- From financial apps to publicly traded funds to crypto-exchanges, there are now a plethora of options for investing in bitcoin.
- Bitcoin remains risky and volatile, so individuals should invest small amounts, keep their accounts secure, and think long-term.
- Bitcoin’s dramatic rise in prices since its first appearance in 2009 is attracting institutional and individual investors.
- Visit the Business Insider Investment Reference library for more stories.
Bitcoin is possibly the most fashionable investment of the past decade. It has shrunk in value from anything from 717,900% to just shy of one billion percent (depending on your initial figure) over the last 10 years. Either way, it’s one of the best performing financial assets in recent history.
But while bitcoin is the talk of the town for sure, much of it remains mysterious. It is unclear to new entrants how best to invest in the cryptocurrency, with banks and most mainstream brokerage platforms refusing to handle it. Also, its price change can be frighteningly volatile by traditional stock and bond market standards.
Let’s define how to invest in bitcoin: the different places to buy it, the risks and rewards, and strategies for secure higher returns.
Why invest in bitcoin?
Bitcoin is cryptocurrency, a type of private, electronic currency whose transactions are validated using cryptography, the science of encrypting and decrypting information. Since its launch in January 2009, it has come to be traded amid the belief that its software-enforced cap to 21 million bitcoins will only ensure its long-term value proposition.
“The best argument for Bitcoin’s future success is the same argument that has long been used for gold, diamonds and collectibles: It is designed to have a limited supply and cannot be forged,” said Bob Fitzsimmons, executive VP of Income Fixed, Commodity, and Stock Lending at Wedbush Securities.
The appeal of bitcoin’s 21 million limited supply became more apparent in the context of the 2020 coronavirus pandemic, which has brought record-low interest rates and “unprecedented levels of fiscal stimulus,” Fitzsimmons said.
But even before the COVID-19 pandemic, bitcoin has enjoyed significant longer-term price increases. After being worth about $ 1 at the beginning of 2010, it reached an all-time high of $ 23,770.85 on December 17, 2020.
It hasn’t been a smooth climb, though. Over the years, the price of cryptocurrency has bounced all over the place, sometimes plummeting by hundreds of dollars in hours. It also hit an all-time high of $ 19,783 in December 2017 – before falling by thousands over the next few years. In fact, in November 2020 it dropped $ 3,000, before climbing again.
Given such price swings, bitcoin can be loosely classified in the same investment alliance as growth and technology stocks, which have given investors above-average returns, in return for taking on higher-than-average risk.
Buying and investing in bitcoin
Assuming they are prepared to accept the risk, investors interested in buying and investing in bitcoin have a number of options available to them. Each has its own advantages and disadvantages.
Bitcoin trusts and funds
For those who don’t fancy the idea of owning or owning bitcoin, one simple option is to buy shares in a publicly traded bitcoin trust. Similar to ETFs or mutual funds, these offer a portfolio that holds or trades the currency.
“The easiest way to buy bitcoin is through the Grayscale Bitcoin Trust (GBTC) because it tracks the cryptocurrency and trades through the traditional financial market,” said Ari Wald, MD of the Institutional Portfolio Strategy team at Oppenheimer & Co.
Apart from the Grayscale Bitcoin Trust (which is by far the largest), other bitcoin trusts or funds include:
Main Custody: Charges for funds and trusts can be quite high. The Grayscale Bitcoin Trust charges an annual management fee of 2%, for example. Like others, it also “trades for a substantial premium,” relative to the value of the bitcoins it owns, Wald points out.
Financial and investment apps
Recently, a small number of financial and investment apps have been jumping into the cryptocurrency fraud.
For example, in November 2020, PayPal began offering its US customers the ability to buy, sell and buy with bitcoin, along with three other cryptocurrencies (ethereum, bitcoin cash, and litecoin).
“The biggest obstacle [for bitcoin buying and selling] have always had to open an account with a bitcoin exchange and provide documents to verify your identity. Because hundreds of millions of people already have PayPal accounts, they can skip all that trouble, “says Glen Goodman, an investment expert and author The Crypto Trader.
However, there are disadvantages to buying bitcoin with PayPal: “You cannot transfer your bitcoin to your own personal wallet or send it to anyone else. You cannot transfer it to crypto-exchange to use for trading other cryptocurrencies , Goodman points out. “There are also relatively large fees” for transactions, ranging from 1.5% to 2.3%, depending on the amount you buy or sell.
PayPal is not the only mainstream app that swaps for the crypto craving. The popular Robinhood investment app also deals in the currency now, and does not charge any commission.
The Square Money App is another platform that includes bitcoin trading, while Swan Bitcoin is an app that allows users to automatically invest in the cryptocurrency on a regular basis. Square usually charges service fees and volatility for bitcoin transactions (though it does not explicitly state what these are on its website), while Swan Bitcoin charges from 0.99% to 2.29% as a percentage of the weekly amount saved.
One of the main ways investors buy bitcoin is through cryptocurrency exchanges. As this option involves buying bitcoin yourself directly on a bespoke cryptocurrency exchange, it is recommended for more experienced investors. These have particular advantages over apps and funds, such as:
- Lower fees in the range of 0.10% to 0.26%
- Ability to withdraw bitcoins and download them to another account. This is considered essential by many experienced bitcoin traders, given that various high-profile cryptocurrency exchanges have suffered hacks over the years. (Some apps allow this, but popular ones like Robinhood and PayPal are not.)
As mentioned, this is a more sophisticated game – you enter the territory of the professional traders. Still, “if you’re a more advanced consumer, then you can probably handle buying on an exchange yourself,” said Samson Mow, chief strategy officer of blockchain technology company Blockstream. “Bitstamp or Kraken are trusted platforms” that he recommends for individual investors.
Other highly regarded exchanges operating in the US include Coinbase, Binance, and Gemini.
To start trading, you will have to open an account with the exchange. These exchanges follow strict know-your-customer (KYC) guidelines, so you’ll need to prove your identity before being able to trade using them. Most exchanges have minimum deposit requirements for fiat currencies and cryptocurrencies, but these are usually very low.
What to know before investing in bitcoin
Despite being over a decade old, bitcoin remains a relatively immature asset. Its markets have less trading volume, which means it is less liquid, and the price changes can be volatile. So it is difficult to predict how it will behave from month to month.
Here are some tips for reducing your exposure to risk while also increasing your exposure to potential gains.
Keep it safe: Crypto exchanges still suffer the occasional hack even today. Since bitcoins do not exist in physical form, experienced bitcoin investors store them in digital wallets. A hardware wallet is a manual offline device that stores the private key necessary to securely transfer your bitcoin holdings from one place to another. Ledger and Trezor are two reputable brands.
“If the amount you store is going to be a lot, you might want to add a backup of seeds as well,” advises Mow. The phrase is backed up by a “seed backup” (i.e. a set of words) that allows you to access your bitcoin wallet. Many investors holding large quantities of bitcoin engrave their seed expressions on metal plates and then store these plates somewhere safe (like a bank deposit vault).
Similarly, you should plan on making all your investment from a secure internet connection. Trading or buying bitcoin on a public WiFi network generally makes you more vulnerable to attacks by hackers.
Start small, rather than large: Given its brief history and still unpredictable behavior, it is usually advisable to keep your initial investment in Bitcoin relatively limited. Even experienced investors (e.g. hedge fund manager Paul Tudor Jones) have allocated bitcoin only a single digit percentage of their capital while keeping the rest in less volatile assets. And, despite the hype and outlook, maintain your investment discipline, buying only what you can possibly afford to lose and not being swept away by promises of huge upheavals.
Keep in mind taxes: Although it is a currency, the IRS considers bitcoin to be a property rather than a currency, so it is subject to the same tax treatment as other investment assets. Bitcoin taxes can be triggered by trading, exchanging, or spending the cryptocurrency only (if it has increased in value since you bought it). It is therefore essential to document all transactions. The good news is that bitcoin’s profits are taxed at the special capital gains tax rate, which is often less than ordinary income rates.
Think about buying and holding: Unless you are prepared to watch the market on a daily basis and move immediately, bitcoin should be invested in the long run. “The heightened volatility of Bitcoin on a day-to-day basis makes this especially true,” said Ari Wald.
That is, it’s not a good idea to buy bitcoin expecting to sell it a day, a week, or a month later, as investors found when the cryptocurrency tanked 50% in two days in March. However, the fact that bitcoin recovered following this crash to reach a new peak at all times in November and then December shows the merit of patience.
The financial takeaway
The investment outlook for bitcoin is bright. 2020 had an exciting time, with an increasing number of corporate investors starting to pick up the cryptocurrency (a large part of why it has risen in price 170% since 2019).
And with more institutional investors buying bitcoin every month, and the relative supply of cryptocurrency shrinking, most analysts seem to believe it still has room to rise higher.
Not only has the future never looked better for bitcoin, but it has never been easier to buy and invest in the cryptocurrency. From payment apps to bitcoin funds to crypto-exchanges, there are now a host of options for anyone who wants to get in touch with the entire digital asset.