In the past twelve months, the price of Bitcoin has gone down significantly. If you bought one Bitcoin on January 24, 2018, it would have cost you 11,365 USD. Today, one year later, you can buy three Bitcoins for the same price, and some cash left over.
And since Bitcoin’s value is now so low, many people are considering investing in it. After all, the basic rule of investing is that you buy an asset when its price is low – and sell it when (or if) its price is high.
But the problem is that many people who want to get on the cryptocurrency bandwagon really have no idea how to invest in Bitcoin in the first place. This handy guide will show you exactly how to do that.
Before getting into it, here’s a brief summary of what we’ll talk about in this article:
- The science behind Bitcoin and why you should consider investing in it: First, we’ll explore what makes Bitcoin such a lucrative investment – and why you should (or shouldn’t) invest in Bitcoin. Because ultimately, the decision will be yours.
- A checklist of items you’ll need before you can buy cryptocurrency: Before you can actually buy cryptocurrency, you’ll need to choose a wallet, sign up on a cryptocurrency exchange and do some other things. We’ll show you exactly what you need to do.
- The easy three-step process for actually buying Bitcoin: In the final section, you’ll get instructions on how to actually buy bitcoin and store it securely.
This article is quite long, so you might want to bookmark it for future reference. But be assured, by the time you reach the end of it, you’ll know exactly how to invest in Bitcoin.
Part 1: The science behind Bitcoin and why you should consider investing in it
Bitcoin, unlike the paper currency you probably have in your wallet, is a digital currency that exists on the internet. It does not exist on paper and no organization, whether private or government, controls it.
This means it doesn’t matter what a country’s political and economic conditions are since these factors do not impact the value of Bitcoin in any way.
Bitcoin’s value, instead, depends upon two far simpler factors:
- Scarcity: Unlike traditional currencies, which can be printed an unlimited number of times, Bitcoins cannot. It is a scarce currency.
- Demand: The greater the demand, the greater the value of a Bitcoin. The lower the demand, the lower its value becomes.
Understanding exactly how these two factors influence Bitcoin’s price is crucial. Once you do, you’ll have a much better understanding of how to successfully invest in Bitcoin.
Here’s a more detailed explanation:
The first and most important detail to remember about Bitcoin is that there will only be 21 million bitcoins produced – and not a single bitcoin more.
And there are two ways you can get your hands on a Bitcoin:
- You can buy Bitcoin from a person or a cryptocurrency exchange.
- You can “mine” Bitcoin using powerful computers.
The first way of buying Bitcoin is simple enough to understand. You contact someone willing to sell Bitcoin – and buy it from them based on its market value, which you can easily search for on Google. Or you can go on a cryptocurrency exchange and buy Bitcoin from there (more on that later).
For example, at the time of writing this article, the price of one Bitcoin was 3543.57 USD. However, on any given day, the price can vary slightly depending on who you buy it from.
Mining for Bitcoin: A brief explanation
The second way of acquiring Bitcoin is to mine it.
For a little background, Bitcoin exists on a technological platform called ”blockchain.” A blockchain is made up of “blocks” and each block on the blockchain stores a specific amount of Bitcoin.
But not all of the 21 million Bitcoin currently exists on the blockchain. Some of it is still available to be “mined.”
And here’s how to do that:
You use a powerful computer to solve complex mathematical problems – or a “hash” – on the blockchain. Once your computer(s) successfully solve the hash, you’ll add a new block to the blockchain. This block will contain new bitcoins that you get as a reward for adding that new block. This process is how you mine Bitcoin.
Every second, more and more people are mining bitcoins. And the more bitcoins that get mined, the harder it gets to mine them (as they become scarce).
This concept is similar to mining gold. In the old days, a bearded, grizzled man with a spade could do some digging, and prospect some gold. But now, if you want to mine gold, you will need powerful drilling machines and a lot more manpower. This is because all the gold near the earth’s surface has been mined, so if you want to find more, you have to dig deeper.
In Bitcoin’s case, mining gets harder with time, because approximately every four years, or after every 210,000 blocks that are mined, Bitcoin production halves. And at the same time, competition between miners increase because they keep adding more powerful computers to mine the remaining bitcoin faster.
For instance, in 2009, you could mine 50 Bitcoins every time your normal desktop computer solved a “hash” and added a block to a blockchain, but by 2020, even if you use a 20,000 USD supercomputer to mine, you’ll only get 6.25 Bitcoins for each hash you solve.
Currently, of the 21 million Bitcoin, only approximately 16.7 million is in circulation. This means there are still approximately 4.3 million bitcoins which can be mined. And once it has, there won’t be any more new bitcoins. At that point, the only way to get it will be by buying from someone who already has it.
And this is why Bitcoin is a scarce currency.
Should you (or shouldn’t you) invest in Bitcoin?
Mining is out of the question for most people, since the financial and technological barriers to entry are so high. This leaves us with our first option, and that is buying Bitcoins that have already been mined. In truth, this is how the majority of people invest in Bitcoin.
And here’s where the “demand” factor comes in to play:
There is a limited number of Bitcoins, i.e., 21 million in the world. Only a few million people own it, and even fewer are willing to sell. But on the other hand, many people want to invest in it. This means the supply, or the number of sellers, is less, while the demand, or the number of buyers, is more. And when this happens, the price of a Bitcoin shoots up.
But right now, the situation is the opposite. Demand for Bitcoin is low while supply is high, and as a result, its value is plummeting.
You could argue that this makes it the perfect time to invest in Bitcoin – and you would probably be right.
Because as more and more people adopt cryptocurrency, and more organizations and companies around the world experiment with blockchain, and as more countries recognize and accept the use of bitcoin, the greater its value will be – and therefore – demand will increase. And if Bitcoin becomes widely adopted – and it is a big “if” – an investment in Bitcoin right now could pay off significantly in the future.
But again, there is no guarantee this will happen. Like every investment, Bitcoin is a big risk, but the rewards that come with it are high as well and might outweigh the risk.
Part 2: 5 things you need to invest in Bitcoin
To invest in Bitcoin, you’ll need five things to get started:
- A digital wallet: A digital wallet is how you will invest in Bitcoin. All of your transactions regarding Bitcoin – whether buying, selling or storing – will be done through your digital wallet. It comes with a public key which you can share with people in order to receive Bitcoin in your wallet and a private key which you can use to access your wallet and transfer Bitcoin to other people.
- A cryptocurrency exchange account: The easiest, safest and quickest way to buy Bitcoin (and other cryptocurrencies) is through a cryptocurrency exchange. Therefore, it’s necessary to create an account so you can start investing in Bitcoin.
- Verification documents: Before you can buy/sell Bitcoin, your government might require you to verify your identity. This means you’ll need original documents that prove your citizenship.
- A bank account, credit card or debit card: To buy Bitcoin from an exchange, you’ll have to link your bank account or credit/debit card in order to actually start a transaction.
- A secure internet connection: Buying and selling Bitcoin is a risky business. If you are on a public WiFi network, such as at a coffee shop, hackers nearby might be able to steal your private key and get access to your digital wallet. To make sure this doesn’t happen, make Bitcoin transactions using an internet connection that’s private and secure and used only by the people you know and trust.
With these five tools at hand, you’re nearly there. So, without any further ado, let’s see step-by-step how you can use these tools to buy your very first Bitcoin…
Part 3: How to invest in Bitcoin in 3 simple steps
To buy your first Bitcoin, you need to follow three steps. Here’s a quick summary of what they are:
- Step 1: Get a digital wallet and connect it to your bank account
- Step 2: Sign up for a cryptocurrency exchange and connect it to your digital wallet
- Step 3: Place your order and buy your first Bitcoin
If you already know how to do these three things, then by all means, go ahead and start buying Bitcoins. But if you aren’t quite sure how to follow these three steps, i.e., what kind of wallet to get, the best exchange to sign up for, etc. – then read on for a detailed description…
Step 1 – Choose a digital wallet
To actually buy and sell Bitcoin, you need a digital wallet. That much you already know.
But what kind of wallet should you get?
Right now, there are two main types of digital wallets you can use to store Bitcoin, and they are called cold storage or a hot wallet.
Cold storage is a physical device like a USB or even a piece of paper where you can store your private key. You can carry this kind of wallet with you wherever you go. And since a hardware wallet is not connected to the internet, it cannot be hacked, and that’s why it is a great place to store your cryptocurrency.
On the other hand, you can also use a hot wallet to store your cryptocurrency.
A software wallet, or hot wallet, is simply an application which stores your private key in either the cloud – or on the device where the software wallet is installed. With this kind of wallet, you can access your cryptocurrencies easier. And while they are secure, they are still connected to the internet which makes them susceptible to being hacked.
What wallet should you get?
There are many types of wallets you can choose from, even within the hardware and software wallet types. Each has their own unique strengths and weaknesses.
We recommend you store your Bitcoin in at least two different wallets; one with its hardware completely disconnected from the internet, and one with software that can give you quicker access to your cryptocurrencies.
This way, if one wallet is compromised or lost, you won’t lose all your Bitcoin.
Step 2 – Sign up for a cryptocurrency exchange
Once you have your digital wallet ready, it’s time to sign up for a cryptocurrency exchange.
The best cryptocurrency exchange available is Coinbase. It operates in 42 different countries and has a robust software wallet that enables you to quickly make transactions.
Right now, Coinbase offers five types of cryptocurrencies you can buy: Bitcoin, Litecoin, Ethereum, Bitcoin Cash and USD Coin. After you verify your identity and connect your digital wallet to Coinbase, you will be able to buy any one of the five cryptocurrencies listed there.
But if Coinbase isn’t supported in your country, you can search Google for a cryptocurrency exchange that is.
Also, when signing up for an unknown cryptocurrency exchange, don’t sign up for its wallet as well. Other than Coinbase, other cryptocurrency exchanges don’t have very secure wallets. You should put your Bitcoin in another digital wallet instead.
Step 3 – Carefully buy your desired amount of Bitcoin
Why did we put “carefully” in the title?
Because once you buy a specific amount of Bitcoin, there’s no going back. When operating on the blockchain network, a transaction between two parties cannot be reversed. In order to get your money back after buying Bitcoin, you’ll have to sell it again.
Since you’re just getting started, you are probably wondering how much Bitcoin you should buy?
The sincere answer is that we can’t tell you. The amount you want to invest depends on how much money you have – and for how long you can and intend to hold the Bitcoin. We recommend you think of Bitcoin as a long-term investment and prepare for its value to go down even further before it gradually goes back up.
Other than as a long-term money-making vehicle, you can also invest in Bitcoin as a hobby by buying very small amounts of it.
That’s because Bitcoin can be divided into 8 decimal places. This means while you can buy 1 bitcoin for, let’s say, 3000 USD, you can also buy 0.001 bitcoin for $3 as well. The lowest you can go is 0.00000001 bitcoin for 0.00003 USD.
And this brings us to the end of our discussion on to how to invest in Bitcoin. Now that you have a pretty good idea how to do it, how much Bitcoin are you going to buy?