Bitcoin Investing: Your Easy 3-Mintue Guide to Bitcoin

Bitcoin was created in 2008 during the middle of one of the worst financial crises in recent memory. The economic downturn was largely caused by irresponsible practices within the United States housing market, which rippled throughout the world economy and is often considered a major factor in the subsequent European debt crisis. Essentially, loans that were known to have a high chance of default were bundled together and sold to other financial institutions in a complicated and risky way. With the inevitable collapse of this house-of-cards lending schema, several large financial institutions found their assets devalued, and investment bank Lehman Brothers Holdings, a significant perpetrator of subprime mortgage lending and holder of many of these debts, filed for Chapter 11 Bankruptcy in September 2008. Despite US federal bailouts stopping the further collapse of large financial institutions, which would have imploded the global economy, the stock markets still took a steep dive, causing the assets and investments of many organizations and individuals to be strained.

This crisis was different than others because it was based on trust. The individuals who received loans from the banks trusted that the banks would act in their best interest. The message that many people received from the financial crisis was that they do not have control over their money and that the people who do have control over it do not care about them. Since the 1980s, there has been a stereotype of the backstabbing, slick Wall Street investor. This reached a peak in 2008 when the mortgage market collapsed, which was seen as the natural conclusion of those pump-and-dump, short-sighted trading tactics.

The trouble with Traditional Money

The Bitcoin whitepaper was written as a response to this message. The author of Bitcoin, Satoshi Nakamoto, outlines the mathematical and computational basis for the cryptocurrency in only nine pages. As commerce increasingly takes place online, electronic payment processors and clearinghouses that enable companies like Visa to hold such authority have more power. Many people are uncomfortable with the number of third-party organizations required to conduct business day to day. The main advantages of cash are its simplicity and the fact that it is easy to keep track of who owns it. Another big advantage is that cash transactions can be done privately and anonymously. However, people found that there were too many drawbacks and challenges to continue using fiat currencies such as the US Dollar, Euro, or Bolivar.

The issuer of a currency has complete control over how much of the currency is produced and how it is distributed. This gave the government the power to cause inflation without warning, which devalued people’s currency. If we look at the Bolivar (the currency of Venezuela) as an example, we can see that the country is known for its economic instability. This is because many citizens make a living by exchanging currency on the black market, and even those who want to follow the law have to use shady intermediaries to conduct large transactions (such as buying a home).

This left a void. While physical currencies offer a high degree of control over ownership, they are not as anonymous as one might think. Digital payment methods have made it possible to instantly send money internationally and to transfer value quickly and easily from one person to another. However, these services have come at a high price. Fees on international transactions, currency conversions, and even monetary transfers often make these services too expensive for low-income individuals or citizens of developing nations. The reason companies like Western Union, MasterCard, Moneygram, and Visa are able to charge high prices is that people have no other option but to use their networks and services.

The Birth of Bitcoin

Enter Nakamoto. A problem with digital currency in the past is that it was easy to spend it twice (‘double spend problem’). There was no way to make digital currency rare and valuable. Digital objects are very easy to copy. When you use cash to buy something, the merchant takes the money from you, and you don’t have it anymore. This transaction cannot be reversed. If a customer has a credit card, they can call their credit provider and get their money back if they have been charged for something they did not purchase. This process is called a chargeback.

This means that people will only trust the system if they know that there is a possibility of reversing a transaction. Nakamoto designed the blockchain computer protocol to establish bitcoin. The blockchain, as the whitepaper explains, is “…a solution to the double-spending problem using a peer-to-peer distributed timestamp server to generate computational proof of the chronological order of transactions.” (Bitcoin Whitepaper) Using a cryptographically sound method of encryption enables this ledger of the chronological order of transactions to be publicly visible and verifiable without providing the private, protected information behind the transactions to anyone beyond the individuals involved. The name ‘blockchain’ comes from the verified transactions that are grouped together in ‘blocks.’ These blocks are publicly viewable and accepted by the consensus of users. This block is confirmed once most users accept it as valid, which generally happens every ten minutes. This means that the transactions can never be undone, reversed, or altered. They are immutable.

In a blockchain transaction, both the sender and the recipient know the “addresses” (or public identification) of all parties involved. Only individuals know the “private keys” needed to access their accounts. Participants in the Bitcoin network can see any given wallet and exactly how much Bitcoin is stored in that wallet, but nobody can see the identities of the owners of those wallets. The ledger also includes a record of all the transactions on the network, providing proof that they actually happened.

Bitcoin is generated by using computers to solve complex equations, called cryptographic hashes. The computer that solves a hash that returns the correct value for a block is rewarded with Bitcoin. No one can change the total supply of Bitcoin. The total number of Bitcoin is unchangeable and set in the protocol. This means that the supply of Bitcoin is finite, just like gold. This mining method for acquiring Bitcoin, along with the ledger of public transactions, creates the digital scarcity needed for a digital currency to function and succeed.

How to Invest in Bitcoin in 5 Steps

Are you ready to dive into cryptocurrency? If you’re looking to buy Bitcoin, you’re in luck as it’s simpler than you might think. Here’s how to invest in Bitcoin in 5 easy steps:

Join a Bitcoin Exchange
Get a Bitcoin Wallet
Connect Your Wallet to a Bank Account
Place Your Bitcoin Order
Manage Your Bitcoin Investments

1. Join a Bitcoin Exchange

The first thing you’ll need to do is figure out where you want to buy Bitcoin. Most Bitcoin investors use cryptocurrency exchanges. Since there is no one company that manages Bitcoin, exchanges have been set up to help with transactions. These exchanges are the middlemen of cryptocurrency investing, like a stock brokerage.

If you decide to purchase from an exchange, you should first research different exchanges to see which one you want to buy from. Here are a few of the most popular options:

Coinbase: A very popular crypto exchange that insures losses in the event of a security breach or fraudulent transfers
Binance: Founded in 2017, Binance is a crypto exchange with a strong focus on altcoins
Kraken: This San Francisco-based exchange allows you to invest in Bitcoin using various currencies from around the world
Gemini: Launched in 2015 by Cameron and Tyler Winklevoss, Gemini offers services for casual and veteran Bitcoin investors with different user interfaces and fee structures for both
Bitfinex : The longest-running cryptocurrency exchange that’s optimized for advanced traders and lenders (unfortunately, Bitfinex doesn’t currently accept US customers)

The increasing popularity of Bitcoin is making it more difficult for investors to choose an exchange. If you want to learn about the differences between Binance and Coinbase, this is the article for you. We’ll go over everything you need to know about each platform so that you can make an informed decision about which one is right for you.

2. Get a Bitcoin Wallet

When you purchase a coin, it is stored in a “wallet.” Your cryptocurrency is stored in this “wallet.” You can use two types of wallets to store your bitcoins: a “hot wallet” or a “cold wallet.”

A hot wallet is a wallet that’s operated by either your cryptocurrency exchange or by a provider. Some exchanges provide you with a hot wallet when you open your account. Hot wallets are convenient because they can be accessed via the internet or a software program.

Some notable hot wallets are:

Electrum: Software that enables you to store your coins on your computer
Mycelium: A mobile-only app for Android and iPhone users

However, hot wallets are not the most secure form of cryptocurrency storage. If the company that provides your hot wallet is hacked, then your coin information may be at stake.

A cold wallet is the best way to store your coins. A cold wallet is an actual piece of hardware that stores your coins. It is usually a portable device that is similar to a flash drive. Most cold wallets cost between $60 to $100. Some popular cold wallets are:

Trezor
Ledger Nano

If you’re only going to buy a small amount of cryptocurrency, you might be able to get away with using a hot wallet with an insured crypto exchange. If you are going to be trading large amounts of cryptocurrency, then a cold wallet would be a good investment.

Need help deciding which wallet is right for you? We’ve put together a list of the best bitcoin wallets so you can choose the right one for you.

3. Connect Your Wallet to a Bank Account

When you have your wallet, you will need to connect it to your bank account. This enables you to purchase coins and sell coins. Your bank account may be linked to your cryptocurrency exchange account.

4. Place Your Bitcoin Order

Now you’re ready to purchase Bitcoin. The cryptocurrency exchange will have what you need to buy. The most important question is how many Bitcoins you should buy.

You can buy fractions of a coin even if it costs thousands of dollars, which means that your initial investment could be as low as $25.

Before you purchase any Bitcoin, it is important to carefully determine your risk tolerance and review your investment strategy. We’ll go over this in the next section.

5. Manage Your Bitcoin Investments

After you’ve purchased bitcoin, you can:

Use your coins to make online transactions
Hold your coins for a long period in the hopes they’ll appreciate in value
Perform day trading with your coins—that is, buying and selling coins with other Bitcoin owners, which can be facilitated on the cryptocurrency exchange.

Your cryptocurrency exchange will sell you the coins you need and provide you with a place to store them.

Tips For Investing In Bitcoin

If you do decide that you want to try Bitcoin investing, be sure to heed the following tips:

Understand your risk tolerance: As mentioned before, Bitcoin is a high-risk investment, and you should carefully review your risk tolerance before you invest. If you don’t feel comfortable investing in volatile assets or only have a small sum of money to invest, you may want to consider other investment options.
Diversify Your Portfolio: The best way to protect yourself from investment losses is to diversify your investment portfolio. Your primary investments should be low-risk, like government bonds or index funds. Next, you should go for medium-risk investments, like real estate or corporate stocks. High-risk investments, like penny stocks or Bitcoin, should be your smallest and least-prioritized investments. Bitcoin is essentially the “icing on the cake:” the investment that could yield substantial profit but which you could still do fine without.
Start Small: If you’re on the fence, start small. Cliff Auerswald, President of All Reverse Mortgage, recommends investing $10 per week. “Many people are still unsure whether crypto-currencies will pan out. With all the buzz surrounding crypto, though, many are still interested and don’t want to miss out,” he says. “One of the most effective ways to invest in BTC is to just put $10 a week into it. That way, it’s not a risk if it doesn’t end up panning out – but over time, you’ll have a healthy investment.”

Summary

Bitcoin is a popular cryptocurrency that uses a large chain of interconnected computers to store and protect your digital assets. Bitcoin is an asset that can have large and fast changes in value. This can lead to high returns but also carries a great deal of risk. It is very important for you to understand how to invest safely in Bitcoin before you make any decisions. You should spread your investments around to different kinds of assets to protect yourself from changes in the market.