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You’ve read about it in the newspaper, heard co-workers talking about it around the water cooler, and even Googled it a few times, but you’re still not exactly sure what it is or how to invest in Bitcoin. You’re not even sure if you should invest in it.
All you know is that bitcoin has so much buzz around it at the moment that you’re half expecting the gas station attendant or the cashier at the grocery store to start chatting with you about it. It’s not surprising that it’s getting a lot of attention at the moment – especially given the fact that the price of bitcoins has been steadily increasing over the last year.
So just what is bitcoin, and does it make a good investment?
Bitcoin is a type of currency often called a cryptocurrency or a digital currency. Essentially, it’s decentralized money that isn’t connected with a government the way most other currencies are. Instead, the money is digital. It allows for private payments online.
Bitcoin has been around since 2009 and was created by Satoshi Nakamoto – which is a pseudonym. No one knows who actually created bitcoin and whether one or more people were involved.
You should know that bitcoin isn’t the only cryptocurrency, but it is the one that is the most well-known. Digital currencies like ethereum and ripple are also getting some attention but not nearly as much. Part of the reason why Bitcoin is so popular is that it’s a scarce resource. Bitcoins are made when computers solve complex math problems in a process that’s referred to as bitcoin mining.
But there is only a limited amount of bitcoins that can be created at any time and only 21 million bitcoins will ever be created. That scarcity is what has helped buoy the price of bitcoins. Since there is only a limited amount, the price could continue to increase as demand increases for bitcoin. For that reason, some people see it as a great investment while others feel like it’s more of a bubble than a sound investment choice.
What is a Bitcoin Exchange?
A bitcoin exchange is a platform that allows you to exchange your dollars for bitcoins or other digital currencies. Some bitcoin exchanges act as marketplaces that allow buyers and sellers of bitcoin to connect. Other types of exchanges are actually brokers that buy and sell the bitcoins across their platform. There are even bitcoin exchanges that connects you with someone local like LocalBitcoins.com so that you can meet up in person and sell your bitcoins that way.
Generally, these companies take a percentage of the transaction – usually around 2% to 5% of your total bitcoin purchase although some might charge more. Some allow you to buy bitcoin using only transfers from your bank account, whereas others allow you to use a credit card or a debit card.
But buying bitcoin can get a little complicated. That’s because you need a digital wallet in order to store your bitcoins. Some of the best bitcoin exchanges have wallets built in that allow you to keep your bitcoins on their platform, whereas others require that you set up your own wallet.
How you set up your wallet is important to consider since it is fairly easy to steal bitcoins if you don’t have a secure wallet or if you share your wallet’s key or information with others. That’s because with bitcoins you never know who you’re sending money to and you can’t get your money chargedback to your wallet if you make a payment mistake.
If you’re just buying bitcoins as an investment and don’t intend to spend them, you might be better off buying them off a bitcoin exchange that offers a digital wallet or vault where you can store your bitcoins. Not only will they help to keep your bitcoins safe, some exchanges like Coinbase have the option of three factor verification that adds extra safety to your account. Keeping them on an exchange platform will also makes it easier for you to resell your bitcoins at a later date.
The problem with bitcoin exchanges are that they have been rife with fraud and hacks. For example, Mt. Gox shut down in 2014 when it was hacked and $450 million in bitcoins disappeared.
There are also a lot of fake websites online purporting to sell you bitcoins. That’s why it’s critical to choose a reputable exchange if you’re going to buy bitcoins
When it comes to bitcoin exchanges, the one that’s currently the most popular is Coinbase. It caters to users in over 30 countries. By 2017, it had exchanged over $6 billion in currency.
One of the biggest benefits of Coinbase is that it is a reputable company. Based in San Francisco, it’s back by a number of trusted investors. That means that you don’t have to worry as much about about bitcoin related scams. Coinbase also offers a bitcoin wallet on the exchange and many exchange marketplaces do not offer that.
For first time buyers, Coinbase is relatively easy to figure out. You’re able to buy bitcoins using a bank transfer or a debit or credit card. With the bank transfer, you’ll pay 1.49% fee on the conversion but it will take 5 to 7 days to process. If you use a back-up credit card as a payment method, then you can do an instant buy via your bank up to $1,000 in bitcoin per week. Want to use a credit or debit card to make your purchase? You’ll pay 3.99% in fees but the purchase will be instant.
In comparison to other bitcoin exchanges, these fees are relatively reasonable. After all, Coinmama charges around 6% and BitPanda charges 5%.
Setting Up a Coinbase Account
When it comes to setting up a Coinbase account, you’ll have to provide full identify verification and share your basic personal details. That includes giving them a photocopy or picture of your driver’s license or passport if you’re buying bitcoins using a credit card.
After you sign up, you have to enter your bank, credit card, or debit information by going into the payment methods section. Finally, you’ll get confirmation that your credit/debit or bank information has been successfully entered and you can buy bitcoins!
One of the benefits of Coinbase is that they have high limits. If you’re verified and a US customer, you’ll be able to buy up to $25,000 worth of bitcoin a week.
How fast you’ll get the bitcoins will depend on your payment method.
Coinbase provides you with something known as the Coinbase Vault. The vault allows you to secure your bitcoins because you can protect them by using multiple approvers. You can add 2 to 5 approvers to your vault and all need to confirm that the withdrawal is valid before it can be processed. In addition, it takes 48 hours to process a Vault withdrawal, which is an additional safety net.
The vault functions as a multi-signature vault where Coinbase has one key, the account holder has another and the third key is shared. If you only have one of the password, you won’t be able to take money out.
This is one great solution to security concerns, but if you think you might need your bitcoins quickly, it likely isn’t the best option for you.
Coinbase also has a wallet that allows you to keep your bitcoins safe as well and allows you greater access to your account and bitcoin balance.
Advantages of Investing in Bitcoin
Now that you know a little bit about bitcoin are you excited to invest? There’s a lot of good reasons to consider doing so. The most important reason is that you could make a significant amount of money by doing so.
As mentioned earlier, there are only 21 million bitcoins that will ever be created. Currently, the system creates new bitcoins at a fixed rate, which means that while demand is high, supply is quite low. That make it a scarce resource and gives the potential of making money as the price goes up.
Another benefit of bitcoin is that it isn’t connected to a government which means that changes in government regulations or economic or political circumstances won’t cause fluctuations in the currency.
If you are wanting to spend your bitcoins, they also offer you the benefit of privacy with transactions being practically impossible to track.
Bitcoin’s technology is also fairly safe. It operates using blockchain technology, which means that it is heavily encrypted and hard to hack into. That means that if you’re certain about where you’re sending the money then your financial transaction will likely be very safe.
While you shouldn’t be investing all your money into a risky Bitcoin investment, it could be one way to differentiate your assets and tap into its growth. That growth has been significant in the past year and it could be even more significant going forward.
Another benefit? It has a cool factor. Being able to say that you’re investing in digital currency will likely give you something to chat about around the water cooler.
Disadvantages of Investing in Bitcoin
Despite the fact that there is a lot of upside potential with bitcoin, it’s important to remember that none of that is guaranteed. Countries around the world are still struggling with how to best regulate bitcoin and new regulations by big countries tend to have an adverse effect on the price of bitcoin. For example, just recently the South Korean government announced a crackdown on bitcoin that made the price of bitcoins plunge.
There is generally a lot of volatility in bitcoin since it’s a new investment category and the factors that affect it are in flux including things like the current demand, government regulation and consumer sentiment. The amount of risk that you would take on by investing in bitcoin is much higher than other similar investments. Depending on your risk profile, what you’re investing money for, and how close you are to your retirement or investment goal, it might not make financial sense to invest in bitcoin.
After all, you could potentially lose all or most of your Bitcoin investment. That’s because it’s unclear whether bitcoin is in a bubble or not. If it is in a bubble and that bubble eventually pops, the price of bitcoin could fall wiping out a lot of value and capital.
Bitcoin also isn’t as liquid as a number of other types of investments. Want to use your bitcoin? You’ll be hard pressed to find a restaurant that takes digital currencies.
There also aren’t legal protections if you lose your bitcoins. If your bitcoins get stolen, there is no way to trace them back and recover them for you. There is no recourse for you.
Right now, bitcoin is a scarce resource, but what happens if the cap on the total number of bitcoins is eventually lifted? That could see the price of bitcoin plunge.
Another downside of investing in bitcoin is that it can be easy to lose your investment. Don’t think that’s possible? One UK man lost $4 million when he threw out the hard drive of a computer that had his bitcoins on it.
Bitcoin also has a somewhat shady history. It’s become the currency of choice for many gangs and drug dealers. It’s also often used as a way to launder money.
How to Get Started Investing in Bitcoin
When it comes to getting started investing in bitcoin, the easiest way is just to buy some. In order to do it, you need to choose a bitcoin exchange. If that exchange does not provide you with a digital wallet, you’ll also want to set that up. In fact, for security purposes, you might want to move your bitcoin to your own digital wallet.
To protect your investment, you’ll want to back up and encrypt your wallet to make sure that you don’t lose your bitcoins. Also, be sure not to lose your Bitcoin keys and you might lose your whole investment.
If you’re new to Bitcoin investing, you should know that many Bitcoin exchanges and brokers put a limit on how much you can buy in bitcoins per week until you’ve been verified. This amount will vary from one Bitcoin exchange to another and can be as little as $50 a week or as much as several thousand dollars.
When choosing a bitcoin exchange to use, you’ll also want to check to see what the exchanges are charging. Fees can range from 3% to 5%.
Author: Jeff Gitlen