How to Invest in Bitcoin

All humans are very different and unique, except when it comes to this—we all regret not buying Bitcoin in 2010 when it was cheap (and becoming multi-millionaires by now).

BTC has grown from pretty much zero to tens of thousands of dollars apiece and that success has left the world wondering —is it still going up?

The best answer anyone can give is—yeah, probably. Bitcoin has become very popular and COVID-19 has only made it stronger.

Moreover, everyone’s favorite digital coin is not as chaotic and unpredictable as it once was—some claim that the price of BTC has become somewhat correlated with gold and the stock market, which means it can become a predictable and viable resource for some investors.

If this happens, the price can grow dramatically—but how do you actually trade Bitcoin? There are multiple trading options, the most popular of which are stock brokers and crypto exchanges—both have their pros and cons you should know of before you start investing.

Trading cryptocurrencies isn’t as easy as trading stocks. There are numerous risks and pitfalls you can step into if you’re not careful and knowledgeable (BTC exchanges and wallets are always in the crosshairs of hackers). Luckily, there are safe and free ways to trade too.

In this article, we will explain how Bitcoin investing works and show how you can trade and store it with minimal risk and fees. Also, we will cover a few investing strategies so you know exactly what to and where to go as a new crypto trader. Let’s get to it.

What is Bitcoin? ₿

Bitcoin is the first among many cryptocurrencies. It’s not a physical asset, but still, it is very valuable because of its extreme practicality. 

Bitcoin can be traded among internet users from anywhere and at any time—sometimes without a middleman. Since crypto plays by different rules, it is even the case that some poorly regulated countries don’t have the infrastructure to trace and tax digital assets effectively—opening up opportunities for both freedom-loving individuals and web criminals alike. 

Because of its soaring popularity, Bitcoin gave momentum to the idea of decentralized finance (DeFi)—a new financial model where users transact directly with each other instead of heavily relying on banks and governments that impose fees and other limitations on your money. The asset is secure by its nature, so you don’t need to have a big institution vouch for its value, so to speak.

Is Bitcoin Safe? 🤔

First of all, BTC is a very secure asset that’s virtually impossible to hack or replicate—that’s the whole point of a cryptocurrency. Bitcoins are the most vulnerable in BTC wallets and online exchanges that are not protected well enough—we’ll talk a bit more about that in later sections.

If you’re worried about the value of Bitcoin, here are two factors you should consider. The number of Bitcoins is limited to 21 million and they are becoming harder to mine as time goes on—that’s why Bitcoin’s inflation rate has been dropping steadily since 2009. 

One more factor to consider is the growth of Bitcoin’s price and popularity. Every BTC price chart looks hectic but this digital asset is growing in value over time. Also, it might not be as chaotic and unpredictable as before: In 2020 we started to see a correlation between the price of BTC and NASDAQ—something that had not happened in the years before.

How You Can Trade Bitcoin 💰

There are a few options, some easier than others. Essentially, you can trade bitcoin through conventional channels like stock, and even popular forex trading apps, as well as independently through Bitcoin exchanges and other channels. Let’s go through all options and see what’s the most convenient choice for you.

Trade Bitcoin Through a Broker – The Easy Way 🖥️

The most user-friendly way to trade cryptocurrency is through one of the top stock brokers that also offer crypto trading on their platform. Ideally, this brokerage should offer free and user-friendly trading software so you can buy and sell your BTC intuitively and without getting robbed via high commissions.

One of the most popular places to trade Bitcoin at the moment is Robinhood—especially if you want to invest commission-free and through one of the world’s top stock trading apps. This is how it works.

How To Buy Bitcoin With Robinhood 🏹

First, you have to open an account with Robinhood (it’s quick and fully digital, don’t worry). Then, you can deposit your trading money via bank or e-wallet transfer, and start investing. 

Trading is simple, you just look at the price chart and buy the BTC at the price you like. Then, when the price has gone up, you can sell just as easily by pressing the colorful “sell” button. You can also set up automatic buy/sell orders—just type in the number you want to buy or sell at, and when the price reaches that point, the platform will make the trade for you.

This entire process costs nothing but you will be subject to capital gains tax. If you buy and hold your Bitcoin for over a year, you will pay a lower tax rate. However, if you sell your asset before 365 days have gone by, you need to pay short-term capital gains tax which is higher (you have to do this wherever you trade cryptocurrencies).

Tax isn’t a nice idea, but you have to pay it—and Robinhood gives you automatic tax reports you can file with the IRS easily, so at least submitting your taxes is very easy. To make things simpler, safety is not a problem since brokers are secure and offer insurance in case something happens to your assets. 

While Robinhood is a great free platform with an easy access to cryptocurrencies, there are other great options as well, like eToro.

Two Ways to Buy and Trade Bitcoin:

How to Use a Bitcoin Exchange 💱

This is another option that includes a middleman but with a few differences. Some Bitcoin exchanges require basic information like your email and then there are those that are anonymous and don’t require you to create an account at all. 

However, this doesn’t mean you can avoid taxes, at least not legally—we’ll speak about that more in the section about crypto taxation. Cryptocurrency exchanges have trading fees and try to mimic the functionality of popular trading software. However, brokers usually do a better job when it comes to trading platforms, so it’s better to go with a broker if you want an intuitive trading experience.

In summary, crypto exchanges offer more anonymity and don’t require thorough personal data for account creation. Unfortunately, crypto exchanges are much less secure—for example, Etherbase got attacked in 2020, and over $5.4 million was stolen by hackers.

In summary, exchanges are harder to use, have trading fees, and don’t give you clear tax reports you can submit to the IRS.

How Brokers and Bitcoin Exchanges Compare

Other Methods of Buying Bitcoin ☑️

1. Use a Bitcoin ATM. 🏧

Many of the ATMs you see in your daily life can actually be used to exchange BTC to USD and vice-versa. They have high fees, so they’re not the best choice for investors, but can turn your digital coins to cash. There are over 7,000 such ATMs around the US and you can find just where they are at Coinatmradar.com.

2. Go Directly to a Bitcoin Owner. 🤝

You can use peer-to-peer Bitcoin trading platforms like Bitquick and Bisq to trade directly with other individuals. You can also trade coins in cold storage in person if you want. In either case, be extremely careful—you never know if you’re trading with a respectable crypto-enthusiast or a scammer.

3. BTC Futures and Options. 🧠

You can use brokers like TradeStation to trade cryptocurrency futures. However, like Bitcoin options, these investments are for pro-level traders so newcomers are advised to stay away from them in the beginning.

4. Bitcoin Funds. 🏢

This is one more asset you can buy via a broker. An investment fund called Grayscale offers GBTC and ETCG—funds that hold Bitcoin and Ethereum respectively.

With this, you’re not investing directly in cryptos, but in a fund that owns a bucket load of coins. Fund fees make this investment more expensive than just buying Bitcoin, but it’s a safe option because the fund is responsible for your coins.

5. BLOK. 🧱

This is an ETF with a 0.7% expense ratio that is traded on the NY Stock Exchange and buying it is similar to buying BTC, kind of. This fund holds many companies involved in blockchain and cryptocurrency development. As such, this is not a direct Bitcoin investment, but you can own companies that benefit from the growth of BTC.

How to Store Bitcoin 👛

To store digital currency, you need a digital wallet and there are two kinds—hot wallets and cold wallets. These are completely different as one is stored online and the other offline—let’s see what their pros and cons are.

Hot Wallets 🔥

Hot wallets are stored in the cloud on your wallet provider’s servers. This means you can access them from your device and trade at a moment’s notice but it also means they’re possible to hack. 

Although it is usually due to the owner’s own carelessness, individual wallets get hacked relatively often, which is why you should ideally use multiple wallets to hold your cryptos. Some popular choices include Electrum and Blockchain, both of which are solely hot wallets.

A substitute for a hot wallet is storing your crypto with the exchange or broker you’re using. Since brokers are safe and insured, they are a good place for storing BTC, but exchanges are popular targets for hackers. For example, Binance, the world’s top crypto exchange once lost $40 million-worth of users cryptocurrency due to a cyber attack. 

Cold Wallets 🧊

As the polar opposite to a hot wallet, a cold wallet is an encrypted device like a flash drive, that you can carry around with you. This means zero risk of hackers—you just have to make sure you don’t forget where you put your Bitcoin wallet and avoid pouring beer on it. 🍺

If you’re planning on buying and holding BTC for a long time, then cold storage is a safe choice. Popular brands like Trezor and Ledger Nano sell these devices for $80 and $60 respectively but they also have more expensive premium options. 

Bitcoin Investing Strategies 🎯

Only a few years back, all cryptocurrencies including Bitcoin were regarded as completely unstable and unpredictable—basically, a risky investment with a random outcome. However, as it is becoming more popular, BTC is starting to show stability and behavior patterns.

For one, Bitcoin is growing over time—in a chaotic way, but growing nonetheless. Also, price of BTC has followed the stock market lately, which is best exemplified by how Bitcoin mirrored the drop in the markets on the 2nd of September 2020 and many other instances. The science of crypto investing is still a work in progress, but there are a few feasible strategies that experienced traders use.

The Long Game – “Buy and HODL” 📈

You probably heard stories about investors who bought a ton of Bitcoin when it was cheap as dirt and are now millionaires. That might not happen in the same magnitude in the future, but Bitcoin is only becoming more expensive and well-established as time goes on.

Because of this, many experts (and many more crypto romantics) believe that Bitcoin will rise to unprecedented heights in the next few years. Some banks seem to agree with this forecast, as we are starting to see an increased number of Bitcoin ATMs around the world.

This is where “Buy and HODL” comes into play. By the way, this isn’t a typo—HODL stands for: “Hold on for dear life.” It refers to buying and holding the coin for a long time, hoping that the price will jump—this is reminiscent of the old days of Bitcoin when it was still as volatile and chaotic as a stick of dynamite next to a crackling campfire.

However, BTC is more stable now, and if you want to make a long-term investment, it’s best to buy it without trying to time the market too much and store the coins in your coin in cold storage. Then, you should wait and make sure your cold wallets are safe and sound—getting more than one is a good idea. 

The fact that Bitcoin has grown so massively over time makes one wonder about what price it will reach in the future.

The allure of Bitcoin might be strong, however, never go all-in with cryptos—even though the potential payoff might potentially be huge, a drop in price is also possible. Being diversified is always a safer option, which is why even real crypto-enthusiasts only devote up to 5% – 15% of their portfolio to BTC.

Short-Term Bitcoin Trading: Buying the Dip 📉

The occasional drops in the price of Bitcoin usually demoralize investors and slow down BTC trading overall. This reduced trading has a positive side—the prices become much less volatile and therefore, less risky. 

However, this doesn’t mean they are risk-free. The main idea here is to be prepared for market crashes, sell your BTC before they happen if possible (which it almost never is), and buy the dip before the rally. One way of attempting this is by studying price history charts and economic trends, but that’s not enough when it comes to Bitcoin.

You also need to follow the crypto community and see what traders are thinking. From time to time, a popular finance guru (or Elon Musk) says that Bitcoin is going to skyrocket, people believe them and start buying—this can cause a price bubble, and the smart traders try to sell before it bursts. 

This is not uncommon, so don’t follow the herd—rather, watch the bubble from a distance and tread wisely. All in all, you should invest only a small part of your portfolio into Bitcoin and trade rationally—don’t let sudden price fluctuations scare you. They are very common and don’t mean much in terms of where prices are going long-term.

Bitcoin investing is still a relatively new and untested field so it’s best not to rely on it too heavily at the moment. Also, don’t trust cryptocurrency gurus who preach very optimistic ideas—the crypto market is still hard to predict and true experts are usually more reserved with overly bullish behavior.

Cryptocurrency Trading Taxes ☠️

Unfortunately, everything we own, see, or breathe is subject to tax by the IRS—this includes Bitcoin. BTC is considered property and is taxed just like stocks, bonds, and other assets. Yes, you have to pay capital gains tax upon converting your Bitcoin to USD, and the rate depends on how long you’ve had the coin and what tax bracket you fall into. 

If you bought your coin over a year ago, you have to pay between 10% and 20% in tax on all your profits. However, if you’ve held your BTC for less than 365 days, you will be taxed at a higher rate, which ranges from 10% to 37% based on your level of income. 

Bitcoin is hard to trace, especially if you exchange it with other cryptos first, so that might give you the idea you can avoid this tax altogether. That’s probably not a good plan, though—if you exchange BTC to USD online you can be spotted and the fines can be as high as 5 years in prison or $250,000 for not reporting your cryptocurrency trades.

Needless to say, filing correct tax reports is important but pretty tedious when it comes to Bitcoin exchanges. These platforms can only track your coins as long as they never leave the exchange, and even then, you don’t get a tax report automatically. 

This is why so many investors opt for Robinhood and some other brokers instead of trading through Bitcoin exchanges. Brokerages give you a clear tax report you can easily submit to the IRS while exchanges require more legwork.

How COVID-19 Has Affected Bitcoin 🦠

When the stock market came crashing down in March 2020, Bitcoin and many other cryptos followed suit. However, unlike the stock market, Bitcoin rallied very quickly without any government intervention—first it dropped by 50% in March, and just 2 months later, it grew back to $10,000+ where it had been before the pandemic.

Although the price of Bitcoin is changing turbulently, on average, it’s on a steady upward trajectory—but for how long? The real question might be whether future stock market crashes will influence Bitcoin in the same way this one has. 

We have seen some correlation between Bitcoin and S&P 500 lately, which suggests that BTC might drop if stocks drop. However, BTC rallied alongside gold, bonds, and other “safe haven” assets. This might seem strange since Bitcoin is all but passive and stable, but it seems the public is turning towards crypto—or at least Bitcoin—at times of crisis nonetheless.

All in all, Bitcoin got up after the Covid-19 crash and correlated with the S&P 500 for a while afterwards. If a new crash happens and Bitcoin performs as it did during this one, we will likely see a quick rally and continued growth—if that’s the case, there will be no need to sell BTC altogether as isn’t a company that can go bankrupt or an asset that seems likely to lose value long-term.