Investing in Bitcoin: How Bitcoin Investing Needn’t be a Risk
On this page we cover the basics of bitcoin investing, how to source a legitimate bitcoin investment, the most secure ways to hold bitcoin and the potential profits (and losses) an investment in bitcoin can generate.
As well as the how what and where, we look at the pros and cons of using bitcoin for investment purposes, and the risks associated with any cryptocurrency.
Investing in Bitcoin for Beginners
Investing in Bitcoin can be highly profitable, regularly seeing 500-1000% increases in price. But if you get it wrong it can create equally impressive losses, with 50% drops being not only possible but relatively common in the cryptocurrency’s history.
This is because Bitcoin – and indeed the whole cryptocurrency market – is highly volatile where steep rises and cliff-like drops can occur almost daily, and no matter which timeline you look at for pricing trends, you’ll see a very choppy sea.
However with volatility comes an immense potential for profit, particularly if you are set up to be able to move from one asset to another smoothly, riding Bitcoin to highs then swapping out to another more stable asset such as gold when the crypto shows signs of changing direction.
What is Bitcoin?
Bitcoin is the original cryptocurrency, created 11 years ago by anonymous programmer “Satoshi Nakamoto“.
Wikipedia describes Bitcoin as “a decentralized digital currency without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries”
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.
From the very outset the number of possible bitcoins was set at ₿21,000,000 – a purposely fixed and finite supply intended to ensure future values cannot be “printed” away to nothing as we see with fiat currencies.
If supply is fixed, any increase in demand will result in a higher market price.
Bitcoins are “mined” from this finite 21 million coin supply by computers solving increasingly difficult mathematical problems. The more problems solved by a Bitcoin miner the more coins they will extract from this virtual mine.
This is a very similar model to a gold mine. When a rich gold seam is first discovered, mining is easy but as the finite supply in the mine begins to run out, it becomes far harder to find smaller and smaller nodes of gold and so the cost of production increases.
As the bitcoin mining problems become increasingly difficult, more and more computing power is required to extract each coin – and as we approach the 21 million figure these problems become extraordinarily complex.
At time of writing we have mined a total of 18,211,425 meaning there are only 2.7 million left “in the ground” – bit to mine these will require more computing power than we’ve seen in total so far.
How Bitcoin Works
Bitcoin transactions rely on the Blockchain, Wallets, Private and Public Keys.
The purpose of the mathematical problems miners are solving is to create, maintain and track a secure “blockchain” – the peer-to-peer network where all bitcoin transactions take place and are stored in a permanent ledger.
This blockchain is the transmission and tracking system and your bitcoins are the virtual assets transmitted upon it.
All Bitcoin are held in wallets – a virtual address unique to it’s holder, and every transaction you make will be stored on the blockchain ledger, showing the Bitcoin quantity, the originating wallet address and the receiving wallet address – and these details are fully transparent to anybody who wishes to look at them.
At the same time the transaction is fully private as none of your identifiable information is stored or transmitted – just the sum sent and two wallet addresses.
Security is provided both by the highly complex and unhackable blockchain and by your wallet having two keys – a public key 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 bitcoin 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 will remain permanently inaccessible even to you.
- You hold bitcoin in a wallet, each wallet has a private and public key.
- When you buy something using Bitcoin, your coins will transfer from your wallet to the seller’s wallet, transmitted over the blockchain.
- The transaction record will be held permanently in the blockchain.
- To withdraw bitcoin from a wallet you must have both public and private keys.
As mentioned, bitcoin is a highly volatile asset when priced in USD or any other fiat currency.
Although by design the value of Bitcoin should rise over time as mining becomes more difficult, the reality is there is much more at play.
As with any fixed-quantity asset, volatility and price changes are caused by changes in demand – the more people who want to own, buy and use Bitcoin, the greater it’s demand and the higher the price. As interest drops or large sales are made, the price drops.
This could be seen clearly in 2017 when Bitcoin investment really entered the public’s imagination. More and more new buyers entered the market after hearing or reading about the profits that had been made by others and as demand skyrocketed the price rose from $900 to $20,000 per bitcoin.
During this time, bitcoin’s use as a currency hadn’t increased all that much, so this was purely a speculative bubble – and sensing this a lot of the earlier larger investors took their profits out.
As more sold, the price began to fall and the more it fell, the more new investors panicked and sold, creating a feedback loop.
Of course the price drop really hurt those late to the party and a lot of retail investors lost far more than half of their investment – but for those who’d been in for a more long term investment, the price after this crash was still substantially higher than it had been at the start of 2017.
Another factor to consider when investing in Bitcoin is that there are a number of very large accounts – early investors and originators. It can be fairly easy for these Bitcoin “whales” to affect market pricing because in comparison to Forex or Gold, the bitcoin market is very small.
This means any large transaction by a whale will have an amplified affect on the whole market – and this can be seen happening regularly, where news of the sale – sometimes even a tweet – can take the price higher or lower very rapidly.
Tracking a Bitcoin whale’s behavior and social media comments can be very eye opening!
Ways to Invest 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 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.
How Do We Invest In Bitcoin Itself?
As with any new class of investment, it’s always a good idea to start small.
Never invest more than you’d be comfortable losing, especially in the beginning – whilst you learn about how wallets work, how the markets behave, exchanges work and the speed at which you can buy and sell your assets.
Bitcoin is considered the safest of all the cryptocurrencies and it’s definitely the most widely supported and understood so it’s a natural starting point for any new investor. Having been in operation now for 11 years and seen millions of transactions across what is a constantly improving infrastructure, Bitcoin just makes a lot of sense as a first buy.
The fact that a Bitcoin IRA is now possible, that Bitcoin can be held in your retirement account – speaks volumes about levels of trust in the medium.
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.
Inside of an IRA or out, you’ll need a wallet – and if you’re holding Bitcoin as a long-term investment you’ll need a secure cold storage wallet.
A cold storage wallet is the opposite of a “hot” wallet – hot being a live wallet held online at an exchange, where you can buy, sell and store your bitcoin.
Hot wallets are great if you wish to carry out regular Bitcoin transactions, but due to their security it’s not a good idea to hold a lot of value in these accounts over time – after all we are regularly seeing hot wallets being hacked.
On the other hand a cold storage wallet is not connected to the internet, is not held online, but instead in a physical device.
A physical “device” can be as simple as a paper wallet, where you have the wallet address, public and private keys written down.
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.
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.
Benefits of Investing in Bitcoin
The number one benefit of investing in Bitcoin is potential for profit – there are few investments with the exception of other cryptocurrencies that have come even close to the gains produced by Bitcoin.
Even allowing for bearish episodes in Bitcoin’s price, it’s overall trend has been upwards. More businesses are accepting Bitcoin as payment and more infrastructure is being created to let it truly florish – just as we’re seeing the total finite amount of mined bitcoins reach their 21 million limit.
With a finite resource under a high and growing demand – price pressure is always going to be trended upwards.
This is why so many analysts are predicting prices in excess of $150,000 for a single bitcoin. For many of us not used to the price movements within the crypto market this would seem ludicrous – but when bitcoin was at $900 only a few years ago nobody would have believed it could reach $10,000.
And for an asset that was only worth $20 a few years earlier even seeing $900 would have been a stretch.
So potential for profit is a given. What about other benefits?
Liquidity and Demand
Bitcoin is considered one of the most liquid assets in the global financial markets thanks to a profusion of bitcoin exchanges, trading platforms and specialist brokers all able to carry out fast transactions at very low fees.
Outside of these regulated markets, there are countless peer-to-peer exchanges where individuals can buy sell and trade cryptocurrencies anonymously, either online using secure open-source platforms complete with insurance and escrow-like services – and even through platforms for arranging face to face transfers.
Whether you’re following strict AML protocols offered by the big exchanges and brokers or you’re going for a more anonymous route, transforming your Bitcoin into dollars, gold or other assets and back is never difficult thanks to high buyer demand, allowing investors to move into and out of bitcoin fast to take maximum advantage of market moves.
Even for investors in a Self Directed IRA, Bitcoin IRA specialists such as Coin IRA [link] can offer easy to use platforms to allow account holders to buy and sell their cryptocurrencies near instantaneously and all within a tax-advantaged account!
It’s possible to buy, hold and sell bitcoin completely anonymously – and easily – however always remember that making profits from an asset without informing the IRS is illegal. It is tax evasion after all.
In fact the IRS has made it mandatory to report bitcoin transactions of all kinds, no matter how small in value – so no matter what transactions you make you DO need to inform the IRS to stay ahead of the law.
But there’s nobody else you need inform.
You can own bitcoin and nobody except the IRS need know. For privacy-minded individuals and those worried about the litigious society we’re living in your BTC assets will be always be safe if nobody knows about them.
Disadvantages of Bitcoin Investing
High volatility which can bring big profits can also produce losses – and this applies to Bitcoin as much as it does to any volatile investment. But there are other risks to Bitcoin investing, some of which are far more serious.
Unless you are working with a trusted specialist[link] carrying best-in-market insurance and offering ultra-secure cold storage vaulting, there are some significant risks – of complete loss.
Theft and Fraud
Whether you are storing your bitcoin at a big exchange or in a hot wallet, there’s always a chance of complete loss – that is all your bitcoin being stolen by a hacker or as a result of some internal fraud.
With several big name multi-million dollar hacks and frauds [link to box] having rocked the crypto community over the years and countless thousands of unreported hacks and robberies for smaller sums, theft and fraud is a big risk.
The same can go for your offline wallet if stored at home – be it a paper wallet or a physical device. If someone gets access to your wallet and secret password or seed phrase then they gain full control of your bitcoin wallet and all of it’s contents.
The only way to be truly safe from fraud is using a trusted third party such as CoinIRA.
Fire and other Disasters
Although Bitcoin is virtual, offline cold storage wallets are definitely not. If you keep your cold storage wallet, password and seed phrase at home, no matter how many places you’ve written down these key pieces of information, you could easily lose it all in a fire, tornado, flood or hurricane.
If you lose your secret key and your seed phrase you lose all your bitcoin – it’s that simple.
To avoid this risk, it pays to keep your key information at several locations along with some form of encrypted online backup – this way if the worst happens, you can always recover your wallet and access to it. For some imaginative ways to hide your secret key see our section here [link]
And don’t ever rely on memory. If you consign your secret key to memory, what happens if you become incapacitated, such as after a stroke – or what if you simply forget one small part of the code. Would you be willing to risk losing your entire investment on maintaining your memory?
Professional cold storage vaulting services such as Coin IRA offer fully insured deep-frozen cold storage, guaranteed theft proof and fully insured to market value in the event of data loss or any other disaster.
Unless you’re willing to risk losing your entire investment it’s the only way to be certain.
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.