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How to Invest in Bitcoin and Cryptocurrencies
You’ve heard the buzz. Bitcoin and other digital currencies—also known as “cryptocurrencies”—have become all the rage lately and investors big and small have sung decidedly varying tunes about them. But what exactly are these currencies, and why should you (or shouldn’t you) take them seriously as an investor?
Let’s start with definitions. Bitcoin is a cryptocurrency—a digital or online currency with the security protection of cryptography. While Bitcoin is, as of this moment, the most popular of the cryptocurrencies, a few have followed since its inception in 2009, including Litecoin and Namecoin.
According to Forbes
You now know more about Bitcoin than approximately 76% of the population. Yet that doesn’t mean Bitcoin is an investment vehicle of zero consequence, quite the opposite, in fact.
As Forbes elaborates
The price of a Bitcoin accelerated some 6000% in the year of 2013, even though it had been on the market since 2009. The advantage of Bitcoin has been its minimal transaction fees—allowing people to exchange money online almost as if they were exchanging cash in terms of cost—but some investors aren’t so sure of the ceiling Bitcoin might have in the future.
Naturally, there is a rebellious and youthful element to the cryptocurrencies that is ignored and ridiculed by the more seasoned investor set. With that said, much fun has been made fun of every new technology, investment vehicle and technological invention that went on to change the world.
The concept of Bitcoin first appeared in 2008 in a research paper written by “Satoshi Nakamoto”—a mysterious name, as no one has been able to verify the author’s identity. Since then, Bitcoin’s open-source nature has allowed for the creation of an infrastructure and an investment base that has accelerated to the point of requiring every investor’s attention.
But should you invest in Bitcoin and other cryptocurrencies? That’s the only question of interest to you. Let us try to answer it.
Determining Whether or Not Bitcoin is Right for Your Portfolio
The shrewd investor doesn’t dismiss Bitcoin off hand—nor does he see the explosive growth and mindlessly spend money. The shrewd investor takes the approach to Bitcoin and other cryptocurrencies they take with every other investment: a detached, comprehensive examination of the pros and cons of investment.
Investing in Cryptocurrencies: Pros and Cons
Bitcoin’s exploding value is certainly attractive, but there’s more than meets the eye here. Let’s zoom in and take a look of some positives and some potential drawbacks of investment:
Pro's
Getting in the ground floor. Yes, Bitcoin has exploded in recent years, but the “online economy” of cryptocurrencies is still in its infancy. Investing now means getting in on the ground floor, even if it might have been better to invest in 2010.
- The Potential for High Returns. The earliest investors in Bitcoin are sitting pretty right now because they’ve seen some extremely high returns for their initial costs. Not only has Bitcoin accelerated in value in a short amount of time, but there is still more promise ahead as the general population learns about the potential advantages of digital currencies. Digital currencies should be considered a “high-return, high-risk” type of investment.
- Ease and liquidity. It’s easy to invest in cryptocurrencies, just as it is easy to use them. In fact, that’s been one of the main attractors thus far: online transactions have been cheap, efficient, and reflect our growing Internet economy.
- Straight-forward supply. In the case of Bitcoin, the number of Bitcoins—and therefore the supply—is fixed at 21 million. For those in favor of supply-based investing, the predictable nature of Bitcoin’s availability is an advantage. If you believe that the market for Bitcoin will only expand, then you have a reasonable sense that it may be a good investment thanks to the fixed supply.
Cons
Volatility. Bitcoin and other cryptocurrencies simply don’t have a record of stability. Bitcoin has gone between several dollars per coin to thousands—and everywhere in between. For this reason alone, these currencies could be considered high-risk commodities. They’re not the type of investment you want to have in your portfolio if you’re looking for more certain long-term, stable growth.
- An uncertain regulatory environment. Bitcoin and other digital currencies are largely without regulation—but that’s only for now. With some concerns about the ability of these currencies to facilitate money laundering, the regulatory future is not so crystal clear. Even the current unregulated state of Bitcoin means minimal protection for consumers—and investors. Because consumer disclosure requirements are nonexistent here, there is a lot of potential for legal issues surrounding the digital currency world.
- Digital currencies are not backed. No central banks are backing the values of these currencies, which means they have no tangible value save for what Bitcoin and digital currency users are willing to pay to invest. This has helped aid the volatility of these digital currencies, and should serve as a word of caution to first-time buyers.
- The concept is new and experimental. For many people, this is an advantage; they believe in the concept and they expect digital currencies to take off to greater heights. For uninitiated investors, new and experimental concepts mean volatility and uncertainty. Yes, they may be a good investment; but the risk of loss is also great.
- Technology and security issues. Born out of technology, these digital currencies are reliant on technology for their value. Although the cryptographic nature of their online security has helped, the security issues are not without their inherent risks.
For the Believers and for the Skeptics
Getting Started in Investing in Bitcoin and Digital Currencies
If you’ve looked over the pros and cons of investing in digital currencies and remain convinced that they’re the right move in your portfolio, it’s time to learn how to take action. The good news is that investing in Bitcoin and other currencies is easy; oftentimes it only requires identifying a good, secure outlet and making the investment.
But as any good investor will tell you, that’s not always the whole story. There’s more than meets the eye here if you really want to optimize your investing experience and really want to make sure that you get the most out of your investment dollar. Let’s take a closer look at the logistics of buying a Bitcoin and what you might do to enhance your chances of success.
How to Buy Bitcoin
The good news here is that buying a Bitcoin, like many other online purchases, is not a very difficult transaction.
The simplest way to go about investing in Bitcoin is to acquire a “digital wallet.” The aforementioned Forbes.com articles lists CoinBase.com as a good place to set up your online Bitcoin presence, as well as Blockchain.info.
These online “wallets” allow you to spending, accepting, and saving your coins just as a real wallet would serve for spending, accepting, and saving your real cash. CoinBase.com now allows you to make regular investments from your bank account.
Acquiring a Bitcoin
You can acquire bitcoin in a number of ways. You can buy Bitcoins directly from a private owner of a Bitcoin. However, if you don’t know anyone looking to sell you Bitcoins, you can also buy Bitcoins directly from an “exchange.” Here is a website you can use to look up exchanges relevant to you.
Bitcoins can also be “mined.” Mining Bitcoins is a concept that’s been around since the Bitcoin itself—essentially, you purchase hardware on your computer that can acquire new Bitcoins, almost like someone mining for gold. (Keep in mind that although not all of the Bitcoins have been mined, there will always be a fixed amount of Bitcoins; in this case, 21 million). Click here for a guide on mining Bitcoins.
How to Use a Bitcoin
Now that you know how to acquire your own Bitcoins—as well as construct your own digital “wallet” for holding, saving, and accepting Bitcoins—let’s take a look at how you can put your Bitcoin to use.
After all, one of the top questions that new Bitcoin investors have is, “so…what can I do with these Bitcoins?”
The truth is, the Bitcoin’s versatility will only expand as far as the amount of businesses willing to trade in Bitcoins. Luckily for investors, that number is growing. Some online retailers, for example, like Overstock.com, allow you to enter Bitcoin codes to spend your money on their site, much like using a service like PayPal.
But if you really want to know the full range of uses you can get out of your existing Bitcoins, you can find it here, at Bitcoin.travel. This website shows you a map of local businesses—and even ATM suppliers—that allow Bitcoin transactions. The search feature allows you to check for companies online that you can trade with as well.
There’s always a third use, however—you can simply save your Bitcoins, trusting that their value against the U.S. dollar will increase over time. This is the main “bet” you are making when you invest in Bitcoins. Many investors have seen the price of their Bitcoins fluctuate from as high as four digits to two digits. As of the writing of this article, the value appears to be healthy, but as is the case for investments of all types, everything hinges upon the future.
How to Invest in Bitcoin
If you’re less interested in owning individual Bitcoins than you are interested in investing in the concept, then this section is for you. Investing in Bitcoin can be done a number of ways—including what you read in the previous sections, such as purchasing coins directly through an exchange—but let’s take the time to explore some alternative ways to invest in this new concept.
First, you can purchase Bitcoin-related stocks. Bitcoin Shop was a company that traded as a “penny stock” in February and promptly saw its value rise tremendously—only to have it fade back down again in the subsequent time period. However, if the timing was done right, many investors may have made a good amount of money investing in Bitcoin Shop. If you’re interested in investing in Bitcoin stocks, keep your eye out on the market for new companies that go public.
Second, there are other high-barrier ways to invest in Bitcoin, such as Hedge Funds that utilize Bitcoin, or by investing in a Bitcoin Investment Trust. These require a greater amount of time and money investment, however, so they require investors of adequate resources.
Trends and Projections for Bitcoin’s Future
What’s next for Bitcoin? There are, however, ways of discerning trends and projections as to Bitcoin’s future that can be nearly as valuable as owning a time machine.
One of the most interesting developments this year has been the growing interest of hedge funds in Bitcoin. Coin Capitol Management, for example, has made a bit of a splash by focusing on digital currencies. According to the fund manager, the investments they’re making in Bitcoin follow all the same principles that their investments in other fields follow—doing their due diligence and ensuring that they have the most information possible before making their moves.
Last year, a hedge fund even boasted a top-level performance after investing in Bitcoin, lending some legitimacy to the possibility that investing in Bitcoin might not be an online-only enterprise.
Investing in Other Cryptocurrencies
Of course, Bitcoin is not the only cryptocurrency to hit the market in recent days. As we mentioned at the beginning of this article, there are a number of other cryptocurrencies to consider if you’re going to think about investing in digital currencies.
One of the most significant players in this field is Dogecoin. The “Doge” concepts comes from an admittedly goofy Internet meme, but the currency may be a legitimate investment to consider. Dogecoin’s popularity with Internet users has made it an introduction, for many people, to the world of online, cryptocurrencies. Generally, Dogecoin has been used amongst Internet users who want to “tip” each other through their experiences in social media or gaming. However, as with Bitcoin, the ceiling on Dogecoin may not even be in sight yet.
Investing in these other currencies can be a similar experience to investments in Bitcoin. They are easy to acquire if you want to simply indulge in the “buy-and-hold” strategy that many people have employed in recent months.
Some other cryptocurrencies to consider include:
- Namecoin
- Litecoin
- Peercoin
- Mastercoin
How is Bitcoin Doing Now?
One of the first things potential investors want to know is: “okay, where is Bitcoin trading now?” In other words, you want to know if the value is ripe for you to make an investment in Bitcoin, or if you might want to consider waiting for a price dip.
Marketwatch has an interesting summary of where Bitcoin has been in recent months—you’ll notice a major spike in November and December of 2013 before the price has settled in the early portions of 2014 somewhere halfway between its previous values.
The volatility is noticeable. According to a source quoted in the article, Bitcoin is some seven or eight times as risky as investing in gold or the stock market. This makes it an attractive investment for those with a high-risk, high-reward strategy; and an absolute “must-stay-away” for those with more conservative investment leanings.
Exchanges: Buying Bitcoins Today
If you already know that you want to buy Bitcoins, the best place to start looking is on an exchange. HowToBuyBitcoins.info has a list of exchanges that sell Bitcoins; you can simply choose from among these in order to get involved with Bitcoins as soon as you’re done reading this article.
Keep in mind that these individual exchanges are not all tied to the same organization—they are their own exchanges, which means that you put your money at risk by entrusting each exchange with your investment. Some exchanges have a better reputation than others; it will pay to do a bit of research to see who is the most trusted if you want to be sure that your investment will be honored.
Gaining Exposure to Bitcoin (Without Holding Any Yourself)
Are you interested in holding some piece of the Bitcoin empire without actually investing in the highly volatile currency itself? You’re not alone. A lot of investors are interested in finding out exactly how to get involved with Bitcoin in a more “traditional” way. If this suits your individual investor’s style, then you may discover that it’s the best course of action for you as well.
If you don’t want to expose your money to the individual Bitcoin exchanges, these are some great ways to invest in the popularity of Bitcoin:
Invest in Bitcoin Through Public Markets
This is a great option for those of you who want to invest in Bitcoin but don’t trust the online exchanges with your money.
CoinDesk.com has a great guide for you, including companies like BTX Trader. These companies sell stock shares without requiring that you invest in their products—in other words, they’re just like any other stock on the market. Other companies, like Bit Stamp, may warrant your attention as well.
If you ask us, the best way to go about choosing a Bitcoin stock is to handle it like any other investment: run the numbers, do your homework, and check your variables.
Stocks to Watch
Want more stocks to watch? Reference the previous section. Other stocks that have been tossed around are the small market cap stocks found recommended at SeekingAlpha.com: WPCS International (WPCS) is the stock behind BTX Trader that you may want to consider; it’s the same platform that was mentioned over at CoinDesk.com.
You can find some other interesting (and a bit risky) penny stocks worth checking out over at MoneyMorning.com. Look for similar themes across these popular recommendations to see which stock might actually be best for you.
A word of warning: many of these stocks are indeed penny stocks, which means they likely should not constitute a large part of your investment portfolio.
Things to Keep in Mind for 2014
Investing in Bitcoin is not for the faint-hearted investor. If you have no money in stocks, no money in bonds, no money in mutual funds…well, you may want to start investing elsewhere. Bitcoin has been an attractive investment for many a young, Internet-savvy investor, but the problem is that these investors haven’t grounded themselves in good overall investment knowledge yet. Sometimes, they get lucky. And sometimes they get burned.
However, the price of Bitcoins in 2014 has been high, despite a sink from its overall high last winter. There’s no doubt that many people consider Bitcoins to be valuable; in order to understand that, you simply have to look at their prices.
As you look for ways to invest in Bitcoin in 2014, consider that as Bitcoin grows, so too do the potential investment strategies. You can invest in stocks or Bitcoins directly—whichever suits your strengths as an investor.
Conclusion
How do you know whether investing in Bitcoin is right for you? Only you can answer that. But a look at your portfolio might help. If you have a lot of conservative investments and are looking for something a little higher-risk, than Bitcoin stocks and actual Bitcoins might be the right strategy you’ve been looking for to round out your overall investment strategy.
For others, Bitcoin might just be too foreign a concept to understand well enough; it’s high risk and high reward, and if you don’t know what you’re doing, it may be best to stay out of the field entirely. But there’s no doubting there could be a lot of potential in Bitcoin, which is why we encourage you to keep learning, keep reading and keep an open mind.
