Bitcoin’s evolution from being a speculative asset to featuring on Wall Street has been spectacular. BlackRock and Fidelity, two giant asset managers, are now offering spot Bitcoin exchange-traded funds (ETFs).
Bitcoin’s market capitalization has transcended $1 trillion as it becomes mainstream. To tap into the potential of this industry, you must learn the ropes and grow your financial portfolio.
This article carefully analyses Bitcoin from a beginner’s point of view. We look into how to invest in Bitcoin extensively so you do not miss a single step.
Bitcoin’s price is highly volatile, making it a high-risk asset. If you are a beginner, you must learn the ropes and how to navigate the murky waters to minimize losses when investing in Bitcoin.
Assess your risk appetite before investing in Bitcoin to establish if you can accommodate losses. The price of this cryptocurrency can rise and drop drastically within a short period. One of the rules that work with most beginners is to invest only what you are willing to lose.
Understanding Bitcoin
Bitcoin was created in 2008 by a pseudonymous programmer, Satoshi Nakamoto. In the whitepaper, Nakamoto describes Bitcoin as “decentralized.” The term indicates that Bitcoin is available to everyone and is not controlled by a single institution or authority.
Bitcoin is decentralized. Unlike fiat currency, which relies on a central entity like a government or central bank for control, Bitcoin runs independently. Peer-to-peer networks aids the exchange of value through Bitcoin.
Every user on the Bitcoin network has equal power and is linked to each other through a central server and an intermediary.
Bitcoin has advantages over fiat currencies. Its lack of a central authority or entity makes it the ideal digital currency to conduct cross-border transactions. It is also the perfect asset for a trader who does not want the limitations of the traditional financial system that only operates during business hours.
Blockchain Technology
Bitcoin uses a peer-to-peer network without intermediaries to execute and validate transactions. All Bitcoin transactions are stored on a public ledger that uses a technology known as “blockchain” or “distributed ledger technology.”
Blockchain technology allows cryptocurrency transactions to be stored, verified and ordered transparently and immutably. New transactions are confirmed and added to the Bitcoin ledger in real time to reflect changes.
New Bitcoin is added to the circulating supply through a process known as “mining,” which demands high computer processing power.
Bitcoin’s Role in the Financial Landscape
The Bitcoin network operates without intermediaries. This means you can transact Bitcoin anytime and anywhere at fast speeds. The fact that there are no intermediaries also makes Bitcoin transactions cost-efficient as there is no middle authority or institution to add more expense to your transaction.
Bitcoin also addresses the issue of privacy in the financial industry. Bitcoin transactions do not contain personal information, making them more private than credit card transactions.
This digital currency also launched after the 2008 financial crisis. Its decentralized nature made it the perfect alternative for an investor looking for something outside the control of traditional banks and central bank governing bodies.
Bitcoin is also gaining rapid adoption in the traditional finance industry, as it is currently being offered as a spot exchange-traded fund (ETF) product by top investment firms on Wall Street. The most popular Bitcoin product in the US is BlackRock’s iShares Bitcoin Trust (IBIT).
Investing in Bitcoin
Before investing in Bitcoin, you should first assess your risk appetite. While Bitcoin can make massive gains quickly, the plunge can also be significant. Therefore, you should invest an amount you are comfortable losing.
The other thing that you should consider is whether you are buying Bitcoin for long-term or short-term gains. If you buy Bitcoin as a long-term investment, you might store the assets in a digital wallet and wait until the price appreciates.
However, if you buy Bitcoin for short-term gains, you should check your portfolio regularly. This is because Bitcoin’s price can record significant price movements quickly.
Before investing in Bitcoin, make sure that you have a fixed amount in mind that you would like to invest. To determine the right amount to invest, consider your investment goals, what you want to accomplish (passive income or investing for retirement), and risk tolerance.
You can enter the Bitcoin market at the right time and see your portfolio double within weeks. However, you should always refrain from investing out of “Fear” and “Greed.”
Avoid holding onto Bitcoin for longer than you initially planned. Once you hit your investment goal, exit the market, and find another opportune moment to invest,
Getting a Bitcoin Wallet
Before buying Bitcoin, you first need to have a secure wallet. A digital asset wallet is a software program running on a computer or dedicated device, allowing you to send and receive Bitcoin.
A digital wallet does not necessarily hold the Bitcoin itself. Instead, it will store the cryptographic keys showing how much Bitcoin you have on the network.
There are three main types of wallets that you can use to hold Bitcoin. These wallets include software wallets, hardware wallets, and paper wallets.
- Software wallets – Software wallets are divided into two categories: hot and cold. Hot wallets are connected to the internet, and while they are more user-friendly, they are less secure. Cold wallets store your Bitcoin offline, making them ideal for those holding Bitcoin for the long term.
- Hardware wallets – Hardware wallets are physical devices, usually in the form of USB devices. Hardware wallets are more secure but can be difficult for beginners to use.
- Paper wallets – Paper wallets come with a physically printed QR code. However, paper wallets are insecure as they can be prone to hacks.
Before choosing the right Bitcoin wallet to store your Bitcoin, consider the following factors:
- Security – A good Bitcoin wallet should be secure. It should have a line of defense that only allows usage when unlocked.
- User-friendliness – If you are a beginner looking to invest in Bitcoin, get a user-friendly wallet that allows you to access your assets quickly.
- Reputation – before getting a wallet, it is best to look at what past users have said about the features of that wallet.
- Private keys –You should also ensure that the wallet you use gives you complete control over the private keys to ensure you are the only one who can access your crypto.
- Compatibility – It is also essential to check whether the wallet is compatible with different devices and operating systems.
How to Set Up Your Wallet
Below are the step-by-step processes of setting up a crypto wallet for those using non-custodial and hardware wallets.
Non-custodial wallets
- Download the wallet app – Download the app of the wallet provider that you want to use.
- Create an account – When creating a non-custodial wallet, you do not have to provide your personal information, making the creation process easy.
- Private key – You should note the 12-word phrase that helps protect your crypto. You should not lose this phrase; without it, you cannot access your crypto.
- Transfer Bitcoin – You can later transfer the purchased Bitcoin to the wallet you purchased.
Hardware wallets
- Purchase the hardware wallet – The two most popular hardware wallets you can buy are Trezor and Ledger.
- Install the needed software – After buying the hardware wallet, you should download and install the software using the instructions on the official site.
- Transfer your Bitcoin – You then have to transfer Bitcoin from a cryptocurrency exchange to your wallet.
Buying Bitcoin on a Cryptocurrency Exchange
Now that you have a cryptocurrency wallet, the next step is to buy Bitcoin. You cannot buy Bitcoin directly with your wallet. Therefore, you need to create an account with a reputable cryptocurrency exchange to buy and transfer Bitcoin to your crypto wallet.
Choosing a Suitable Crypto Exchange
Many cryptocurrency exchanges are in the market today, and getting one can take time for a beginner. Before settling on an exchange, you must read past user reviews. Go through the past experiences of people who have used that exchange to see whether your funds will be safe.
Cryptocurrency exchanges are also regularly under regulatory scrutiny. For instance, in the US, some of the largest exchanges, including Binance, Coinbase, and KuCoin, have been sued by the US securities regulator for non-compliance.
While these lawsuits do not mean the exchange’s closure, they are worth considering to avoid falling victim in case of a bank run. Moreover, these lawsuits are why you should take out purchased Bitcoin from an exchange and store it in a wallet.
You should also consider the security of that cryptocurrency exchange. Look through the history of that exchange to see whether a hacking incident has ever happened, as that could lead to massive losses.
In 2014, Mt.Gox, the largest Bitcoin exchange, was hacked, and all of the Bitcoin was drained. The affected users are getting their reimbursement back now after nearly a decade.
In 2016, another hack happened with the Bitfinex exchange, with 119,756 Bitcoin stolen. The hack was later attributed to poor security defenses.
Looking at these incidents, one can see why the security of a cryptocurrency exchange is a crucial factor that you should consider before opening an account.
The recent collapse of the FTX exchange due to managerial negligence also shows why you should review the internal processes of an exchange and what other people say about it to make an informed decision.
Creating a Crypto Exchange Account
After choosing an exchange, the next step is to create an account. Due to regulatory requirements and compliance with anti-money laundering and counter-terrorism financing (AML/CTF) laws, many exchanges will require that you complete a Know-Your-Customer (KYC) verification process.
The process for creating a cryptocurrency exchange account is nearly the same for all platforms, and it entails the following:
- Step 1: Sign Up – Sign up on the exchange’s website or mobile app using your email address. You will also be prompted to create a password for your account.
- Step 2: Verify your email address – The exchange will send a verification link to your email address. Click on the link, and you will be redirected to your account creation page. The verification might also be a code sent to your email.
- Step 3: Provide personal information – The exchange will ask for your information, including name, address, and date of birth. Ensure that you provide accurate details.
- Step 4: Verify your identity – You must verify the personal information you provide by uploading a government-issued ID, passport, or driver’s license.
- Step 5: Enable security features –To improve the security of your account, enable two-factor authentication (2FA).
How to Buy Bitcoin
Now that you have opened an account on a cryptocurrency exchange, it is time to make your first Bitcoin purchase.
You will first have to fund your account. You can deposit fiat money to the account using a credit card or a bank transfer. Most cryptocurrency exchanges accept Visa, Mastercard, and PayPal.
If you have interacted with cryptocurrencies, you can deposit funds from another wallet to the exchange’s account.
With money in your account, it is now time to buy Bitcoin. You have to enter the market at the right time. Most popular investors enter the market when the price is low. Avoid buying Bitcoin at all-time high levels because the chance of a reversal is very high.
There are two main types of orders that you can create when buying Bitcoin: market order and limit order.
A market order will automatically be fulfilled at the current market value of Bitcoin. However, with a limit order, your order will be fulfilled until Bitcoin drops to a specific price you are willing to enter.
Risk Management Strategies
Bitcoin is a high-risk asset; you need risk management strategies to minimize losses if the price drops. The two most popular ways of mitigating risk are portfolio diversification and stop-loss orders.
Portfolio Diversification
You can diversify your portfolio by investing in other cryptocurrencies. There are more than 10,000 cryptocurrencies in the market, but it is best to stick with the largest cryptocurrencies by market capitalization.
You should also balance your investment portfolio by investing in different types of assets. For instance, you can invest in other cryptos with real-world use cases in gaming, decentralized finance, etc.
Stop-Loss Orders
You can also mitigate risk using a stop-loss order. A stop-loss order ensures you only incur a loss you are willing to withstand. For instance, if you set the stop loss order at 5% below the price you bought Bitcoin, your loss is limited to 5%.
When you set a stop-loss order, the Bitcoin you hold on the exchange will be automatically sold when the price drops to a certain level. This type of order is useful when you are not actively monitoring your portfolio.
You can also adjust the stop-loss order to reflect the ongoing market conditions. If the market is bearish, you can adjust the order to minimize possible losses. However, when the price regularly drops to test support during bull markets, you can adjust the stop-loss to ensure you do not miss losses if the price bounces.
How to be an Active Bitcoin Trader
If you hold Bitcoin for the long term, you do not have to keep up with market trends. However, if you invest for short-term gains, you should always know what is happening in the market to avoid unexpected losses.
You should use cryptocurrency tracking tools to know the best entry and exit prices for Bitcoin. These tools use past Bitcoin’s performance to gauge how it might perform.
You should always remain updated on news and developments happening in the cryptocurrency industry. The best way to do this is through X (Twitter), which has an active cryptocurrency community. You should also follow top crypto publications for the latest news.
It is also essential to conduct market analysis before making an investment decision. One of the most popular charting tools for analyzing Bitcoin’s performance is TradingView. You can also use price tracking tools like CoinGecko and CoinMarketCap to monitor the price movement.
You should note that even the most competent trader can make losses because the Bitcoin market is unpredictable. Always learn from past trading experiences and regularly change your trading strategy to match the current market trend.
How to Protect Your Bitcoin
After buying Bitcoin, you should invest in ways to protect it. Among the ways to do this is by regularly updating software. Check out software updates for the exchange’s mobile app or wallet provider. You should also ensure that these updates are genuine.
You should also avoid sharing the key phrase for your wallet and account passwords with anybody. Avoid following suspicious links sent to you via email, as they could be phishing campaigns seeking to drain your wallet.
It is also essential to adopt secure internet practices. These include regularly updating your phone or computer software and having an antivirus program to keep hackers and malicious software away.
Wrapping Up – How to Invest in Bitcoin
Before investing in Bitcoin, you should understand the risky nature of this asset. The price is very volatile and can change rapidly in a short time. If you want to invest in Bitcoin as a beginner, start with an amount you are comfortable losing.
The journey towards investing in Bitcoin starts with having a crypto wallet and opening a cryptocurrency exchange account. If you buy Bitcoin as a long-term investment, hold your coins in a secure digital wallet. However, if you are trading for short-term gains, keep your Bitcoin in an exchange or hot wallet, which will be easy to access.
The mistake many beginners make when investing in Bitcoin is entering the market at high prices. You should use analytic tools and keep up-to-date with market trends and news to discover the right time to buy Bitcoin.
In conclusion, the Bitcoin market is still in its nascent stages. The regulatory framework is still changing, and prices are regularly shifting. Therefore, to be a good Bitcoin investor, you should always be willing to learn.
FAQs
How much money do I need to invest in Bitcoin?
You can invest in Bitcoin for as little as $10. The lowest amount you can invest depends on the exchange. Some exchanges even allow you to start with $5. Remember that Bitcoin is a high-risk asset; you should only invest what you can be comfortable losing.
How much will I get if I invest $100 in Bitcoin?
Bitcoin is divided into smaller units called “Satoshis.” If you invest $100, the number of satoshis you get will depend on the current market value of Bitcoin.
What should I know before investing in Bitcoin?
The main thing that a beginner should know before investing in Bitcoin is that it is a risky asset. You can make quick gains quickly, but you can also make losses.
Can I buy Bitcoin with PayPal?
Yes. Some cryptocurrency exchanges allow you to fund your account using PayPal. The money on your PayPal account is deposited into the exchange, and you can then use it to buy Bitcoin.
Can I lose all my money on Bitcoin?
Yes. You can lose all your investment in Bitcoin if the price drops drastically. Risk management strategies like setting a stop-loss order should be adopted to avoid this.
