Even though Bitcoin came into existence in the late 2000s, it’s one of the newest major investment types and still carries a bit of novelty appeal, especially to investors who are most familiar with more traditional assets. Bitcoin isn’t just an investment — it’s an entire currency, one that’s completely digital and not attached to any government or sovereign entity.
Early Bitcoin adopters benefited hugely when the currency originally spiked from sub-$1,000 to nearly 20 times that over the course of 2017. This makes it an appealing option for investors hoping it will see similarly meteoric rises in the future. However, investing in Bitcoin and other cryptocurrencies remains incredibly risky, so it’s wise to keep holdings to a fraction of your overall portfolio at most.
What Is Bitcoin?
In the simplest terms, Bitcoin is a decentralized, open-source digital currency that derives its value from mathematics rather than from physical assets or the backing of a government or bank. Bitcoin functions less like a traditional currency and more like a digital credit account.
You’re able to transfer value by inputting your credit card information online because that credit card is tied to a bank that confirms its authenticity whenever you make a purchase. Similarly, Bitcoin transactions are valuable because they can be verified by a system called the blockchain. But unlike a bank, the blockchain is decentralized and not tied to any single entity or government institution.
You can spend as much time as you like learning about Bitcoin, cryptocurrencies, and the blockchain, depending on how much of an expert you want to become. For investing purposes, though, a basic understanding will suffice.
What You Need to Invest in Bitcoin
Just like you need a brokerage account to invest in the stock market, you need to set up a digital wallet and an account with a cryptocurrency exchange to buy Bitcoin. You also need to decide whether you want to pay via bank transfer, debit account, or credit account and have that information ready too. Finally, you need identification to verify your identity with the exchange you choose.
Choose a Digital Wallet
Digital wallets are similar to password managers or keychains. They store your bitcoins securely and are connected to whatever account you use to fund your purchase. Popular Bitcoin wallet providers include Coinbase, SoFi, Robinhood, and Exodus.
You can also purchase a “hardware” wallet, which allows you to store your Bitcoin offline on a device similar to a hard drive. Popular models include Trezor and Ledger.
Choose a Crypto Exchange
While crypto exchanges are different than crypto wallets, some are connected. For example, Coinbase, SoFi, and Robinhood allow you to buy and sell Bitcoin as well as store it. Other Bitcoin exchanges include Binance, BitForex, and Bitcoin.com, which also maintains a directory of Bitcoin exchanges you can explore.
If you choose an offline Bitcoin wallet or a Bitcoin wallet that isn’t connected to an exchange, you’ll have to choose an exchange and set up a connection so you can transfer bitcoins from your wallet to sell.
Different exchanges have different processing fees and exchange rates, so be sure to do your research before choosing one.
Ways to Invest in Bitcoin
There are more ways to invest in Bitcoin than simply buying and holding the currency itself. There are also Bitcoin trusts, ETFs, and other variants that can be a better option depending on your particular circumstances.
The first and most obvious method of investing in bitcoin is directly by buying, holding, and selling bitcoins or fractions of bitcoins in the same way you would buy and sell individual or fractional shares of stock.
This method is simple, but it’s also fairly high-risk. Bitcoin value can fluctuate wildly, and it’s harder to predict than more traditional investments. This means the payouts can be much greater, but it also means the chances are higher that you’ll lose it all in the gamble.
Grayscale Bitcoin Investment Trust
Another method of gaining exposure to Bitcoin is through a fund like the Grayscale Bitcoin Investment Trust (OTCMKTS:GBTC). Similar securities exist for other cryptocurrencies, but GBTC is currently the only publicly traded Bitcoin trust.
The benefit of investing in GBTC rather than in Bitcoin directly is that GBTC trades like stock, so you don’t need to set up a digital wallet or join a Bitcoin exchange to purchase shares. However, you’ll pay a significant premium for the convenience — GBTC trades at well above the value of the corresponding amount of Bitcoin to which the fund is tied, so risk remains high.
Cryptocurrency Index Funds
Index funds are portfolios made up of assets in a combination designed to mimic any index’s performance. For example, the Vanguard 500 is designed to resemble and perform similarly to the S&P 500.
Similarly, crypto index funds are designed to track indexes of crypto assets and mimic their performance. Examples include Cryptoindex, the Bitwise 10 Crypto Index Fund, and CRYPTO20.
These funds allow you to invest in a basket of crypto assets without needing to research each one individually. But since all of the assets in these indexes are still crypto assets, the risks associated with these investments remain high.
Finally, there are a few exchange-traded funds (ETFs) that include holdings of businesses that are involved in or profit from the blockchain industry. These ETFs are a way to invest in the business of blockchain without buying cryptocurrency itself.
Examples include the Amplify Transformational Data Sharing ETF (BLOK), Goldman Sachs Finance Reimagined ETF (GFIN), and Innovation Shares NextGen Protocol ETF (KOIN).
The pros and cons of investing in crypto ETFs are similar to those of private cryptocurrency index funds. Since they trade on the stock market, they’re more similar to traditional investments and can be purchased with standard currency. But like all crypto assets, these ETFs remain far more variable than traditional investments.
No matter how you plan to invest in Bitcoin, keep in mind that all crypto investments are highly variable and expose holders to significant risk. Some crypto investments may be more stable than others, but they’re all wildly risky compared to traditional investments and currencies.
Be sure to do plenty of research before delving into the world of crypto investing, and if possible, consult with a professional before making any final decisions. Keep your crypto assets to a small minority of your portfolio so you can withstand significant variability without endangering your personal finances.
And of course, be sure to verify the legitimacy of any account, exchange, or individual you encounter along the way. There are plenty of scammers ready to take advantage of Bitcoin amateurs, so stay alert!