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Founded in 2009, Bitcoin is the most popular cryptocurrency on the market. Recent data shows that about 46 million Americans — or 17% of the adult population — have Bitcoin in their investment portfolio. And a far greater percentage want to learn more about it.
Before you invest in Bitcoin, or any investment for that matter, it’s important to understand what you’re getting yourself into. In this guide, you’ll learn the basics of Bitcoin, how to buy Bitcoin, and whether it’s the right choice for you.
What to Know Before Investing
As with any investment strategy, it’s important to do your research and have a plan before you get started. Here are a few things to consider before you invest in Bitcoin.
How Bitcoin Works
Bitcoin is a cryptocurrency that runs on blockchain technology. It uses a decentralized, peer-to-peer network to facilitate instant trades with no middlemen and limited fees. Bitcoin, like other cryptocurrencies, markets itself as a form of currency. However, the federal government classifies it as a commodity.
Bitcoin is becoming increasingly popular as a payment method. Hundreds of online stores accept Bitcoin as a form of payment. However, in most cases, investors use Bitcoin as a way to grow wealth in the same way they might with stocks.
Read More: Understanding Bitcoin Taxes: What You Need to Know Before Investing
Bitcoin in Your Portfolio
Before you start investing in Bitcoin, it’s important to consider what role you want it to play in your overall portfolio. Diversification is a core principle of investing — the more diversified you are, the more you’re able to spread out your risk. Just as you wouldn’t invest 100% of your money into a single stock, you also probably wouldn’t want to invest 100% of your money into Bitcoin. Instead, as with other speculative investments, limit your investment to an amount you can afford to lose.
What You’ll Need to Invest
Investing in Bitcoin is fairly simple, and you’ll only need a few things. First, you’ll need to provide personal identification when you open your account on a trading platform. You’ll also need a payment method, which could be a bank account, credit card, or debit card — though keep in mind there may be a fee for certain payment methods.
You’ll also need a place to securely store the private keys needed to access your Bitcoin holdings — this is commonly known as a crypto wallet. Your wallet can be online in the form of an app or website. Or you can use a hardware wallet, known as a cold wallet, which is more secure.
How to Invest in Bitcoin
Ready to start investing in Bitcoin? Here’s your step-by-step guide to buy Bitcoin and craft your investment strategy.
Step 1: Sign Up for a Bitcoin Exchange
When it comes to purchasing stocks, bonds, and other traditional investments, you must sign up with a brokerage account. Bitcoin is no different, and you’ll have to sign up for a trading platform. A few online brokerage firms like Robinhood and Webull allow you to trade Bitcoin, but there are plenty of trading platforms designed specifically for cryptocurrencies. Options include Coinbase, Binance, and Gemini.
Step 2: Get a Bitcoin Wallet
Before purchasing your Bitcoin, you’ll want to make sure you have a safe place to store your private keys. First, you can store your keys in a hot wallet, which could be a website or mobile app. You could also use a hardware cold wallet, which provides an added layer of security.
Step 3: Place Your Bitcoin Order
Once you’ve signed up for a trading platform, connected your payment method, and set up your cryptocurrency wallet, it’s time to place your order. Chances are you won’t be buying an entire Bitcoin — in June 2021, they’re trading for more than $30,000 a piece. But you can buy fractional coins, meaning you own a percentage of a Bitcoin.
Keep in mind that there are ways to purchase Bitcoin without buying it directly. For example, Bitcoin futures allow you to speculate on the future price of Bitcoin. Another option is buying a Grayscale Trust, which allows you to buy shares in a trust without purchasing Bitcoin directly. Finally, you could invest in an actively managed fund that includes Bitcoin, such as BLOK.
Step 4: Devise Your Bitcoin Strategy
It’s important to have a strategy for your investments, so you know how to respond to changes in the market. In general, there are three strategies you might consider:
- Buy and “Hodl”: Hodl is an intentionally misspelled version of the word “hold,” sometimes said to mean “hold on for dear life.” Hodl is used to describe a cryptocurrency strategy of buying and holding an investment for the long term. Investors who are particularly bullish on Bitcoin might use a buy-and-hold strategy with the belief that it will make them rich in the future.
- Long position: A long position is when you invest with the belief the price will increase. If you take a long position on Bitcoin, you might hang onto it until it experiences a price surge and then sell your holdings.
- Short position: A short position on an asset is when you believe the price will decrease. If you’re taking a short position on Bitcoin, you might sell your holdings, believing the price is about to decrease. When the price decreases, you buy it again at a lower price, meaning you get more for your money. Then, when the price eventually increases again, you’ve made a profit.
- Day trading: Day trading is an investment strategy where you execute trades throughout the day as a way to profit from price shifts. This might be a particularly effective strategy when Bitcoin is especially volatile.
Is Bitcoin a Good Investment?
You might be asking yourself whether Bitcoin is really a good investment and worth adding to your portfolio. Ultimately, no one can answer that question for you. But we can share a few pros and cons to consider as you make your own decision.
Before investing in Bitcoin or any other asset, it’s critical that you understand what risks you’re signing up for. Because the fact is that every investment comes with a level of risk. There are a few particular risks to pay attention to:
- Volatility: Bitcoin is a volatile investment, and unlike stocks and other investments, there’s no lengthy history to look back and see how likely it is to bounce back from a downturn. In 2021, Bitcoin lost nearly half of its value in just a few months.
- Lack of insurance: Traditional investments are insured by the Securities Investor Protection Corporation (SIPC), meaning investors are made whole if the brokerage firm goes under. However, Bitcoin and other cryptocurrencies don’t have the same protection.
- Hacking: Like many things online, Bitcoin is vulnerable to hacking. And because there are no legal protections for Bitcoin owners, there’s little recourse if your Bitcoin account is hacked. Two ways to mitigate this risk are to use a secure internet connection and store your private keys in a cold wallet.
- Debt: Most trading platforms allow you to purchase cryptocurrency with a credit card. While this might seem like a good idea if you feel confident that your Bitcoin portfolio will earn money, it’s a dangerous game to play. Credit cards are a form of high-interest debt, and it’s not advisable to take on that added risk for a volatile investment (or any investment at all).
That’s not to say that Bitcoin isn’t a good investment. Those who purchased Bitcoin in 2017 or earlier would have seen their portfolio increase more than 4,700% by June 2021. And while it’s not possible to take advantage of those early gains today, the price could increase in the future.
Ultimately, Bitcoin is considered a speculative investment, and you should proceed with caution. As with other high-risk investments, don’t invest with money you can’t afford to lose.
Next Steps for You
Bitcoin has only been around since 2009, but it’s become increasingly popular, making its way into more and more investors’ portfolios. It’s important to know exactly what you’re getting yourself into before investing in Bitcoin. Just as important is understanding your investment performance. Personal Capital’s Crypto Tracker can help you track the performance of your Bitcoin and other cryptocurrency holdings.
Personal Capital compensates Erin Gobler (“Author”) for providing the content contained in this blog post. Compensation not to exceed $500. Author is not a client of Personal Capital Advisors Corporation. Third party data is obtained from sources believed to be reliable; however, Personal Capital Corporation (“PCC”) cannot guarantee the accuracy, timeliness, completeness or fitness of this data for any particular purpose. Third party links are provided solely as a convenience and do not imply an affiliation, endorsement or approval by Personal Capital of the contents on such third party websites. The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money. Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.
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