Over the past few years, Bitcoin has made headlines for reasons varying from its stratospheric rise in value and popularity among investors to its stomach-churning volatility. In addition to making headlines the world over, it’s Bitcoin’s also made history as the first crypto currency to break through to the mainstream and achieve (relatively) widespread adoption. While people still aren’t using Bitcoin to buy laundry detergent and coffee filters at their local Target, the coin has made its way into the investing “mainstream” via inclusion in major trading platforms and funds.
What is Bitcoin? A Brief History of the Most Popular Cryptocurrency in the World
Bitcoin is a crypto- or digital- currency that serves as a store of monetary value. There is no physical Bitcoin you can touch and hold- it’s digital only. Similar to other tech, Bitcoin lives in the cloud, and all transactions ever involving Bitcoin are recorded in the blockchain, a transparent database that is both decentralized and immutable. Bitcoin is commonly shortened to BTC.
Unlike traditional currency, Bitcoin is not backed by, nor associated with, any national currency, group or organization, meaning it is decentralized. It’s believed BTC was invented in 2008 by Satoshi Nakamoto, but it’s unknown if this is a real, singular person or a group of people collaborating. In early 2009, Bitcoin was released as an open-source software, but adoption among the general public didn’t take hold until late 2016.
Beginning in early 2017, the price of a Bitcoin (in US dollars) began its first rocket upward, growing from less than $1,000 at the beginning of the year before hitting a high in December 2017 of nearly $20,000. The price of the coin slid back to less than $5,000 in the first half of 2018 and consistently remained below $12k until summer 2020, when the value again shot up, hitting a new all-time high of over $50k in February 2021. And while the price of the currency continues to fluctuate, it seems likely this form of cryptocurrency will continue to remain both valuable and popular, as only 21 million Bitcoin can ever exist.
How to Buy Bitcoin
Buying Bitcoin is a bit more complicated than buying another country’s currency- you can’t just walk into the bank and swap the teller a $20 bill for Euros, pesos, or rubles. In order to get in the Bitcoin game, there are a few steps you’ll need to take:
- Research Bitcoin Buying Options: Evaluate your numerous options to buy bitcoin. Choices include exchanges, investment apps, and peer-to-peer sales options, among others.
- Connect exchange to Your Payment Method: Depending on how you choose to buy bitcoin, you’ll need to link your bank account or another payment method to the exchange/platform, etc in order to fund boin purchases.
- Place Order: Determine the amount you want to invest in cryptocurrency, and execute purchase.
- Select Secure Storage: Because crypto currency can’t be stored under the mattress, you’ll need to decide if you prefer a hot or cold storage solution.
1. Evaluate All of Your Cryptocurrency Buying Options
From exchanges to private transactions (also known as peer-to-peer or P2P transactions), there are a number of ways to buy bitcoin and other cryptocurrencies. To keep things simple, we’ll break down the choices by category.
A crypto exchange is effectively a marketplace where people can buy and sell bitcoin and other cryptocurrencies. Depending on which exchange you select, the information you’re required to provide to sign up- name, address, social security number- etc may vary. Some exchanges are decentralized- meaning there is no central point of control, no CEO, no president, no group in charge, etc, While decentralization allows for the ultimate in privacy, it also can be risky, in that there’s no “boss” to go to, should there be any issues.
Most of the exchanges that have risen to popularity and widespread use are not decentralized, meaning that personally identifiable information will be required to set up an account. This transparency cuts the risk of money laundering and other nefarious activity.
Today, some of the most popular exchanges include Coinbase, Gemini, Coinmama, Kraken, and eToro. Each of these cryptocurrency exchanges allows for the buying and selling of Bitcoin, and several offer individual insurance policies, to protect against theft.
Cryptocurrency exchanges are good options for people new to the crypto space who are looking for safe, secure trading platforms. While their fees vary, exchanges are cost effective and accept multiple funding sources (link to bank account, etc). They also are quick and easy to set up, so you can begin buying- and selling- bitcoin quickly.
Investing apps like Acorns, Betterment, and Stash have gained significant popularity among young people looking for simple, but robust mobile banking and investing technology. However, not all mobile banking and investing apps support the ability to buy Bitcoin. Two of the most popular, though, are Robinhood and SoFi.
With the Robinhood app, users can buy other forms of cryptocurrency, too, including Ethereum, Litecoin, Bitcoin Cash, and Dogecoin. Trades of Bitcoin through Robinhood are subject to the company’s standard fees, but the ease of use for many young users makes Robinhood the best way to buy Bitcoin, in their eyes.
SoFi- which began life as a behemoth in the student loan space before expanding their offering- also supports the buying and selling of cryptocurrency via their app. Using SoFi to buy Bitcoin may be a good choice for younger or more conservative investors, as they require just $10 to get started.
Additional Ways to Buy Bitcoin
While exchanges like Coinbase and Gemini or investing apps like Robinhood and SoFi remain the most common way to purchase and sell cryptocurrencies like Bitcoin, there are other ways to transact. Below are alternative ways to buy Bitcoin legally.
According to Coin ATM Radar, there are over 11,000 Bitcoin ATMs nationwide. What’s a Bitcoin ATM? It works like a regular ATM in that you deposit money (cash or card) and instead of spitting out cash, the Bitcoin ATM deposits Bitcoin into your digital wallet (more on digital wallets below).
Peer-to-Peer (P2P) Exchanges and Transactions
Buyers and sellers of Bitcoin and other cryptocurrency who want to transact directly can do so, too. There are exchanges like LocalBitcoins, Bitquick, and Bisq that connect buyers and sellers directly.
Account holders on these platforms can post requests to buy or sell, as well as info about the price, and payment method. Unlike the major exchanges (and the stock market, for that matter) where buyers and sellers are anonymously connected, P2P exchanges involve direct connections.
When using a P2P exchange, both buyers and sellers should exercise extreme caution when transacting with an individual.
Bitcoin Futures and Grayscale Fund
These choices are for the ultra experienced, and the completely inexperienced… though you’ll pay for the lack of experience and convenience.
Sophisticated, professional traders may consider trading Bitcoin futures through a platform like TradeStation, or through a brokerage like the CME group. But be aware, futures are a complex trading strategy and likely aren’t a suitable choice for the novice investor.
According to their site, “Grayscale Bitcoin Trust (GBTC) is solely and passively invested in Bitcoin, enabling investors to gain exposure to BTC in the form of a security while avoiding the challenges of buying, storing, and safekeeping BTC directly.” There are fees associated with GBTC and it often trades at a premium, but it may be an option for investors who want exposure to BTC without directly handling currency storage (more on storage and wallets below).
2. Connect Your Payment Method
Once you’ve selected your preferred method to buy Bitcoin, you’ll need to set up the funding. Exchanges generally require personally identifiable information including name, address, Social Security number, and possibly even a photo of your Driver’s License or Passport. Some may even inquire about employment and the source of the funds. While not all exchanges require the same information to sign up, most will make these inquiries to prevent money laundering.
After successfully creating an account and verifying your identity, you’ll need to fund the account. Funding options typically include directly linking it to a bank account or imputing a credit or debit card. However, credit cards are not a recommended method for funding, due to the volatility of the currency and high-interest rates associated with credit cards.
3. Place Order and Make Purchase
Once an account has been created and funded, you can purchase Bitcoin. In January 2021, Bitcoin hit a new all-time high at over $40k per coin. While some wealthier investors may choose to purchase an entire coin, most chose to buy fractional shares of the coin. Apps like Robinhood and exchanges like Coinbase are ideally suited to this task.
Depending on your level of sophistication and the exchange you choose, you’ll be able to pull a variety of levers including market and limit orders, and even stop-loss orders.
Technically speaking, an account is all you need to buy, hold, and sell Bitcoin, but a more secure storage method is highly recommended.
4. Safely Store Bitcoin
Due to the decentralized, anonymous, and immutable nature of Bitcoin, selecting secure storage is an extremely important aspect of trading cryptocurrency. While exchanges can hold currency for short periods of time (ideal if you’re executing frequent trades), they’re not considered long term storage options. For this, you’ll need a Bitcoin wallet.
In terms of Bitcoin and other cryptocurrencies, wallets are privately held, secure storage solutions to keep your money safe. It ensures you’re the only one who can access the Bitcoin held within, and keeps it away from echanges, which can be a popular target for hackers. Investors can choose to have a hot wallet (online) or a cold wallet (physical device).
A hot wallet is a cloud-based storage choice for Bitcoin and other cryptocurrencies. Like Bitcoin itself, you cannot physically hold a hot wallet. They are linked to internet-connected devices like laptops and smartphones, and because of this, they are quite convenient for those making regular trades.
But it’s this same internet connectivity that makes hot wallets a riskier choice than cold wallets. Hot wallets have unique keys to access your BTC, but if a hot wallet is hacked, your money can be stolen without recourse. While exchanges may offer insurance against widespread attacks, hacks, or security breaches, that coverage likely will not extend to individual or isolated hacks.
As hinted at in earlier paragraphs, exchanges and investment apps include hot wallet storage, but because storage is not the sole function of the exchange/app, the security is often weaker, putting your money at risk. If the convenience of a hot wallet is paramount to your investment strategy, perhaps consider a third-party hot wallet company. These companies have security at their core and are considered less attractive to hackers as such.
Cold wallets- also called offline or hardware wallets- are physical devices used to store Bitcoin and other cryptocurrencies keys. They are not connected to the internet and are considered as safer choices for BTC storage, as they connect to your computer via a USB port. The top two cold wallet producers are called Trezor and Ledger Nano.
Cold wallets are a bit more complicated to set up and can be expensive pieces of hardware, ranging in price from $50-200, but the added security makes this price worth it for many, especially people with large stakes in BTC.
Regardless if you choose to use a hot wallet or cold wallet to store your BTC, be sure to choose passwords that are complex and two-factor authentication.
Is Bitcoin a Good Investment?
The answer to this question will vary in large part based upon your individual financial situation and goals. Are you early in your investing career and can “afford” a loss, or are you on a fixed income later in life? Are you a risk-averse conservative investor, or do you like to “let it roll”? Are you looking to invest $100 or $100k? Are you looking for a quick entry and exit, or are you playing the long game?
All of these factors- along with macro economic and political trends- will help to answer this question for you as an individual. We recommend always consulting with a certified financial professional before investing.