If you’re considering delving into crypto investing, you’ve got a lot to consider these days.
For newbies, investing in bitcoin is a good way to toe the water before you dive in headfirst. Bitcoin is much simpler to understand than most other cryptocurrencies and it’s the apex coin of the crypto world.
Although bitcoin is volatile — the price can vary by as much as 50% or more over the course of a year — it’s actually less volatile and probably a safer bet than most other cryptocurrencies over the long run.
In this article, we’ll talk about why bitcoin is a good investment, especially for newbies, and then we’ll get into some of the different routes you can take to get started on your crypto investing expedition. Hop in and hold on tight.
What is bitcoin and why would you want to buy it?
No one should ever invest their hard-earned money into something they don’t understand — at least at a basic level. In that spirit, before we talk about how to buy bitcoin, let’s talk about what the Bitcoin network is and why you might want to buy bitcoin in the first place.
What is the Bitcoin network?
The Bitcoin network (capital B) is a decentralized computer network much like the World Wide Web. However, while the World Wide Web is an information exchange protocol, Bitcoin is a monetary exchange protocol. And, like the World Wide Web, anyone can take part in the Bitcoin network.
Moreover, unlike a central media source such as a television network, the World Wide Web has no CEOs or managers or employees or buildings you can point to. The same goes for the Bitcoin network. Unlike a traditional bank, the Bitcoin network has no CEO, no staff, no overhead, no headquarters.
Bitcoin is essentially a bank that’s owned and operated by the folks that have a stake in it. This includes not only those who have accounts on the network, it also includes miners and nodes.
Miners supply the computer power that records the transactions and balance the ledgers. In exchange, they are automatically rewarded in bitcoin (lower case B). Nodes are additional computers on the network that help to keep it open and honest.
The more miners and nodes there are on the network, the more decentralized and secure it is.
Why would you want to buy bitcoin?
In just a short 13 years, Bitcoin, the world’s first decentralized monetary network has grown from complete obscurity to become only one of a handful of networks with a trillion-dollar market cap. You might be familiar with these other trillion-dollar networks: Apple Computer, Google, Microsoft, Amazon.
Yes, you’re 13 years too late if you wanted to get into Bitcoin on the ground floor. But if you had invested in any of these companies 13 years after they launched, you’d be rolling in cash right now. So you’re not too late to join the party.
Here’s some perspective for you. It took computer companies Microsoft and Apple 44 and 42 years, respectively, to grow to a trillion-dollar market cap. And it took Amazon and Google 24 and 22 years, respectively, to reach a trillion-dollar valuation. It took Bitcoin 12 years. And it’s very likely going to leave the Apples and the Amazons of the world in the dust in very short order.
Because Bitcoin is not part of the fiat money system, for the most part, it’s inflation resistant. The more money the government prints, the smaller each slice of the pie gets. Whereas, the more money we all put into the bitcoin network, the higher the value of everyone’s bitcoin.
Before bitcoin, if you wanted to protect your savings from inflation, you had to buy gold or real estate, or some other asset that grows in value faster than inflation. To be completely blunt, buying and holding bitcoin is far simpler than buying and maintaining physical assets such as gold and land.
These factors make bitcoin an excellent “store of value” and one of the best investments of all time.
Keep this in mind, however. Some experts claim that Bitcoin will inevitably rise from its current value of tens of thousands of dollars to reach well into the millions. But others say that Bitcoin is destined to go to zero at some point, and when it does, it will happen suddenly.
Is bitcoin a safe and secure investment?
This leads to the question, is bitcoin safe and secure?
Unlike putting your money in the bank, there’s no customer service to call if something goes wrong. Everyone is responsible for keeping safe custody of their own bitcoin or otherwise entrusting custody to a 3rd party such as a broker.
You can take custody of your own fiat cash. You merely withdraw it from the bank and put it in your wallet. However, now you have to make sure no one steals your wallet. And if your stack is big enough, you might want to keep it in a vault or safe deposit box.
Taking self-custody of bitcoin is no different except that you’re storing electronic money in an electronic wallet. Great care needs to be taken to make sure your bitcoin wallet can’t be stolen or hacked.
You can put your bitcoin in a “cold wallet” and store it in a vault. Or you can use a “hot wallet” that lives on your computer or mobile device. If you choose the latter, then you need to take precautions to assure that no one can access your private address and spend your bitcoin.
The bottom line is that learning how to invest in bitcoin is a step-by-step process. As a beginner, before you start worrying about self-custody and how to keep your wallet secure, you might want to get your feet wet by opening an account with a broker or exchange and letting them hold onto your bitcoin for you.
Is the Bitcoin network secure?
The short answer to this is, yes, the Bitcoin network is quite secure. All records on the ledger are permanent and immutable. Since the money is digital, there’s no need for a vault and armed guards.
That being said, anything that connects to the network becomes a weak link. Wallet passwords can be stolen, exchanges and brokers can be hacked, etc. While some of them will guarantee your funds, others offer no such assurances.
One of the major threats to bitcoin comes from the prospect of quantum computers. In theory, a powerful enough quantum computer could crack open a bitcoin wallet and transfer the funds to another anonymous wallet and that would be the end of that.
That being said, if the news were to report tomorrow that someone has the technology to hack bitcoin wallets, the entire network would become worthless. However, it would be ludicrous to spend the money required to put together enough computer power to hack a wallet considering that the moment you do so, it becomes valueless.
Nonetheless, far too many of us have a stake in bitcoin to let that happen. As you might guess, there are some bright minds out there working on how to make bitcoin wallets quantum-proof, and most likely they will succeed well before quantum computers come down in price enough to make it a worthwhile undertaking.
Where to buy bitcoin
Now you have a very basic understanding of what bitcoin is and why you might want to invest in it. It’s time to get the heart of the matter and talk about the best way to buy bitcoin for complete newbies.
We have a few options to discuss:
- Crypto exchanges
Real quick, the difference between a broker/custodian and a crypto exchange is that a broker lets you purchase and sell bitcoin for fiat cash only. An exchange, on the other hand, allows you to trade one cryptocurrency for another. And a “proxy” is a publicly-traded asset such as a stock, the value of which rises and falls along with bitcoin.
Let’s look at each of these in a bit of detail.
A crypto broker is much like a bank except that you can have both a fiat cash account and a bitcoin account. You can trade your cash for bitcoin or vice versa. Many offer a handful of cryptocurrencies in addition to bitcoin.
And while some brokers will allow you to withdraw your bitcoin to a wallet, others do not. Those that do not can be referred to as crypto custodians.
Examples of popular broker/custodians include:
Buying bitcoin on these sites is very simple:
- Install the app or go to the website.
- Open an account.
- Deposit some fiat money.
- Buy your bitcoin.
Pros and cons of broker/custodians
The upside of keeping your bitcoin with a custodian is that it saves you from having to deal with the intricacies of maintaining a crypto wallet.
There are, however, several downsides. For example, if you decide to get into trading bitcoin for other cryptocurrencies, then you’ll have to cash out of bitcoin, withdraw your fiat money, open an account elsewhere, and buy all over again.
For those who are serious about investing in bitcoin, we recommend you avoid crypto custodians that do not let you take self-custody of your bitcoin and instead sign up with an actual cryptocurrency exchange.
As we mentioned, the difference between a crypto exchange and the above-mentioned custodians is that a crypto exchange allows account-holders to exchange one cryptocurrency for another. While some crypto exchanges only offer a handful of coins and tokens, some offer scores or even hundreds of trading pairs.
Although they come in a wide array of flavors, there are two basic types of crypto exchanges:
- Decentralized exchanges (DEX)
- Centralized exchanges (CEX)
A decentralized exchange — or DEX — is an application that, like Bitcoin, runs on a decentralized network and isn’t owned and operated by any centralized party. In essence, a DEX is a peer-to-peer crypto trading system with no middleman. Many DEXs offer powerful features for experienced crypto traders.
Some popular decentralized exchanges include Uniswap, Pancake Swap, Sushi Swap, 1Inch, and several others.
Pros and cons of buying crypto on a DEX
There are a couple of advantages of trading on a DEX. One is that you don’t have to provide personal information to use a DEX as you do with a centralized exchange or with brokers such as Coinbase or Robinhood.
Another upside is that you can trade directly from a crypto wallet and not have to leave your assets in an account as you would with most other options.
The downside of trading on a DEX, for beginners, in particular, is that, unlike using PayPal or Robinhood, DEXs require some level of crypto trading knowledge prior to partaking. Moreover, DEXs offer zero customer service or technical support.
A centralized exchange — or CEX — is a centralized service that allows customers to not only purchase crypto but also to trade one crypto for another in what is called “trading pairs.” Whereas a broker such as Robinhood only lets you buy and sell bitcoin with cash, CEXs let you trade bitcoin for other cryptocurrencies and vice versa.
Buying bitcoin on a centralized crypto exchange is usually a better option for newbies than using a DEX. Although centralized exchanges require users to provide personal information in order to use them, the upside is that they usually offer some level of technical support and customer service.
Some CEXs offer only a handful of coins and tokens, others offer hundreds of assets. And while some offer both a mobile app and a desktop version, a few of them only offer one or the other.
Some popular CEXs for newbies include Coinbase, BlockFi, Kraken, Crypto.com, Voyager, Gemini, Binance, and several others.
Pros and cons of buying bitcoin on a CEX
As we mentioned, unlike DEXs, CEXs do offer customer service and technical support. If you’re a total noob, this can be invaluable. Many CEXs also offer extra benefits such as interest-bearing accounts, debit cards, and so forth.
The downside of trading on a CEX is that they are regulated and required to collect personal information from their customers. Also, some CEXs charge hefty transaction fees.
Which CEX to go with is a personal choice that depends on factors such as how many coins you want to swap, whether or not you’re trading or investing for the long haul, whether or not you prefer to have a desktop version, etc. It’s going to take some research to see what each CEX has to offer and to decide which one feels right for you.
If you’re just getting your feet wet and looking to stack some bitcoin, you might not even need a CEX — you can just go with a company such as Robinhood which doesn’t charge transaction fees.
The most popular CEXs are probably the ones you should be looking at first. Some of the most popular CEXs that are suitable for newbies include:
Best crypto exchange for beginners: Coinbase
Our recommendation for first-time bitcoin investors is Coinbase. Coinbase is the largest publicly-held crypto exchange platform with millions of users worldwide. They offer both mobile and web applications that are fairly easy to use. While Coinbase’s exchange fees are among the highest, you can enjoy perks such as lower fees and a more powerful set of trading tools by signing up for Coinbase Pro.
Investing in bitcoin via proxies
Before we leave you to begin your life as a fledgling bitcoiner, let’s talk about another option for investing in bitcoin — proxies.
Proxies are assets that that track the price of bitcoin — more or less — but that can be purchased on stock exchanges.
The upside of investing in bitcoin via proxies is that you can use your regular brokerage account including your IRA and forget about crypto exchanges altogether.
Some popular proxies for bitcoin include:
- Grayscale Bitcoin Trust (GBTC) — Grayscale is one of the largest holders of bitcoin on the planet. They not only offer a Bitcoin trust but also Ethereum (ETH) and several others. These funds are not available on the major stock exchanges and can only be purchased via brokers that offer OTC (over-the-counter) stocks. These include brokers such as Fidelity, TD Ameritrade, and E-Trade.
- Mircorstrategies (MSTR) — This company holds billions of dollars worth of bitcoin in their treasury.
- Amplify Blockchain ETF (BLOK) — This exchange-traded fund is a basket of publicly traded companies that are in the blockchain space.
A few additional ticker symbols you might want to check into that are similar to BLOK include:
2 Tips for newbie bitcoin investors
Finally, before you venture into the wonderland of crypto trading here are a few solid tips for you to consider.
Trading vs. investing
Crypto trading means buying and selling crypto as the prices rise and fall as a means of short-term income. Investing means socking your money away for the long haul. Trading is super risky and requires not only extensive training in technical analysis, but if you want to do it right and actually be profitable it’s also a full-time job. Very near 100 percent of newbie traders lose money. Unless you’re willing to dedicate your time to becoming a crypto trader, a better idea is to make money some other way and invest it long-term.
By far the best way to invest is via a plan called “dollar-cost averaging” or DCA. DCA involves stashing away some amount of money on a regular basis. Many brokers offer investors automated weekly or monthly purchases. Or, if you’re looking 15 to 30 years down the road, it can be a yearly event. With a DCA strategy, sometimes you’ll pay more, sometimes you’ll pay less than average. But over the long run, DCA is likely to beat trying to time the market. So far, no technical trading system has been proven to beat the strategy of DCA.
One of the best ways to save for your future is to put your investments into an individual retirement account or IRA. IRAs help investors save money on taxes. On the downside, they tie up your money until retirement. You can get at your money early but there are penalties. There are two types of IRAs. A traditional IRA lets you write off your deposits on your tax return, but you’ll pay taxes when you begin withdrawing your money. And with a Roth IRA deposits are taxed along with your regular income, but you don’t pay tax later when you begin taking distributions. Talk to your financial adviser about your options.
As a newbie, which method you choose to invest in bitcoin really depends on how involved you want to get. Unless you’re willing to spend hundreds of hours educating yourself on crypto trading and hundreds more following charts, your best bet is to DCA into your IRA.
But if you do want to get into crypto trading, you’ll need to sign up with a DEX or CEX that allows trading between crypto pairs rather than a broker/custodian. But be prepared to fall flat on your face for the first few years as you learn the ropes. Start small and work your way up as you get the hang of it.
Either way, investing in bitcoin has so far turned out to be one of the most prolific investments of all time. Many a millionaire has been made over the past decade simply by buying and holding bitcoin. And the ride is far from over. The growth of the Bitcoin network isn’t expected to slow down any time soon.