Bitcoin is a well-known cryptocurrency that offers tech enthusiasts an alternative form of money. Cryptocurrencies such as Bitcoin offer a relatively new method of tracking and verifying asset ownership, which enables the Bitcoin network to operate. In addition to functioning as a mode of payment, many people buy and hold Bitcoin as an investment, although it’s important to note that Bitcoin investments are extremely risky.
If you want to join the ranks of Bitcoin investors, you have several options to buy the world’s biggest and most popular cryptocurrency. Here’s a detailed look at the required steps to buy Bitcoin.
How to Invest in Bitcoin in 4 Steps
The easiest way for most people to buy Bitcoin is through a brokerage account or cryptocurrency exchange account. You can buy Bitcoin using most digital wallets as well, but in this section we will focus on the easiest way to buy:
Choose the Right Bitcoin Exchange or Brokerage
Start your Bitcoin purchase by choosing the best place to buy and store your digital currency. Popular places to buy Bitcoin include Coinbase, Robinhood, eToro, FTX, Gemini, and BlockFi, among many others. Take note of fees and the reputation of the exchange when picking where to buy Bitcoin. Also, if you plan to transfer your Bitcoin out of the brokerage account, make sure that feature is supported, as not all brokerages give you that option.
Open an Account With Bitcoin Support
Once you’ve picked your ideal account, it’s time to open your brokerage or cryptocurrency account. For those in the United States, plan on sharing your basic contact information and valid identification to meet the exchange’s know your customer (KYC) requirements.
Fund Your Account With Fiat (Government-Backed) Currency
Once your account is open, it’s time to add funds. The fastest and cheapest way is typically with an online funds transfer from a connected bank account. Depending on your exchange, you may also be able to use payment apps like PayPal. Some cryptocurrency exchanges give you instant access to trade, while others may require you to wait for funds to clear before buying. If you can buy cryptocurrency immediately, you may have to wait until the deposit clears before you can withdraw funds from the account.
Enter a Purchase Order
When you think the moment is right, click the buy button to enter an order. The exchange will turn your dollars into Bitcoin, stored in the same cryptocurrency account, similar to holding stocks in a brokerage account. Once your trade executes, you are officially a Bitcoin owner.
What You Need to Know Before You Invest in Bitcoin
Bitcoin is an exciting digital currency that began an online currency and digital asset revolution. Bitcoin uses a triple-entry bookkeeping system that powers a decentralized system run by many participating computers around the world, known as miners. Bitcoin was first created in 2009 and reached a peak value of more than $60,000 per coin in early 2021. However, the price is highly volatile compared to other assets, such as stocks and diverse ETFs.
If you move forward and make a Bitcoin purchase, you can choose between storing your Bitcoin in the same exchange account you used to buy the currency or external software, hardware, or paper cryptocurrency wallet. Offline storage with a hardware wallet, known as cold storage, is considered the safest and most secure place to keep your Bitcoin.
Understand the Risks of Investing in Bitcoin
As mentioned, Bitcoin is a relatively new and risky asset. While it’s possible that Bitcoin could double, triple, or even 10x in value over a short period of time, it could also drop to zero. Bitcoin is also susceptible to government actions and could be made illegal or severely limited, as recently happened in China. With Bitcoin or any other cryptocurrency, only invest what you can afford to lose.
Bitcoin is also susceptible to certain forms of hacking, which is why it’s important to keep your digital currency accounts extremely secure. If someone gets ahold of your Bitcoin wallet address and password (private key), they can take your Bitcoin and you likely won’t have any way to recoup losses.
If you keep your Bitcoin offline, it’s essential to keep your access information secure and available, as losing your wallet information could lock you out of your currency.
Pros and Cons of Investing in Bitcoin
Relatively easy to buy
Offers an alternative currency and investment strategy
Highly risky and volatile
Potential for hacks and other losses
Requires some level of technical knowledge
- Relatively easy to buy: You can easily buy Bitcoin using a cryptocurrency exchange, brokerage, or another account with Bitcoin support. It’s as easy as buying stock and other common investments.
- Offers an alternative currency and investment strategy: Bitcoin can act as a hedge against inflation and other currency risks. It also offers a unique investment outside of traditional financial markets.
- Secure: The blockchain technology behind Bitcoin makes it very secure and difficult to hack. All coins are tracked from inception through current ownership in a public ledger.
- Highly risky and volatile: Bitcoin’s value is very volatile. The currency lost about half of its value over about three months in the first half of 2021.
- Potential for hacks and other losses: If you don’t keep your Bitcoin access information secure, hackers may be able to access and steal your currency. In some cases, even large exchanges have experienced losses.
- Requires some level of technical knowledge: While you don’t need advanced computer or programming skills, you’ll need to use a computer and the internet to buy, sell, and exchange Bitcoin and other cryptocurrencies.
How to Start Investing in Bitcoin
Here’s a more detailed look at the steps involved in buying Bitcoin for the first time:
Open an Account
Once you choose your brokerage or exchange, start by opening your account. For most cryptocurrency exchanges, the online account opening process takes just a few minutes if you have your information readily available. You need a cryptocurrency wallet, included in most cryptocurrency exchange accounts, to store your digital assets.
Plan to enter your name, address, phone number, email, and Social Security number to activate a cryptocurrency account. Some require additional information, like a picture of your driver’s license or passport, to access all account features. The experience is similar to opening any typical brokerage or bank account.
Decide Which Cryptocurrency to Buy
Bitcoin is the largest and most popular cryptocurrency by market capitalization. While Bitcoin is arguably the most important digital currency, most exchanges also give you access to currencies such as Ethereum, Cardano, Stellar Lumens, or Dogecoin.
Each currency has its own unique use cases, potential benefits, and market risks. Most cryptocurrencies are arguably riskier than Bitcoin, so invest with care.
Make Your First Transaction
To purchase Bitcoin, enter the amount of Bitcoin (abbreviated "BTC") in your exchange’s trading tool. You will need enough of your local currency for the transaction to go through once you click the button to submit.
Bitcoin transactions occur instantly on some exchanges, while others may process a transaction on the Bitcoin blockchain that takes some time to complete. Standard Bitcoin transactions require four confirmations and take about 40 minutes to complete, according to an exchage called Kraken. However, you can choose to pay higher transaction fees for faster processing times with some exchanges.
Alternatives to Buying Bitcoin Directly
If you want to buy cryptocurrency through a third party, you can take advantage of a growing number of alternative investment options.
For example, Grayscale Bitcoin Trust enables investors to invest in Bitcoin through a traditional investment fund that in some ways is similar to an ETF. The shares of this fund trade with the symbol GBTC on the OTC exchange OTCQX, and can be purchased through your brokerage account.
Another way to get indirect exposure to Bitcoin and the crypto industry is through other cryptocurrency and blockchain industry-focused ETFs, like Siren NASDAQ NexGen Economy (BCLN), Bitwise Crypto Industry Innovators (BITQ), and Capital Link NextGen Protocol ETF (KOIN). Consider fees and risks when investing in any ETF, particularly one focused on a relatively new industry.
What to Watch Out for After You Invest in Bitcoin
Bitcoin is risky and volatile. The price rises and falls very quickly and sometimes with little notice. A Twitter message by Elon Musk or a negative message from a government official could be enough to send Bitcoin’s value into a tailspin.
While Bitcoin and other cryptocurrencies may be a reasonable asset to hold in your investment portfolio, don’t invest more than you can afford to lose, and consider keeping cryptocurrency as a relatively small portion of your overall investments.
If you time it right and sell your Bitcoin for a profit, it’s also important to note that Bitcoin sales are taxable. So put enough cash aside to cover your tax bill if you expect significant capital gains taxes after a profitable cryptocurrency sale or exchange.
Should I Invest in Bitcoin?
Everyone has to make their own choice about whether they believe Bitcoin’s price will go “to the moon” or the dumps. If you decide to invest in Bitcoin, invest with caution and avoid putting too much of your net worth into this highly volatile asset.
If you find the idea of active stock trading intimidating, you probably won’t enjoy the high-speed, 24/7 cryptocurrency marketplace. But if you have the stomach for risk and don’t mind riding out the ups and downs of Bitcoin’s price, there’s no reason Bitcoin can’t be a part of your long-term investment strategy.
Advanced Strategies for Investing in Bitcoin
If you enjoy the Bitcoin marketplace, you can advance your strategy to include Bitcoin futures, decentralized exchanges, and automated trading strategies.
Bitcoin futures, like futures of other commodities, are derivative products with Bitcoin as their underlying securities. Derivatives are typically riskier than investing directly in the underlying security, and that means Bitcoin futures carry an even greater risk than directly buying Bitcoin.
Although it may be riskier and involve a better understanding of cryptocurrencies, another way to buy Bitcoin is through a decentralized exchange. Unlike Kraken or Gemini, which are centralized exchanges, platforms such as Exodus and Bisq allow you to connect with third-party buyers or sellers directly. Exodus does this through its app, whereas Bisq has software that you can run on your computer to give you access to a peer-to-peer network.
While using decentralized exchanges gives you more control over your Bitcoin and trading, it does have a few drawbacks.
Fees may be higher or lower than centralized exchanges depending on the currency you purchase, market rates, and how you enter the trade. If you’re not careful, it’s easy to spend a lot more on network fees when using a decentralized exchange. There is also more opportunity for you to make a mistake or send to the wrong wallet address, as centralized exchanges take care of much of this for you. Decentralized exchanges may also have a limited selection of cryptocurrencies and might not allow the trade of cryptocurrency options.
Another advanced strategy to buy Bitcoin that may not be suitable for beginner investors is using automated trading. There are many applications or trading bots, such as Cryptohopper, that have algorithms that make trades based on market conditions. Signing up for something like that will let the bot make trades on your behalf to take advantage of small price fluctuations, but it can be risky.
Frequently Asked Questions (FAQs)
How can beginners invest in Bitcoin?
Beginners can invest in Bitcoin most easily through a major cryptocurrency exchange or brokerage. Examples of dedicated cryptocurrency exchanges include Coinbase, Gemini, Kraken, and Binance. You can also buy Bitcoin through other financial and brokerage accounts, such as Robinhood, SoFi, and the Cash app from Square. Investing in Bitcoin through these services is similar to buying stock with a brokerage account.
Do I need a lot of money to invest in bitcoin?
While the value of a single bitcoin may be in the tens of thousands of dollars, you don’t need nearly that much money to invest in Bitcoin. At Coinbase, for example, you can buy as little as $2 of Bitcoin at a time. If you’d like to test out investing in Bitcoin with a small amount, perhaps $10 or $20, that’s certainly an option. You don’t need to be wealthy or have a lot of money to invest in Bitcoin.
What is the best way to invest in Bitcoin?
The best way to invest in Bitcoin may vary based on your goals. Some speculators may be happy with an account that makes investing in bitcoin easy, even if it requires higher fees. Some may want to buy and HODL ("hold on for dear life"), aiming for long-term appreciation, while others prefer frequent trades to capture profit from smaller day-to-day price fluctuations. Start by understanding your goals, and then you can pick the right exchange and Bitcoin strategy for you.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.