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A Guide to Trading and Investing in Bitcoin

Ashesh Anand
Nov 03, 2021

Bitcoin is not only the first cryptocurrency, but it is also the most well-known of the over 5,000 cryptocurrencies currently in use. Bitcoin has become an inextricable part of the landscape, with financial media breathlessly covering each new dramatic high and stomach-churning collapse.

While the high volatility may make for interesting headlines, it hardly qualifies Bitcoin as the ideal option for new investors or those seeking a reliable store of wealth. Understanding the in’s and out’s of Bitcoin might be tricky, so let's take a closer look.

( Read More: What is Cryptocurrency? )

What Is Bitcoin and How Does It Work?

Bitcoin is decentralized digital money that may be bought, sold, and exchanged without the use of a middleman such as a bank. Satoshi Nakamoto, Bitcoin's developer, first described the necessity for "an electronic payment system based on cryptographic proof rather than faith."

Every Bitcoin transaction that has ever been made is recorded on a public ledger that is open to the public, making transactions difficult to reverse and spoof. That's on purpose: Because of its decentralized structure, Bitcoins are not backed by the government or any issuing institution, and their worth is only guaranteed by the proof encoded into the system.

"It's worth money because we, as people, decided it has value—just like gold," says Anton Mozgovoy, co-founder and CEO of Holyheld, a digital financial services company.

Bitcoin's value has skyrocketed since its initial public offering in 2009. Although it previously sold for less than $150 per coin, one Bitcoin now costs more than $62,000 as of October 26, 2021. Because its supply is capped at 21 million coins, many predict its price to rise steadily over time, especially as more major, institutional investors begin to use it as a kind of digital gold to protect against market volatility and inflation.

( Must Read: Digital Currency and Cryptocurrency: Types and Benefits )

How Does Bitcoin Mining Work?

The process of adding new transactions to the Bitcoin blockchain is known as bitcoin mining. It's a difficult job. Bitcoin miners employ a technique known as proof of work, in which computers compete to solve mathematical problems that validate transactions.

The Bitcoin code rewards miners with additional Bitcoins to encourage them to keep racing to solve the riddles and maintain the entire system. According to Okoro, "this is how new coins are created" and new transactions are uploaded to the blockchain.

( Suggested Blog: Most Stable Cryptocurrency in 2022 )

Mining Bitcoin used to be possible for the common person, but that is no longer the case. The Bitcoin code is built in such a way that solving its problems becomes increasingly difficult over time, necessitating more and more computational resources. To be effective today, Bitcoin mining necessitates strong computers and access to large amounts of cheap electricity.

Bitcoin mining is considerably less profitable than it once was, making it even more difficult to recoup increased computational and power costs. Flori Marquez, the co-founder of BlockFi, a crypto asset management company, explains that when this technology initially came out in 2009, “every time you got a stamp, you got a significantly higher quantity of Bitcoin than you do today.” “As the number of transactions increases, the amount you get paid for each stamp decreases.” By 2140, it's expected that all Bitcoins will have been released into circulation, leaving miners with little choice but to rely on transaction fees.

( Read More: How to Mine Bitcoin? )

How to Purchase Bitcoin

The majority of Bitcoin purchases are made through cryptocurrency exchanges. You may buy, sell, and hold cryptocurrencies on exchanges, and opening an account is similar to opening a brokerage account in that you must authenticate your identity and offer a funding source, such as a bank account or debit card.

Coinbase, Kraken, and Gemini are all major exchanges. Bitcoin can also be purchased using an online broker such as Robinhood.

( Also Read: Blockchain Mining: Types and Uses )

You'll need a Bitcoin wallet to hold your Bitcoin regardless of where you buy it. It's possible that this is a hot wallet or a cold wallet. An exchange or a provider stores a hot wallet (also known as an online wallet) in the cloud. Exodus, Electrum, and Mycelium are examples of online wallet providers.

A cold wallet (also known as a mobile wallet) is a Bitcoin storage device that is not connected to the Internet. Trezor and Ledger are two mobile wallet solutions.

A few crucial points to keep in mind when purchasing Bitcoin: While Bitcoin is expensive, some sellers offer fractional Bitcoin. Fees, which are often minor percentages of your bitcoin transaction amount but can quickly build up on small-dollar purchases, must also be considered.

Finally, keep in mind that Bitcoin purchases are not as quick as many other stock purchases appear to be. Because Bitcoin transactions must be validated by miners, your Bitcoin purchase may take 10-20 minutes to appear in your account.

Watch this: How Cryptocurrency ACTUALLY works.

How to Invest in Bitcoin?

You may buy and hold Bitcoin as an investment just like a stock. You can now do so in Bitcoin IRAs, which are specialized retirement funds.

People's investment philosophies differ depending on where they keep their Bitcoin: Some investors buy for the long term, others buy with the intention of selling following a price surge, and yet others gamble on the stock's price falling. Bitcoin's price has fluctuated dramatically over time, reaching as low as $5,165 and as high as $28,990 in 2020 alone.

( Suggested Blog: Everything About Bitcoin Futures ETFs )

Consumers can also invest in a Bitcoin mutual fund by purchasing shares in the Grayscale Bitcoin Trust (GBTC), albeit it is presently only available to accredited investors with a net worth of at least $1 million and an annual income of at least $200,000. This means that the vast majority of Americans will be unable to support it.

Diversified Bitcoin investing is becoming more accessible in Canada. Purpose Bitcoin ETF (BTCC) began trading as the world's first Bitcoin ETF in February 2021, and the Ontario Securities Commission has also approved the Evolve Bitcoin ETF (EBIT). Blockchain ETFs, which invest in the technology that underpins cryptocurrencies, is a good option for American investors searching for Bitcoin or Bitcoin-like exposure.

( Must Read: ETF Dividends: Types, Working, and Examples )

However, while crypto-based funds may diversify crypto holdings and reduce risk modestly, they still carry significantly more risk and demand significantly more fees than broad-based index funds with a track record of consistent returns. Index-based mutual and exchange-traded funds are a good option for investors who want to grow their money steadily (ETFs).

Bitcoin Price Growth

Consider the Following Before Investing in Bitcoin

If you're already thinking about investing in Bitcoin, here are a few things to consider:

1. The Market Price Is Already Excessive

With the current price's recent significant and exciting climb, investing in Bitcoin today may not be the best idea. Many analysts feel that Bitcoin will crash in a few weeks as a plausible consequence due to the extreme volatility.

You can still invest in Bitcoin despite the fact that all investments are a hazard. This is due to the fact that, while it is not the best time to invest, it is also not the worst. Industry watchers also predict that Bitcoin will exceed $100,000 by the end of 2021. However, since predictions can go either way, you should be prepared if the market crashes and fails to provide you with the returns you desire.

2. Real-World Bitcoin Usage Isn’t Common

About 2,300 businesses in the United States, including TeslaCompany, and 15,174 businesses worldwide, accept Bitcoin. Despite the fact that hundreds of transactions are conducted every day with Bitcoin, it is still not as popular for commercial transactions.

( Must Read: How can Blockchain be used in Financial Services? )

In actuality, Bitcoin is being used by a small number of firms. Furthermore, there are more Bitcoin hoarders on the market, which prevents Bitcoin from being used. Bitcoin circulation is effectively hampered as a result of this. This is also why it is more of a store of value than a medium of exchange.

3. Tax Returns Can Be a Trouble

Investors in cryptocurrency should be aware that these assets are considered property and so taxable. As far as the International Revenue Service is concerned, this virtual currency is comparable to traditional assets such as stocks or gold. Costs, gains, and losses will all be assessed.

( Also Read: Difference between Bitcoin and Bitcoin Cash )

Because the IRS's tax forms already have a space for cryptocurrencies, it's crucial to compute your earnings or losses correctly. You should consult an expert to ensure that you are appropriately reporting your income, holdings, and gains on your taxes. Learning the ins and outs of cryptocurrencies and their taxation can be time-consuming. However, if you want to invest in Bitcoin, it will pay off in the long run.

4. What are your aims?

When making investments, keep in mind your long-term objectives and plans. It's critical to understand the risks and benefits of this digital currency. This is because the current high value of Bitcoin entails a larger risk of investment at this time. Bitcoin, on the other hand, is a worthwhile investment if you want to extend and grow your assets and can afford the risk that comes with cryptocurrencies. However, you should always use caution while investing in cryptocurrency.

( Must Read: What is the Future of Cryptocurrency? )

When you're a rookie Bitcoin investor, make sure your objectives are in sync before you invest. Never put more money into something than you can afford to lose. Due to recent developments, cryptocurrency assets are already dangerous. Know your limits and limit your potential losses by carefully assessing and establishing a cap on how much you can invest.

Watch this video on - Bitcoin Trading for Beginners

Bottom Line

Bitcoin has grown in popularity as digital investment money in today's globe. It has attracted a large number of digital investors from around the world, and its price and worth continue to rise, attracting even more attention.

Bitcoin remains the most popular and safest cryptocurrency to invest in today. It has the largest market capitalization and is regarded as "digital gold" with a high market value.

Finally, whether or not you invest in a crypto is entirely up to you as an investor. If Bitcoin's remaining potential still piques your attention, you should go for it. If you want to invest in Bitcoin, go to reputable sites and keep learning so you can make informed selections.

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