Bitcoin (BTC) is still a relatively new asset class but is quickly gaining interest among retail and institutional investors alike. Investing in bitcoin is easy, though a little background research is useful before you get started.
What is Bitcoin?
Bitcoin is becoming an increasingly popular investment, for a number of reasons, but dipping your toes into the cryptocurrency world can be quite different from conventional investing. Popular search queries such as ‘how to invest in bitcoin stock’ suggest that many of those who are interested in buying bitcoin do not understand it well.
Bitcoin is a digital currency: a form of online money that can be transferred from one user to another without any third parties like banks or payment processors. It is peer-to-peer electronic cash.
Unlike regular currencies such as dollars and euros, though, Bitcoin has a fixed supply. There will never be more than 21 million BTC. This makes it more like a commodity, such as gold. In fact, bitcoin has become known as ‘digital gold’ by the cryptocurrency community, due to its guaranteed scarcity. As such, bitcoin is not subject to long-term inflation – a property that has helped push its value from $1 early in 2011 to over $10,000 at the time of writing.
Why invest in bitcoin?
Bitcoin has only been around since 2009 but the currency has a unique collection of properties. Advocates say these factors make bitcoin worth investing in, and while BTC is subject to high volatility in the short term, the long-term pattern over the span of ten years has been one of exponential growth.
Some of the factors that may make investing in bitcoin attractive include:
- Scarcity. As ‘digital gold’, bitcoin is the hardest money ever created. Its current inflation rate is less than 2% – the target for most central banks – and is falling all the time.
- Bitcoin is a truly global asset that can be bought, sent, and used anywhere in the world.
- It is censorship-resistant: no bank or government can reverse or block transactions, or confiscate it unilaterally.
- Bitcoin is still in its relative infancy and has the potential for significant adoption and further growth
- It is an independent asset, not intrinsically linked to the economy of any specific country or region
- Bitcoin is the gateway to the crypto world, and many other digital assets trade against it
Bitcoins are useful
Most people invest in bitcoin as just that: an investment. In other words, they hope and expect the value of the BTC they buy to go up over time.
Bitcoin investment is often viewed as risky since there is no guarantee that you will make money and cryptocurrencies can be quite volatile – more so than most stocks or other traditional investments. But a bitcoin investment is useful in a number of ways, thanks to the properties described above.
The ultimate hedge? Due to its limited supply, Bitcoin may prove – like gold – to be a popular hedge against high rates of inflation caused by unprecedented money printing. Similarly, your balance will not be eroded by negative interest rates, like money in a bank account will be.
Unconfiscatable. Bitcoin is solely controlled by the owner of the private keys that give access to an address. This means funds can’t be taken by governments in the event of bail-ins or other forms of wealth confiscation.
Privacy. While Bitcoin is not entirely anonymous, it can offer a high degree of privacy if used correctly.
Unrestricted. You can use bitcoin to transfer money anywhere in the world, quickly and for just a small fee – allowing you to send friends and relatives cash when they need it.
Bitcoin price action
Investing in bitcoin can be lucrative, but it is risky: over shorter time frames, bitcoin can be extremely volatile. If you’re asking yourself ‘Is bitcoin worth investing in?’, you have to take this into account.
There’s a good chance that your BTC will, at some point, be worth less than you paid for them. This is not a ‘safe’ investment like gilts or high-quality bonds, which maintain their value and pay regular interest. It’s more like gold or silver, which are subject to significant price swings. If you’re not comfortable with that, it’s probably time to think twice about whether this is the right investment class for you. If you are happy with it, you will still want to think about managing your risk by limiting the amount you buy, and considering in advance whether there is a point at which you would sell to prevent further losses if the price fell.
It is also a good idea to prepare yourself to hold onto your investment for a period of time – perhaps between two and five years.
Given its volatility, the question of when to invest in bitcoin is one that traders spend a lot of time studying.
When is the right time to buy bitcoin?
Even the very best professional traders cannot call the market perfectly, buying the very bottom of a market cycle and selling the very top. Realistically, it’s best not to try to time the market unless you have a lot of experience – and good risk management.
One strategy that has gained popularity is dollar-cost averaging, or DCA. This simply means buying a certain amount of bitcoin at a regular interval. For example, you might decide to purchase $100 worth of BTC on the last day of each month.
This has at least two benefits:
- It takes the emotion out of investing, making it a mechanical process. You are not looking at the price and seeking to time your entry, just buying a little every few weeks.
- It smooths out the ups-and-downs of the market, allowing you to average into a position over time. This significantly reduces your risk, since if the price falls, you buy more BTC for the same amount of money, and when it rises, your holdings based on lower prices are worth more.
If you are looking to trade or invest in bitcoin for the long term, there are several ways to go about it. Services like LocalBitcoins are suitable for peer-to-peer purchases almost anywhere in the world. Depending on your location, Bitcoin ATMs also provide a facility for smaller purchases.
For larger, regular, and more efficient crypto trading, a regulated exchange is a better option. Coinbase provides facilities for customers in many countries around the world. Meanwhile, for Australian users, crypto trading platform Timex offers a secure, user-friendly, and compliant way to buy and sell cryptocurrencies.
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