“Should I Invest in Bitcoin?” This is perhaps one of the most asked questions in the past decade. Since its inception in 2009, Bitcoin has been gradually gaining the attention of investors, both short term and long term. As of now, it is one of the most volatile assets that you will find in today’s world. Despite this, the number of Bitcoin users and investors is increasing by the day. Are there any investment approaches that they are using, that you could also implement, in a bid to profit for the short-term or long-term?
You can invest in Bitcoin today, but that is all dependent on your risk appetite. Before you begin, here are some things that you should know:
Information for the Beginners
If you want to become a Bitcoin investor, then there are several things that you should have, including:
- A cryptocurrency exchange account
- All your personal identification documents (there are necessary for the Know Your Customer process)
- Reliable internet connection
- A payment method such as a functional bank account, credit card, or debit card.
- Personal cryptocurrency wallet
Bitcoin ATMs are becoming quite popular all over the world, so you should also consider having a Cryptocurrency ATM card to ensure that you can access your money just like other investors do by using regular ATM cards.
As an investor, you also need to be aware of the fact that privacy and security are very important when it comes to the use of Bitcoin. As much as there are no physical Bitcoins, it is not a good idea to openly talk about the Bitcoin tokens you are in possession of. Any person who accesses a private key to a public address can easily authorize transactions within the Bitcoin blockchain. The private key, like your ATM PIN, should be kept safe, since criminals will try looking for ways to obtain it if they want to steal your Bitcoin.
Anyone can see view your Bitcoin balance, provided that they know your public address. It is also possible for people to view transactions on a Bitcoin, including you. This, however, does not mean that you can also view all the other personal details that are related to a particular account. Actually, only the user’s public key appears right next to the transactions. This makes all transactions confidential, but they are not anonymous. This is why Bitcoin transactions are perceived as being more transparent and traceable, in comparison to cash. Unless there’s any need to trace a given transaction within the blockchain, however, Bitcoin can be used anonymously.
Bitcoin investment strategies
Buying and hodling
Hodling, not holding, is the term that is used to refer to the holding of bitcoin amongst those in the Bitcoin community. An investor who is hodling their bitcoin is referred to as a “hodler”.
Most of the Bitcoin investors in the world invest by simply purchasing the cryptos and hodling them. Their belief is that Bitcoin has the potential to bring them long-term prosperity. To these people, the short term volatilities do not matter as much, since they are on a journey towards achieving a higher value. For the one decade that Bitcoin has been in existence, these investors have been rewarded by the market handsomely for using this investment approach.
Taking a long position on Bitcoin
There are investors who are usually looking for ways to get immediate returns by buying Bitcoin then selling it off at the end of a given price rally. There are a couple of ways in which investors can do this, including riding on the crypto’s volatility with the expectation of a high rate of return, if the market moves in their favor.
Bitcoin trading platforms are also offering leveraged trading, which is simply all about lending traders some money so that they can increase their position as they take a long position on Bitcoin.
Taking a short position on Bitcoin
There are investors who also make an income by betting on the decrease in value of Bitcoin, more so during a bubble. A bubble is essentially a rapid increase in prices that is then followed by a consistent decrease).
Investors can sell their Bitcoin at a given price, then try to repurchase it when the prices are lower. Say you purchased your Bitcoin at $500, you should sell it for $500, then wait for its value to decrease. If the buyer of the Bitcoin intends to sell, you can offer to buy it back, but at a lower price. This means that you essentially get to make a profit that is equivalent to the difference between the price you sold the Bitcoin at, and the lower price than you bought it back at.
The risks involved in the Investment in Bitcoin
Bitcoin is very volatile
You only need to view a graph of Bitcoin prices for you to understand that this asset can be very dramatic when it comes to fluctuations. Its prices have the potential of shooting up or down by a couple of thousand dollars within a few days. Depending on the price at which you purchased your Bitcoin, you can end up making significant gains or losses.
Glitches and hacks in the Bitcoin exchanges
Bitcoin exchanges can at times be very unreliable. This was frequently observed in the early days of cryptocurrency adoption. A Japanese bitcoin exchange known as Mt Gox, for instance, was rendered useless upon losing 850,000 bitcoin, along with hundreds of millions of dollars. Also, in 2016, a glitch on Coinbase led to the momentary drop in the price of Bitcoin to $0.60. These are just but two examples of what is capable of going wrong with Bitcoin investments.
What is it that you are actually purchasing?
For starters it is good to get this out of the way- you are not purchasing a physical coin. According to Carsten Sorensen, a reputable associate professor at the London School of Economics, purchasing Bitcoin is akin to buying a number.
Depending on the amount of money that you are willing to spend, you can end up with 1 Bitcoin, 20 Bitcoin, or a small fraction of a Bitcoin. This cryptocurrency was created in such a way that only 21 million coins will ever be in existence.
Since Bitcoin can be divided out to 8 decimal places, you can purchase small fractions of a single unit of Bitcoin. You can purchase a fraction of the unit of Bitcoin and use it for the purpose of investment.
What about the Wallets? Do you really need one?
Yes, as earlier on highlighted, you will need a Bitcoin wallet if you want to buy Bitcoin. The wallet is essentially the address that you will input or give for the crypto you’ve purchased to be sent. The wallets are used to store your Bitcoin, just like other currency wallets do, only that in this case, the Bitcoin wallets are virtual. Some common wallets are:
These wallets can be accessed on one’s smartphone or computer.
There are also hardware wallets that are used to store Bitcoin away from the Internet, in a bid to ensure that they cannot be accessed by hackers. Opening such a wallet is free, and you will only pay a small fee to transfer your Bitcoin into and out of your preferred wallet.
How do you buy Bitcoin?
The most reliable and accessible option as of now is a Bitcoin exchange. There are Bitcoin vending machines, but these may be novelties at this stage.
All you should do is create your account on a Bitcoin exchange, then enter your payment method. Most reputable exchanges will request that you provide your:
- Bank account details, or
- Debit card info, or
- Credit card details
You may also have to prove your identity by sharing a copy of your drivers’ license, ID Card, or passport. Upon the verification of your identity, you can start buying Bitcoin using your preferred payment method, as you transfer it to your Bitcoin wallet, then watch out for price fluctuations.
That will be all for this article on how to invest in Bitcoin. I hope you now have the basic knowledge on how to get started with this cryptocurrency. If you are ready to explore the available opportunities and diversify your portfolio, be sure to check out the recommended read above.
I wish you well,
Eric, Investor and Team Member at Gold Retired!