method carries different risks, benefits and disadvantages, but for us the most secure method and one that comes with added tax benefits is buying Bitcoin inside an IRA.
This is particularly useful for new investors as the IRA specialist will handle all elements of the transaction from initial set up and funding to secure storage and insurance, and because the investment is IRS approved, tax-savings will generally cover far more than any costs involved.
How to Invest in Bitcoin
Buying Bitcoin and Investing in Bitcoin both follow the same general process, except investments tend to involve greater sums and may be held over longer periods of time.
This higher dollar amount coupled with longer-term storage means investors need tighter security than small-scale buyers looking to use Bitcoin for occasional online transactions. This causes investors to shy away from the simpler online wallets and P2P buys, opting instead for offline cold storage.
Investor’s need for a return – be it capital gains or a form of income also means they’re looking for a way to minimize costs and fees or find additional methods to create opportunities for gain, such as tax advantages.
With Bitcoin, even small investments can soon mount up and so the often substantial profits are liable to taxation – especially at a time when the IRS is clamping down on crypto-related tax avoidance and evasion.
Despite being called cryptocurrencies, the IRS considers Bitcoin to be an asset and not a currency meaning US investors must report ALL Bitcoin transactions on their tax returns. Where Bitcoin has been held for less than a year, they are subject to short-term capital gains taxes and if greater than a year tax payers must use the long-term capital gains rules.
There is an exception however: IRAs.
Bitcoin can be purchased inside of a specific type of retirement account and be tax-deferred in the case of a Traditional IRA or tax-free at distribution in a Roth IRA. As an example a 35% rated income tax payer can save over a third in costs at purchase through tax allowances, or save 35% tax on eventual resale with a Roth.
The IRA account also satisfies investor’s need for security, being as they are held in the most secure form of cold-storage available: high security vaulted depositories under the watch of IRS approved custodians.
Now not all IRA allow Bitcoin – only Self Directed IRAs or SDIRAs – and even then not all SDIRAs are set up to accept Bitcoin due to not having the secure crypto-specfic infrastructure in place.
Owning Bitcoin in an IRA doesn’t require they be held for the duration of the IRA.
Because the account is self-directed, the account holder is able to sell Bitcoin at highs and move into any number of different assets such as gold and silver and back again as often as they like, maximizing gains and minimizing losses – the only rule being proceeds of any sales cannot be distributed outside of an IRA until the age of 59½ without paying penalties.
Due to the US crackdown on Bitcoin accounts, the legal requirement to notify the IRS of all transactions and the willingness of Bitcoin exchanges to share your information with the federal government there is now no legal escape from taxes in Bitcoin – meaning Bitcoin IRAs are seeing a massive surge in popularity – in fact a single Bitcoin IRA company recently announced they’ve sold over $400 million in Bitcoin through their IRAs.
It’s hardly surprising when we’re effectively given a choice of being taxed or not!
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Ways of Investing in Bitcoin
There are three principal ways to invest in Bitcoin: Outright purchase, Bitcoin mining and the trading of Bitcoin derivatives.
- Buying Bitcoin: You can invest in Bitcoin itself, buying and holding the cryptocurrency in a wallet, either as part of your investment portfolio – or even in your IRA.
- Mining: You can invest in a Bitcoin mining company as you would a Gold mining company, or you can even buy a mining “rig” yourself – a specialist high-powered computer which will create new Bitcoin for you.
- Bitcoin Derivatives: As with gold, Bitcoin comes in a range of derivative assets, from Bitcoin ETFs (Exchange Traded Funds), Bitcoin Futures and Bitcoin Options / CFDs (Contracts for Difference)
Although there are many people who make good money trading EFTs, Futures and Options / CFDs the danger is this is adding another layer of volatility onto something which is already notoriously volatile.
Being able to make leveraged bets on something as volatile as Bitcoin is potentially a recipe for disaster, especially if you’re not highly experienced in both the particular derivatives market and Bitcoin. Yes you can make far more money than by simply buying bitcoin, but you can also lose more than your initial investment – bringing a very real danger of negative equity.
Mining, especially home-mining requires both expensive equipment and uses a lot of electricity, but does offer a route to acquiring what can be under-market value coins.
If Bitcoin’s price drops below your total costs, you will be losing money on every Bitcoin generated, but at times when the price is higher this is an excellent way to add to your wallet if you’re tech-minded and can operate the systems required.
Investing in Bitcoin mining companies is much the same as buying any company stocks – with big miners such as Marathon Patent Group trading on the NASDAQ (Stock: MARA) being popular examples.
Provided market prices remain higher than the cost to mine, Miner stocks can offer a more stable route to investing bitcoin than owning the raw coins – although your profits will be similarly diminished.
For us the only real way to own Bitcoin is to actually own it.
Yes it’s a speculative asset and yes it’s volatile, but the future of our world’s currencies will somehow involve the blockchain and with bitcoin being the first and the biggest, it’s considered by most as being the safest bet out of all the cryptocurrencies currently on the market.
Where to Start Investing in Bitcoin
For a newcomer there can seem like an almost infinite amount of possibilities when deciding where to start investing in Bitcoin.
Part of your choice will depend on the amount you want to buy.
If you’re only looking to buy a small fraction of a Bitcoin, say $1,000 worth, as a test purchase then any of the main Bitcoin exchanges will suit you perfectly.
Well known Bitcoin exchanges are:
You’ll need a digital wallet in which to put your bitcoin – some exchanges allow you to open a wallet within their account pages, others require you to already have a wallet.
Opening a wallet is very simple and free. Although there are lots of places where you can create a paper wallet, doing so securely is another matter altogether.
One of the most trusted sites to open a paper wallet is Bitaddress.org where you can open a wallet and receive your public and private keys immediately. On arriving at the page you either move your mouse around to create a random string or type random gibberish into a text box.
As soon as you reach a randomness level of 100%, the page refreshes and your key is generated.
It will look like this:
Note that we’ve blurred the secret key!
You can print the page by clicking the print button or write down the pubic and private keys somewhere secure, and you’ve got yourself an offline “paper” wallet!
Online exchanges are relatively fast, easy to work with and can be inexpensive but by storing your Bitcoin online within a hot wallet on an exchange you are at a far greater risk of loss, from hacking, fraud and appropriation than you would be with an offline wallet – so only ever store a small amount online.
Some exchanges actually own the Bitcoin in “your” account and can close or remove your access privileges to an account at any time – we’ve heard some true horror stories!
If you’re lucky enough to live near a Bitcoin ATM then all you do is place your dollars in it’s slot and the machine will set up a wallet for you and add the Bitcoin automatically.
You can find Bitcoin ATMs near you on CoinATMRadar.
For the brave, you can carry out P2P (peer to peer) exchanges where you meet someone in the real world, give them hard currency or carry out a bank exchange and they will transfer bitcoin into your wallet.
Sites like LocalBitcoins are highly trusted and carry detailed reviews of individual buyers and sellers – but in any situation where you’re meeting someone and might be carrying a lot of cash take precautions – meet in a busy location and bring a friend. If anything seems suspect, walk away.
Our preferred option buying Bitcoin is by using the deferred tax benefits offered by an IRA.
This is particularly true when investing in 5 figures or greater. If there’s ever a tax-advantaged way to buy an asset we say take it!
Another huge plus when working with a Bitcoin IRA provider such as CoinIRA is they will do all of the work for you, setting up the wallet, adding your choice of cryptocurrencies and then storing your Bitcoin in the most secure way possible – a physically vaulted depository, fully insured against loss.
No other method of bitcoin storage comes close on security and peace of mind.
CoinIRA also lets you store precious metals in your IRA through Goldco giving you the stability and wealth insurance of gold alongside the profit potential of Bitcoin.
Arranging Secure Storage for Bitcoin
The security options for Bitcoin range from the very poor (online hot wallets) to the excellent (physically vaulted cold storage in secure depositories.)
Depending on your risk-tolerances, your needs and the time-scale you’re looking to hold your Bitcoin you have a range in choices, but in any case we’d always advise to be as secure as possible.
Given the hacking risks in exchanges, online and computer-held wallets, serious investors should look to cold storage solutions, which can be as simple as a paper wallet, as tried and tested as a specialist hardware device such as those available from Trezor and Ledger – or at the ultimate end of the market in a Fort Knox type vaulted depository.
Arranging a paper wallet is as easy as clicking a website button and writing down the generated public and private keys. After that, how secure it is, is down to you – some of the ways people hide their secret keys are beyond staggering, from the genius to the truly bizarre!
With a Trezor or Ledger, all you need do is buy the hardware device. These are available online and in some tech stores, costing between $60-$150. After this you simply follow some very easy instructions and your Bitcoin are secure. Even if you lose the device or it breaks your coins are safe provided you have kept a note of your secret key or a key phrase used to generate it.
As for the ultra-secure physically vaulted wallet, held in a depository? Specialist IRA investment companies like Coin IRA will arrange this on your behalf – either as part of an IRA, or as a standalone service. Thanks to the economies of scale these companies work at costs are surprisingly affordable, especially given the full-value insurance and extra peace of mind these solutions tend to come with.
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Buying Bitcoin at Better Prices
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 will charge anything from 10-32% in transaction charges and fees while Bitcoin specialists who offer detailed investment advice and a full white-glove concierge service price inside a similar range, depending on the company.
You can pay almost nothing in charges when you use an in-person transfer, but for many the risk is too great: meeting a complete stranger and handing over money in exchange for Bitcoin.
Finally, somewhere in the middle costs-wise you have fees on big exchanges like Coinbase and Coinmama at between 1.5% – 7% depending on where you are and how you’re paying.
Given that Bitcoin can rise 5% in a day, spending a lot of time looking across the market to save 3% here or there is potentially going to cost you more in lost opportunity – so we always find it helps to assume 10-15% and take it from there.
When it comes to all-in costs, the best possible way to buy Bitcoin tends to be inside a tax-advantaged IRA, thanks to built-in tax savings.
Special tax-breaks given by the IRS to help us save for our retirement mean buying Bitcoin in an IRA can result in significant tax advantage at either the front or back end of any investment.
For an investor in the 35% income tax bracket you can effectively save 35% in tax – so even if your Bitcoin IRA specialist charges a total of 10-15% in fees for the exacting IRS-approved work they carry out on your behalf, you’re still going to be looking at an overall 20-25% saving versus any non-IRA investment.
Is Your Bitcoin Insured?
Bitcoin exchanges offer a certain amount of insurance against loss, but this varies wildly depending on the exchange in question.
For example Coinbase is insured both for it’s cold wallets and it’s hot wallets. Where cold wallets are generally safer from hacks, hot wallets are always at risk. This means it’s rare to find insurance on hot wallets and it’s something to always look for when you’re buying or transmitting Bitcoin and it involves a hot wallet.
Outside of hot wallets on exchanges, most cold wallet suppliers offer a degree of insurance and again this varies by exchange or physical device. Some will be limited up to a certain amount and others will offer full market value on any loss.
Again it pays to read small print and see exactly what kind of loss is covered.
Most policies focus exclusively on physical damage or loss of private keys including employee misuse or theft but don’t cover traditional hacking or other related crimes. They may or may not cover transactional failures or vulnerabilities such as errors or problems with the blockchain itself.
Some of the best cover can be had with Bitcoin IRA providers as not only are they dealing with Bitcoin and cold wallets, but are doing so in high-security vaulting depositories under the watch of IRS vetted custodians.
How to Buy Bitcoin With an IRA
We cover Bitcoin IRAs in full in our IRA section here but with an IRA the process is almost the same as in any Bitcoin investment. You provide the investment money, you open a wallet and the Bitcoin are stored inside the wallet.
The big difference is that with an IRA, you carry out buy and sell transactions through an IRA specialist, you store your wallet / key inside an IRS approved depository (much like a bullion vault) and watched over by an IRS approved custodian.
You don’t take possession of your Bitcoin wallet and the Bitcoin are legally owned by your IRA account – not directly by you.
Apart from that you can buy and sell as and when you wish, move to other cryptocurrencies or go back and forth to real assets like gold and silver. Provided you don’t remove any of the profits from the account until you’re at least 59½, everything you do is wholly tax neutral.
A further advantage is that the actual process of opening an account and buying the Bitcoin in an IRA is far easier than if you had to go it alone. You don’t do any of the heavy lifting, they set everything up for you and when you want to carry out any transaction you simply call your broker, email them – or use an app if the IRA specialist has one – and the purchase or sale is near-instant.
Want more? Full details of IRA services and how-to guides are available in our Bitcoin Investor Guide – a unique physical kit delivered direct to your door.
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