How to Invest in Bitcoin: A 5-Step Guide for Beginners

Cryptocurrency has taken the financial world by storm in recent years. A form of digital currency, cryptocurrency was designed to be anonymous and secure, and not backed by real assets or tangible securities.

In 2009, the first Bitcoin Block was introduced by Satoshi Nakamoto (known only by this pseudonym). Cryptocurrencies are traded between consenting parties with no broker and tracked on digital transaction ledgers called blockchains, which are duplicated multiple times through a network of computers. Apart from Bitcoin, other examples of cryptocurrency include Ethereum, LiteCoin, and Electroneum, among others. Over 6700 variations of cryptocurrencies are traded publicly, totaling $645.7 billion in value amongst the entire variety. Bitcoin, the first and most popular cryptocurrency, has made sky-high gains in value recently, surpassing $40,000 (per one BTC) in early January 2021 (compared to its trading price of $3,237 in December of 2018).

The Bitcoin market is a new frontier — which inherently comes with all of the potential and downside of any intrepid market. Because of its experimental and volatile nature, it is important to take the utmost precautions when investing in Bitcoin. Some investors like to approach risker investments such as Bitcoin (or individual stocks, for that matter) by allocating a small percentage of their portfolio (e.g., 10%) to these asset classes.

For many investors, approaching Bitcoin may seem mysterious and even a little daunting. So, we set out to break down investing in the Bitcoin market in 5 simple steps:

1. Understand Where to Buy Bitcoin

As an investor, you can access the bitcoin market through exchanges, traditional brokers, and a few other platforms.

Cryptocurrency Exchanges

Coinbase: Coinbase is popular among U.S. bitcoin buyers, as it allows for an easy link to the buyer’s bank account. On this platform, you can also access etherium, litecoin and other cryptocurrencies. On each transaction, Coinbase charges a spread (an adjustment in the purchase or sale price of an investment) of about 0.5%, plus a fee.

Binance: Binance is the biggest cryptocurrency exchange by volume. Binance charges a 0.1% fee for all crypto trades (some discounts are available), plus a withdrawal fee. Generally, you can only make purchases using cryptocurrency, though Binance did recently add the option to pay by credit card for an additional fee.

Gemini: Gemini is based in the United States, and trades bitcoin, bitcoin cash, and other cryptos. Transaction fees range from $0.99 to 1.49% of your order, depending on the size of the purchase or sale, plus a fee of about 0.5%.

Coinmama: Coinmama requires a minimum $60 purchase and charges a transaction fee of 5.9% (plus an additional 5% fee for credit card purchases).

Traditional Brokers

There are a small number of brokers offering investors the platform to trade bitcoin. Notably, Robinhood was the first mainstream investment broker to offer bitcoin. TradeStation and eToro also offer bitcoin trading services.

Other Platforms for Investing in Bitcoin

Bitcoin ATMs: Work like regular ATMs, but used to buy and sell bitcoin.

Peer-to-peer bitcoin owners: You can purchase bitcoins directly from other bitcoin owners through peer-to-peer platforms. This should be done with the utmost caution because direct transactions with individuals can be dangerous.

Bitcoin investment firms: Investment firms that manage bitcoin are run like other investment firms, allocating assets under management for their selected investments. There are high fees, and this option may only be best suited for very high-net-worth individuals.

2. A Few Tips Before You Buy

Organize your information before your purchase. Establishing an account may take a few minutes, but you’ll need some pertinent and sensitive information, including your Social Security number, bank account, debit card/credit card to fund your bitcoin account, and picture ID.

AVOID using a credit card. Although some providers allow you to purchase bitcoin by credit card, making investments by borrowing from a high-interest product like a credit card is never a good idea.

There usually is no insurance. Bitcoin and other cryptocurrencies are not insured by the Securities Investor Protection Corporation for exchange failures or theft, which is an insurance protection employed by traditional stock brokerage accounts (up to $500,000). Some exchanges like Coinbase provide private insurance, but that doesn’t protect against individual online breaches like someone stealing your password.

Use a secure, private internet connection. This is important any time you make financial decisions online. Buying bitcoin while at the coffee shop, in your hotel room, or using other public internet connections is not advised.

3. Think About How to Store Bitcoin: Hot vs. Cold Wallets

Bitcoins can be stored in two kinds of digital wallets: a hot wallet or a cold wallet. With a hot wallet, transactions generally are faster, while a cold wallet often incorporates extra security steps that help to keep your assets safe but also take longer.

Hot Wallet

With a hot wallet, bitcoin is stored by a trusted exchange or provider in the cloud and accessed through an app or computer browser on the internet. Any trading exchange you join will offer a free bitcoin hot wallet where your purchases will automatically be stored. But many users prefer to transfer and store their bitcoin with a third-party hot wallet provider, because it can be more secure from hackers and other security breaches.

Cold Wallet

A cold wallet is a small, encrypted portable device that allows you to download and carry your bitcoin. Cold wallets can cost as much as $100 but are considered much more secure than hot wallets.

When creating accounts for your digital wallets and currency exchange, use a strong password and two-factor authentication.

4. Go Ahead and Buy!

After linking your bitcoin wallet to the bitcoin exchange that you select, you can now decide how much bitcoin you want. Bitcoin trades at a very high price currently (~$32,000+, trading symbol BTC or XBT), but it can also be bought and sold for fractional shares, so your initial investment may be as low as $50 or $100.

5. Manage Your Investment

If you are not a professional investor, and see a future for bitcoin as a digital currency, it might be best to consider your investment over the long-term — and buy and hold for a sustainable period. Shorter-term trading is always an option, but should be done with caution.

*Be Aware of Fees*

As always, keep fees in mind. Fees play a major role in your returns. There are some tricks, though. For example, if you buy BTC on Coinbase you’ll pay higher fees than Coinbase Pro. Little do most people know, fees are everywhere; even in your employer-sponsored retirement accounts and especially if you have an investment advisor. Head over to www.Compoundly.com to find out what fees your paying and to get those fees cut.