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How to Invest in Bitcoin: A Simple Guide

Investing in Bitcoin offers the potential for high returns, but it comes with significant risks.

In an era when financial instability seems to be a way of life, the search for a stable medium of exchange has been evolving. Enter Bitcoin. It’s an attempt by the free market—or, more specifically, the Internet—to create a new and different currency.

Bitcoin has been described as “the first decentralized peer-to-peer payment network that is powered by users with no central authority or middlemen.” Simply put, it is a currency equivalent that is developing and being implemented beyond the control and authority of the world’s central banks.

What Is Bitcoin?

Bitcoin is a decentralized digital currency, also known as a cryptocurrency, that enables instant payments to anyone, anywhere in the world. It operates on a peer-to-peer network, with transactions recorded on a public ledger called the blockchain.

What is a Blockchain?

Bitcoin uses a public ledger called a blockchain that records every transaction ever processed, allowing a user’s program to validate transactions. This allows all users full control over sending payments from their Bitcoin address.

CBInsights defines blockchains as “Blockchain technology offers a way for untrusted parties to reach an agreement (consensus) on a common digital history. A common digital history is important because digital assets and transactions are, in theory, easily faked and/or duplicated. Blockchain technology solves this problem without using a trusted intermediary.”

A Brief History

Bitcoin was introduced in a 2008 white paper by an individual or group using the pseudonym Satoshi Nakamoto. Satoshi Nakamoto ended their participation in the project by the end of 2010, but the system has grown considerably since.

Bitcoin was the first cryptocurrency and remains the most well-known and widely used. Over the years, it has transitioned from a niche experiment into a significant financial asset, capturing the attention of investors worldwide.

How Does Bitcoin Work?

Bitcoin requires a mobile app or computer program that provides a personal Bitcoin “wallet.” That wallet enables you to both send and receive Bitcoins.

There are people involved in the Bitcoin network who are referred to as miners. These people are compensated—with new Bitcoins—in exchange for verifying the validity of transactions. Their compensation is at least partially how new Bitcoins come into existence.

Who Controls Bitcoin?

In short, no one! Bitcoin is a network similar to the Internet. In theory, it’s controlled by all network participants, though developers constantly work to improve the software.

How Investing in Bitcoin Works

Investors can buy Bitcoin using fiat currencies (like USD, EUR, etc.) or, in some cases, other cryptocurrencies. Upon purchasing, the ownership of the Bitcoin is transferred to the buyer’s wallet, which can be a software wallet (on a computer or mobile device) or a hardware wallet (an offline device).

How Investors Make Money

  • Capital Appreciation: The most common way to profit from Bitcoin is through capital appreciation—buying low and selling high. For example, if an investor purchased 1 Bitcoin at $10,000 and sold it when the price reached $20,000, they would realize a profit of $10,000.
  • Trading: Some investors trade Bitcoin short-term against other currencies, both fiat and crypto, to profit from its price volatility. A trader might buy Bitcoin during a dip in price and sell it during a market upturn, capitalizing on these short-term fluctuations.

Where to Buy Cryptos?

Bitcoin can be bought and sold on cryptocurrency exchanges, purchased directly from other Bitcoin owners, or earned through mining. Some popular cryptocurrency exchanges include:

  • Coinbase
  • Binance
  • Kraken

Cryptocurrency exchanges are the most accessible places to buy, sell, and trade Bitcoin.

Find the best crypto exchanges on the financial marketplace.

You might also buy and sell Bitcoin through:

  • Bitcoin ATMs: In some cities, you can purchase Bitcoin from a dedicated ATM.
  • Peer-to-Peer Networks: Platforms that facilitate direct transactions between individuals.

Steps to Get Started Investing in Bitcoin

Step 1: Choose a Cryptocurrency Exchange

Select a reputable exchange to buy Bitcoin. Look for factors like security, ease of use, fees, and available features.

To find the best crypto exchange for you, read the list here.

FactorDescriptionWhy It Matters
SecurityRobust measures like 2FA, encryption, and cold storage. Check for past breaches.Ensures the safety of your funds and personal information.
Ease of UseUser-friendly interface for beginners and advanced tools for experienced traders.A simpler learning curve and better trading experience.
FeesIncludes trading fees, withdrawal fees, and other charges.Affects the overall cost of trading and your investment returns.
Available FeaturesMultiple cryptocurrencies, fiat transactions, margin trading, wallet services, etc.Enhances trading flexibility and options.
Regulatory ComplianceCompliance with legal standards and possession of necessary licenses.Adds a layer of security and legitimacy, ensuring protection against fraud.
Customer SupportAvailability and effectiveness of customer service.Crucial for resolving issues and supporting your trading activities.
Geographical RestrictionsSome exchanges may not operate in all regions.Ensures the exchange is available and functional in your location.
ReputationUser reviews and testimonials.Provides insights into user experiences and the reliability of the exchange.

Step 2: Set Up and Secure Your Wallet

Before buying Bitcoin, set up a wallet to securely store your digital assets. Understand the difference between hot (online) and cold (offline) wallets.

FeatureHot Wallets (Online)Cold Wallets (Offline)
DefinitionDigital wallets on internet-connected devicesStorage devices not connected to the internet
ExamplesSoftware apps, mobile apps, web walletsHardware wallets, paper wallets
UsageBest for small amounts and active tradingIdeal for long-term storage of large amounts
Security VulnerabilityMore susceptible to online threatsProtected from online threats
Setup ProcessDownload the app, create an account, set securityPurchase device, configure device, set security
ConvenienceHigh, easy for transactionsLow, not suitable for frequent transactions
Security TipsStrong passwords, enable 2FA, software updatesSecure physical location, backup recovery phrase

Additional security best practices:

  • Never share your private keys or recovery phrase with anyone.
  • Regularly back up your wallet, especially after transactions.
  • Stay informed about security practices and potential threats.

Step 3: Buy Bitcoin

Link your bank account or debit card to the exchange, place an order to buy Bitcoin, and then transfer it to your wallet for safekeeping.

Step 4: Implement a Strategy

Decide if you’re a long-term holder or a short-term trader. Your strategy should reflect your investment goals and risk tolerance.

  • Monitor the Market: Stay informed about the market trends and news that could affect Bitcoin’s price.
  • Know When to Exit: Have a clear idea of when to sell, whether to realize profits or cut losses.

Risks to Understand

Investing in Bitcoin offers the potential for high returns, but it comes with significant risks. It’s essential to approach Bitcoin investment cautiously, conduct thorough research, and never invest more than you can afford to lose.

  • Volatility: Bitcoin prices can be highly volatile, experiencing rapid increases and sharp declines.
  • Regulatory Risks: The regulatory environment for Bitcoin is still evolving, which could impact its value and legality.
  • Security Risks: Holding Bitcoin requires safeguarding private keys. If stolen or lost, your Bitcoin could be irretrievably gone.
  • Market Risks: Like any investment, there is no guarantee of profit with Bitcoin, and investors should be prepared for the possibility of losing their entire investment.

Are you ready to start investing in Bitcoin?

Bitcoin can be part of your investment planning, but take advantage of the “traditional” ways people have built wealth. Consider investing in stocks or saving for retirement before jumping into the highly volatile world of cryptos.

Jason Vitug

Jason Vitug is a bestselling author, entrepreneur, and founder of phroogal.com and thesmilelifestyle.com. His purpose to help others live their best lives through experiential and purposeful living. Jason is also a certified yoga teacher and breathwork specialist and has traveled to over 40 countries.

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