How to invest in Bitcoin?

Bitcoin is, nowadays, a very popular investment alternative. Since its launch in 2009, the first cryptocurrency on the market has gone from being worth a few cents on the dollar to having a market capitalization in excess of billions of dollars.

The success of bitcoin as an investment vehicle has been cemented by the belief that the currency will continue to gain value over the years. Due to its de-inflationary monetary policy and scheduled scarcity, BTC promises to be a crypto asset that will not devalue over time and more than a few investors have been buying bitcoins on an ongoing basis in the expectation that it will generate returns.

A vision that has not been far from reality if we take into account that, in the course of 2020, the cryptocurrency doubled its price. Due to this performance, it became one of the financial products that generated the most profits by that time and far exceeded the income generated by other more traditional securities, such as stocks or oil.

The technological innovation of cryptocurrencies, their growing adoption and the wide variety of financial tools offered by this new market, make assets such as bitcoin a highly desirable alternative for both institutional and independent investors.

In a financial scenario where bitcoin is increasingly traded, it is essential to know the various ways to invest in this cryptocurrency safely. It is an investment that can generate juicy returns, but it is also considered highly risky. 

Why invest in bitcoin?

To understand why more and more investors are betting on bitcoin, it is necessary to know which are the characteristics of this financial asset that make it unique compared to other products used for investment, such as the dollar, gold and stocks.

One of the most outstanding benefits that bitcoin offers as an investment vehicle is that it is a currency that does not devalue over time. To understand this, a differentiation must be made between “depreciation” and “devaluation”, the former term being understood as the decrease in the value of an asset. Bitcoin has depreciated on many occasions, decreasing in price due to market variations.

However, when we speak of “devaluation” in the Anglo-Saxon world, we refer mainly to the loss of value that a currency has with respect to another in a provoked way. Ergo, it is a depreciation resulting from monetary policies applied by the institutions in charge of managing the currency, in most cases the central banks.

This loss of value occurs mainly due to the indiscriminate printing of new banknotes that are injected into the financial system. To avoid such a depreciation, at the time this cryptocurrency was conceived, Satoshi Nakamoto proposed that the Bitcoin network would have a limit of 21 million coins issued. Likewise, a disinflationary monetary policy was programmed that regulates and reduces such issuance every 210,000 blocks by means of a mechanism known as halving. In this way, Nakamoto promised that bitcoin would be a truly scarce currency.

Scarcity is an important principle for the appreciation of an asset. The fewer units there are of a commodity, the more valuable it is and buyers may be interested in purchasing it at higher and higher prices. Unlike with fiat currencies such as the dollar, euro or pesos, no institution can decide to create more BTC than is already programmed. In this sense, cryptocurrency users are protected from having their money lose value by the indiscriminate issuance of new assets.

Bitcoin has also stood out in the financial market for its high profitability. Although it is a volatile asset, if we analyze its historical behavior, its trend is mostly bullish. As if that were not enough, if we evaluate the growth in the value of bitcoin over the years, it can be said that its profitability has exceeded the expectations of many.

A year after its launch, in 2010, bitcoin traded at a price of 0.37 cents on the dollar. This number is derisory if we take into account that, a little more than a decade after that quotation, by 2021, bitcoin will have reached 64,000 dollars per unit. In a single year, the cryptocurrency has managed to achieve a price increase of more than 700%, as mentioned above.

A unique feature of crypto assets such as bitcoin is that they are decentralized in operation. This gives users the ability to have full control over their own money, which they can manipulate in non-custodial wallets if they wish. Likewise, they do not need to rely on an intermediary to transfer or manage their assets, reducing cases of censorship and the fact that a third party also has power over their clients’ money.

Bitcoin can also be a safe investment method compared to financial instruments such as gold, bonds or stocks. For example, it is impossible to counterfeit bitcoins on the network, as there are mechanisms in the Bitcoin protocol that prevent double spending. Similarly, all transactions made with this cryptocurrency are recorded in a public ledger (blockchain), which promotes greater transparency.

How can I invest in bitcoin?

There are several ways in which a person can start acquiring bitcoins for investment purposes. It will all depend on what the investor’s intentions are, as well as how much they want to be involved in this market on a technical level. For example, some buyers would prefer not to have to directly manage their bitcoins but only gain exposure to their price movements, while others prefer to have full control over their crypto assets.

Buying bitcoins independently

The most common way to buy bitcoins for the first time is through a cryptocurrency exchange or peer-to-peer (P2P) platform. Buyers can visit these websites or their applications to purchase crypto assets directly. That is, in exchange for domestic currency or other cryptocurrencies they can access amounts in BTC that will be deposited into a wallet address under their control.

Users interested in buying bitcoins in this way can go to the most popular platforms worldwide, such as Binance, Coinbase, Kraken or Localbitcoins. Likewise, there are also companies in Latin America and Spain specialized in buying and selling bitcoins with local currencies, facilitating the exchange for residents of Venezuela, Colombia, Argentina or Peru.

To operate on these platforms, users must register, and generally have to provide personal information to comply with KYC laws. A common element that cryptocurrency exchanges have in common is that they offer a variety of payment methods to acquire BTC and other cryptographic assets, including bank accounts, credit cards or even cash. On the other hand, P2P platforms – such as Localbitcoins or Paxful – facilitate contact between buyers and sellers of bitcoins to carry out their trades.

Investing in bitcoin mutual funds

Those who wish to have exposure to the bitcoin price through traditional markets can turn to mutual funds to buy shares. For several years now there have been several fund offerings that invest in cryptocurrencies, two of the most prominent being the Grayscale Bitcoin Trust (GBTC) and the Bitwise 10 Private Index Fund, both focused on the U.S. market.

These financial instruments allow investors to gain exposure to the bitcoin price without having to buy the asset directly. In other words, all they need to do is buy one or several shares in the fund, which represent a percentage of BTC with which they will receive profits or losses depending on the price variations of the cryptocurrency. No non-custodial crypto wallets are needed and it is the fund itself that safeguards the BTC offline.

Cryptocurrency mutual funds are very popular among more traditional investors because no technical knowledge of crypto assets is needed to manage them. Also, because they are regulated financial products, there is more stable regulation and taxation for them. In this sense, there are not few traditional investors who prefer to start in the cryptocurrency market by investing in such funds, despite the fact that they have much more expensive operation fees than exchanges.

ETFs and other bitcoin derivatives trading

If the investor’s expectation is to generate money quickly with bitcoin, then financial instruments such as ETFs and derivatives may be the most ideal way to start investing in the cryptocurrency. As we have previously discussed, derivatives are financial products whose value is anchored to an underlying asset that it replicates, in this case a cryptocurrency.

Traders can purchase derivatives, such as ETPs or futures contracts, in order to gain exposure to the price of bitcoin under certain conditions. That is, either through an exchange-traded fund (ETF) or by speculating on price volatility through options, futures or perpetual futures contracts. Derivatives are highly risky investment tools, but they are also capable of generating high returns in short periods of time.

Like mutual funds, they are traded in institutional and regulated markets. Because of this, more traditional investors tend to prefer these instruments over the direct purchase of bitcoins.

Mining

Another way to invest in bitcoin is to buy an ASIC machine and join a pool to start mining this cryptocurrency. This activity can generate juicy returns for those who practice it, since for each block mined, miners receive a reward of 6.25 BTC for their work. In addition, they also receive the commissions paid by users to transfer their money.

It is worth noting that this is not the most profitable investment option. Mining equipment tends to be very expensive devices, as miners have to constantly upgrade and cover energy and maintenance costs. On top of that, cryptocurrency mining -especially bitcoin- is a highly competitive ecosystem of great difficulty and technical complexity.

However, in times of rising prices and with state-of-the-art equipment, bitcoin mining becomes a very profitable activity. Interested parties can join a pool to concentrate processing power and have greater capacity to mine a block, for this activity they receive a reward proportional to their work. Likewise, there are also platforms such as Nicehash where processing power is rented and sold to mine blockchain networks.

Most popular investment strategies

All those who want to start investing in bitcoin should keep in mind that there are investment strategies that can help achieve specific profitability goals with the cryptocurrency. Investors decide to apply one method or another depending on how quickly they want to make a profit, or how much they want to risk their capital.

Hodl

The term “hodl” is widely used in the cryptocurrency ecosystem, being a word created by the same community of users to refer to one of the most promoted investment strategies. When talking about “hodl”, investors refer to “holding” or “holding” bitcoins purchased with the expectation that they will increase in value over time.

Those who practice “hodl” work under the assumption that the price of bitcoin will continue to rise higher and higher over the years and that, due to its programmed scarcity and utility, the increase in its value is assured. In this sense, these investors tend to buy bitcoins constantly with the intention of keeping them in their wallets and not selling them.

Dollar Cost Averaging (DCA)

Another investment strategy widely used in the cryptocurrency market is Dollar Cost Average (DCA). Investors who follow this methodology usually plan how much is the total amount they want to invest in an asset, making several purchases under that price and then making small increases if the investment is performing well.

For example, a trader may decide to buy $50 worth of bitcoin every month-end for a period of five months. If the investment is generating steady profits, then they can increase their monthly investment to $60 and then to $70, and so on.

This type of strategy allows buyers to manage the risk they are exposed to when investing, decreasing capital loss and compensating for market volatility. Instead of making a single purchase with all their savings, they prefer to plan the investment and go testing whether they are willing to buy more bitcoins.

Long and short positions

Investors who are looking for a more immediate return often sell bitcoins when they are in an uptrend and then buy them only when the price goes down. These practices are known as long and short positions, as traders bet that the price of the currency will rise or fall at a certain point in time.

If the cryptocurrency rises sharply in price, investors sell their bitcoins to earn returns. On the contrary, if the price decreases, they buy bitcoins at this price, under the prediction that its value will rise again and they will be able to generate profits with it. In other words, it is a constant cycle of selling and buying, where the aim is to take advantage of market volatility and generate returns with the difference in price that an asset may have at different times.

Those who carry out this strategy usually analyze the market in search of very abrupt price increases, which they can take advantage of to make money or predict a future correction in the value of the asset. Likewise, the suspicion that a financial bubble is forming around bitcoin and the cryptocurrency market can be a decisive element for an investor to sell his assets before a crash occurs.

Many of these investors often use leverage to generate even more profits with long positions. By borrowing money, they can buy more bitcoins and then pay off the debt with the money earned when the market favored them. Of course, when an investor decides to use leverage in their strategies they should be aware that they risk losing even more capital.

How much is the minimum to invest in bitcoin?

It depends. Although it is true that you can exchange up to pennies on the dollar in bitcoins, the minimum amount to buy will largely depend on the platform used to acquire these cryptocurrencies. For example, it is not the same to buy bitcoins from a friend than from an investment fund such as Grayscale.

If you want to buy directly from a cryptocurrency exchange, the minimum purchase transaction that can be made on platforms such as Binance, Kraken or Huobi is approximately 5 dollars per BTC (0.0001 BTC), at the time of writing this publication.

Generally, exchanges accept up to 0.001 BTC as a minimum for buying and selling.

However, it is important to take into account that very small transactions can have high commission costs, so when acquiring bitcoins it is important to know how much the transaction fee will be deducted.

On the other hand, if it is the investor’s preference to buy through a peer-to-peer platform such as Localbitcoins, Paxful or Binance P2P, you can get a variety of offers made by other users or even make your own offer to buy.

In case you wish to trade in more traditional markets, as is the case with the Grayscale and Bitwise funds, the minimum amount to invest goes up considerably. For example, in the Grayscale Bitcoin Trust the minimum investment is $50,000 and in Bitwise it is $100,000. These financial instruments also charge commission for their operations and for keeping the cryptocurrencies they work with under custody.

Who can invest in bitcoin?

Anyone. No matter the age, gender, country or profession. Whoever wants to invest in bitcoin only needs an internet connection, a computer or a smartphone. However, it is important to have a minimum knowledge about what a wallet is, how bitcoin works and what are the risks of investing in cryptocurrencies.

On the other hand, although it is not necessary to be an accredited investor to start using bitcoin as an investment vehicle, some financial instruments (such as certain mutual funds) may require a license to operate.

When is it a good time to invest?

This is one of the most common questions one asks when starting to invest in bitcoin. However, it is not so simple to answer and it is even misleading to promise that a particular period is a better time to invest than another.

It is important to know that, although investors are always looking for the “right” time, this situation may vary according to the investment strategies they are applying to their capital or the state of the market at the time of making the investment.

For example, if an investor is following a long position strategy, then he will wait for the market to be at a low price so he can buy bitcoins and then sell them at a higher price. However, if he wants to practice a hodl strategy, then market movements may not be as important because his returns are expected over the long term.

Still, it is always a good time to enter the market when the price is stable or has had a correction. Conversely, if the market is in a bull rally and there is a lot of FOMO around it, then it could be a season with a lot of speculation that ends in losses for investors who enter too late.

In this regard, it is important for those who wish to buy bitcoins to always keep in mind not to be impulsive. It is important to study the asset before making a decision, using tools such as technical analysis (TA) or fundamental analysis (FA) to determine when is a good time to invest.

Knowing that each market has its own cycles is also vital to determine the best time to enter a market. All assets go through a season where demand begins to grow, the price stabilizes and finally depreciates due to oversupply. These cycles occur constantly and are renewed, so it is vital for an investor to determine where bitcoin is before buying.

Another tip that can help you survive as a bitcoin investor is to not get carried away by the expectations of the community. Cryptocurrencies are extremely volatile assets and, although social media may say that bitcoin is going to the moon, the reality is that at any moment an uptrend can be reversed. Not falling into despair and blind optimism is key to surviving in this market.

Risk of investing in bitcoin

Bitcoin is a high-risk investment. This is one of its characteristics that must be kept in mind when buying in this market, since if it is not taken into consideration it may happen that users invest more than they are willing to lose and end up getting into debt.

One of the main elements that makes bitcoin and other cryptocurrencies a risky investment is the high volatility of their market. These assets tend to change price abruptly, and although in many cases this volatility can be beneficial and generate profits, it also has the capacity to generate huge losses if provisions are not made.

Because it is also a new market that has been surrounded by a great deal of speculation, bitcoin is also vulnerable to the formation of financial bubbles and fraudulent schemes such as “Pump and Dump”. In this sense, it is important for investors to know how to differentiate when there is a real opportunity in the market and when there is a manipulation that could lead to an unexpected drop in the price of bitcoin.

The technical complexity of cryptocurrency networks, as well as the lack of knowledge of novice users when managing their assets is also a potential risk. Bitcoin is a decentralized financial instrument, where the user can have full control over his assets and is therefore responsible for their safekeeping. If the user does not take basic security measures to safeguard his investment and does not commit to knowing how this asset works, he may be exposed to multiple loss factors.

For example, he may pay too high commissions to transfer his coins due to lack of knowledge, or lose the recovery phrase of his wallet and totally lose access to his bitcoins. Therefore, it is important that whoever decides to start investing in bitcoin is committed to expanding their knowledge of the cryptocurrency market and is extremely careful about how they manage their assets.