On a late Friday night sometime around 2013, I found myself alone in a dark room trying to figure out how to invest in bitcoin.
(I know, sweet social life, 23-year-old Money Wiz…)
Physically, I was in a dark room, and my face was illuminated by the blue hue of my computer screen. But mentally, I was in an all-too familiar place – deep down the rabbit hole of random Wikipedia articles.
Or maybe I was reading an online message board.
The exact details don’t matter. But there is one detail I’ll never forget…
I was reading about people investing in something called Bitcoin. It was a wild new type of money that somehow existed entirely within computers. I didn’t quite understand how that was possible, but I did understand the headline I was reading.
Bitcoin had just skyrocketed in price. It was now over $100, for the first time ever.
“Wow,” I thought. “Some people must have made some serious returns on an investment that grew from $2 to $100 in less than a year!”
“Say, I’ve got an extra five thousand bucks. Maybe I should throw that into this wild new technology?” I asked myself. (23-year-old, Friday-night-loner Money Wizard didn’t have many people to talk to, apparently.)
“Nah, this bitcoin thing has to be a total bubble,” I decided. “It can’t last.”
…Fast forward four years.
By 2017, bitcoin was no longer some unknown discovery buried in the Wikipedia rabbit hole.
Everyone from the Starbucks barista to my own grandmother seemed to have an opinion on it.
And the headlines were again talking about a crazy prince increase. Except this time, those headlines weren’t impressed with a $100 bitcoin.
Bitcoin had just hit $20,000.
In other words, had I pulled the trigger, my sleepy Friday night $5,000 investment would have been worth $1,000,000.
ONE. MILLION. DOLLARS.
I’m not bitter at all…
- What is bitcoin?
- Why invest in bitcoin?
- The 4 Most Common Ways to Buy Bitcoin (Pros & Cons)
- How to Invest in Bitcoin (The Best Way, in 5 Easy Steps)
- My personal bitcoin investment strategy
First, a disclaimer:
To write this article, I:
- Watched Netflix’s “Banking on Bitcoin” documentary
- Read Digital Gold cover to cover
- Got my hands on Satoshi Nakamoto’s original 9 page white paper that introduced his technology to the world
- Read not only the entire Bitcoin Wikipedia page, but the entire History of Bitcoin and Cryptocurrency wiki for good measure
- Read every major article about cryptocurrencies on the front page of google. And the second page. And probably the third page too.
- Opened a cryptocurrency exchange account and made my first bitcoin investment, to the tune of a couple thousand bucks.
After all that? I’m still not sure whether Bitcoin is a good investment.
(I’m also not a professional, so you should always take my investment advice with a grain of salt anyway.)
That said, I definitely learned a ton about the technology. Which is why I’m creating this massive guide to show you, step by step, how investing in bitcoin actually works.
And at the end of the article, I’ll share my personal opinions on bitcoin, along with my exact bitcoin investing strategy.
What is bitcoin?
Before you invest in something, it’s probably worth understanding just what the heck it is. But if you still can’t tell your bitcoin from your blockchain, don’t be discouraged. “Cryptic” is literally built into the cryptocurrency name!
Bitcoin is the world’s first digital currency. It was originally created in 2009 by a mysterious character named (or nicknamed…) Satoshi Nakamoto, which gives rise to a whole host of juicy conspiracy theories.
We won’t get into all that, because the true genius of bitcoin is how it’s not controlled by any single entity or person. Instead, it’s run on a network of regular bitcoin users who volunteer some of their computer resources to the cause. A crude analogy would be the way that Wikipedia isn’t written by any single person. Or how those old music sharing programs like Napster and Kazaa (throwback!) relied on the upload and downloads of all the website’s collective users.
This network of bitcoin users contribute to “The Blockchain” – a public accounting ledger.
The purpose of the blockchain is to verify the accuracy of all transactions on the bitcoin network. No different than the way your credit card company works with your bank to verify whether your impulse Amazon.com buys are legit.
Why invest in bitcoin?
Most people invest in bitcoin for no other reason than its skyrocketing price. As proven by my million dollar mistake, a lot of people got very rich, very quickly off their bitcoin investments.
I mean, just look at this historical chart!
But if “rising price” is your whole investment thesis, you might as well buy a lottery ticket.
Instead, it’s worth looking at the three major advantages of bitcoin. (We’ll get to a few disadvantages and, as promised, my personal bitcoin investing strategy, at the end of this article.)
1. Decentralization from third parties
The reason why bitcoin lovers get so giddy about the technology changing the world boils down to this one word: decentralization.
Remember when we talked about that blockchain verification process? Before bitcoin, the only way to verify transactions was to go through a third party, like a bank or clearing house.
Anyone who’s ever sent a wire transfer knows this frustration. If you want to send money to your cousin in Australia, you wire the money, some clearing house holds onto it for three days and charges you a $15 fee while they double check everything, and you wait around feeling like an idiot, hoping your cash didn’t get lost.
With bitcoin, that verification occurs over the blockchain. Instantly. And for pennies. Your Australian cousin will have their money in seconds.
People who believe Bitcoin will become the worldwide currency of choice are banking on its four unique characteristics:
- Extremely low fees.
- You can use bitcoin in any country.
- Your account can’t be frozen by some third party.
- There are no arbitrary limits on transfers.
2. Decentralization from government shenanigans
This idea of decentralization also expands to Uncle Sam.
Bitcoin is backed entirely by computer code. Compare this to most historical currencies, which were backed by physical gold, or the current US dollar, which is backed by people’s faith in the government.
Say the US government announces a $3 trillion stimulus packages because some banks broke the economy or the government forgot to prepare for a pandemic. Since our government runs a budgetary deficit, that stimulus money usually comes from firing up the U.S. Mint’s printing presses.
The problem? The government printing new money supply creates inflation and devalues the existing money supply.
Since bitcoin isn’t controlled by a government and instead runs on computer code that no single entity controls, government induced devaluation can’t happen.
Which brings us to our next point.
3. Limited supply.
Bitcoin’s code limits the total number of bitcoins worldwide to 21 million. Forever.
The goal here is to mimic the characteristics of other limited resources, like gold.
Bitcoin investors hope that as more people use or invest in the currency, the value of those limited coins will continue to rise.
The 4 Most Common Ways to Buy Bitcoin (Pros & Cons)
If that’s all got you nice and fired up, then let’s get to the main event – How to actually buy bitcoin.
There’s really four main ways you can get yourself some of that sweet, sweet bitcoin. So let’s go through them, and I’ll quickly share my thoughts on each one.
1. Sell a product and accept bitcoin
This is a tough one. Bitcoin’s usage as a true currency is still in its infancy, so this process is somewhat involved.
- First, you have to figure out a product to sell.
- Then you have to create that product, market it, and find willing buyers.
- Finally, you’ve gotta realize that only a fraction of your paying customers will use bitcoin.
For the average person just wanting to invest in bitcoin, this option isn’t the most realistic.
2. Buy bitcoin from a local dealer
For those wanting their bitcoin acquisition to be completely anonymous, the best way is to buy bitcoin directly through a local dealer.
Why would you want your bitcoin acquisition to be anonymous?
Well, chances are, you’re either a criminal or worried about government confiscation.
Hopefully the first part doesn’t apply to anyone here. As far as government confiscation, sure that might sound a little tinfoil hat-like, but there’s also legitimate reasons to be concerned about this.
Might I reference Executive Order 6102?
That said, buying bitcoin locally sounds super shady to me.
You’re basically doing an in-person Craigslist deal for potentially thousands of dollars worth of bitcoin. People have had success with this, but personally, this sounds like a great way to get shot or scammed.
3. Use a Bitcoin ATM
Most Bitcoin ATMs will also allow you to buy bitcoin anonymously. You can search websites like CoinATMRadar.com to find nearby Bitcoin ATMs, and then you simply exchange cash for bitcoins.
The big negative with Bitcoin ATMs? The fees. We’re talking credit card level fees… usually usually anywhere from 5-20% per purchase.
Depending on the size of your bitcoin investment, that can be massive, especially compared to other options.
4. Buy through a bitcoin exchange
Lastly, we have cryptocurrency exchanges. If you’ve ever purchased stock through your account at Vanguard, Fidelity, Charles Schwab, etc… then you’ll immediately recognize this type of interface.
Bitcoin exchanges are simply websites that connect buyers and sellers of bitcoin. They’re fast, easy, and low fee. (Usually somewhere around just 0.20% of the purchase amount.)
The big negative with exchanges? At least for U.S. residents, there’s no way to use bitcoin exchanges anonymously. As part of opening your account, you’ll have to provide personal information, so there will absolutely be a paper trail of your bitcoin purchases.
How to Invest in Bitcoin (The Best Way, in 5 Easy Steps)
Of our options, I think the most legit way to invest in bitcoin is to do so through an exchange.
Sure, you lose the anonymity. But in my opinion, the chances I get ripped off by the U.S. government seems much less than the chances I get ripped off by a shady bitcoin dealer or high ATM fees.
So, as usual, I thought I’d be your personal financial crash test dummy. I took a small chunk of cash from MyMoneyWizard.com’s earnings and decided to “throw the hail mary” on bitcoin, as Mark Cuban put it. (Again, we’ll get to my personal bitcoin strategy at the end of this article.)
What I learned is that investing in bitcoin really boils down to 5 steps, of varying difficulty.
Step 1. Find a Bitcoin exchange
There’s literally hundreds of cryptocurrency exchanges to chose from. The most popular exchange is probably Coinbase.com, which boasts millions of happy customers.
Unfortunately, in doing my research I also found handful of extremely unhappy Coinbase customers too. The most common complaint is nonexistent customer service in the unlikely event something bad happens. (Like this guy, who alleges his $50,000 deposit went missing, and Coinbase wouldn’t answer his support requests until he publicly blasted them on Reddit.)
In general, the best cryptocurrency exchange seems to be Kraken.com. At least according to the enthusiastic users on various cryptocurrency forums.
And I do have to say, Kraken shows many encouraging features:
- I noticed Kraken’s fees were among the lowest.
- I was surprised to find actual customer support, who I could immediately reach via chat or email. (In the world of crypto exchanges, this is surprisingly rare.)
- I also liked that Kraken is one of the few exchanges headquartered in the United States.
Step 2. Get your account verified.
Next, you’ll have to put your faith in the security of the exchange you’re working with. No way around it…
For all new accounts on Kraken.com (and all other legit exchanges) you’ll need to “get verified” if you ever want to purchase bitcoin with US dollars.
This means handing over all sorts of cozy personal information, like your SSN, driver’s license or passport, proof of residence, and even a weird selfie of your face holding a piece of paper confirming your name and personal documents.
Obviously, this information isn’t shared publicly. But it definitely reinforces the need to choose a trustworthy and security-focused exchange. (Kraken, from what I’ve seen, has some of the highest marks in the industry on that front.)
Step 3. Fund your account.
Next, we have to fund our account with however much money we want to invest in bitcoin. To do so, we’ll have to initiate a wire transfer from our personal bank account to the cryptocurrency exchange, with ourselves listed as the ultimate recipient.
Personally, this was the scariest part of the process for me.
As a millennial through and through, I’ve never initiated a wire transfer in my life. I learned the process goes like this:
- Get the wire transfer address from Kraken.com, and then copy those details into my bank’s online wire transfer form.
- Get charged some ridiculous $15-30 fee.
- Wait an agonizing amount of time, anywhere from a couple hours to a couple days, depending on the amount of fees you paid.
- Pray your transfer doesn’t disappear into the ether of cyberspace.
I was actually paranoid enough in this process that I first did a test transfer for the minimum amount, even though it meant double the fees in the end.
Apparently, my paranoia was all for naught, because the transfers went through without any hiccups.
Step 4. The main event: buying bitcoin.
Buy! Buy! Buy!
Except, in the world of bitcoin, that hot market action looks more like this…
Actually buying the bitcoin was the easiest part of the process. You simply navigate to your exchange’s trading page, and then enter how much you want to invest.
Select “Buy XBT with USD”…
And review your order like an Amazon.com shopping spree. (Hopefully this turns out as a little better investment…)
Hit submit, and…
Congrats! Welcome to the wild west world of bitcoin!
(FAQ) Is there a minimum bitcoin investment?
One of the cool things about bitcoin investing is that you can invest in fractional bitcoins. This means you don’t have to save up the full price of 1 bitcoin before making your first investment.
Technically, the minimum amount of bitcoin you can purchase is 0.00000001 bitcoin, known as 1 “Satoshi.” At today’s prices, that’d be about .01 pennies.
In practice, most exchanges impose slightly higher limits. Kraken.com, for example, has a minimum bitcoin investment of .002 bitcoins, or about $20.
Step 5. *IMPORTANT STEP* – Get a bitcoin wallet.
If you made it this far, you’re the proud new owner of some bitcoins.
But pay careful attention here, because this might be the most important step in the list.
Once you’ve bought your bitcoins, you have two choices for how to store them.
- Leave them in your account on the exchange
- Transfer them to an offline bitcoin wallet. (Aka “cold storage”)
If you’re serious about not losing thousands of your hard earned dollars, you’d be crazy not to choose option 2.
When you leave your bitcoin in the exchange, you’re taking a serious risk. Bitcoin remains a big target for hackers, which means if your exchange login ever gets compromised, they could drain your whole account. And there’s no take backs or FDIC insurance when it comes to bitcoin…
Equally scary is the idea of putting all your faith into the exchange itself.
Look no further than the infamous Mt. Gox debacle. Mt. Gox was a bitcoin exchange that by 2014, was handling 70% of all worldwide bitcoin transaction. Then, the entire exchange got compromised and promptly declared bankruptcy, leading to over $450 million in stolen bitcoin.
Yeah… not a good time.
You can avoid both of these risks by storing your bitcoin in an offline wallet.
What’s the best bitcoin wallet?
These are essentially specialized USB sticks that plug into your computer and have their own unique bitcoin address. The only way for a hacker to steal these would be for them to break right into your home. Even then, offline wallets can be backed up across multiple devices.
Setting up an offline wallet works like this:
- Buy the wallet. Here’s an affiliate link for the Ledger Nano X, which in my opinion is the best intro wallet on the market today.
- Set up the wallet. This involves memorizing or writing down a unique “recovery phrase” which is a list of 24 words. This phrase acts as the wallet’s password, and can even be used to recover the device if something were to happen to it.
- Send your bitcoin from the exchange to the unique address that comes with your wallet. This can all be done through the exchange itself and is actually pretty simple… no different than sending bitcoin to a friend.
- For extra protection, backup your wallet onto a second wallet. Ledger is currently offering a great deal on its backup pack designed specifically for this job.
Step 6. Wait… and… profit?
Just get ready for a ride.
And not a normal “wild ride” in the sense of stocks or any other asset classes. Bitcoin sports volatility like a raging bull, ready to buck you off the back and knock your teeth out in the process.
If you’re not comfortable with the idea of 50-70% losses from one day to the next, well then it’s time to move on to a different investment idea.
(Here’s 18 other passive income ideas to get you started…)
My personal bitcoin investment strategy
Phew. With all that out of the way, it’s time for me to share my own thoughts and strategies for bitcoin.
First thing’s first. Personally, I don’t think you should even consider throwing a single cent at cryptocurrencies if you don’t, at a minimum, have a well-funded 401k and a rock-solid after-tax investment portfolio, consisting mainly of something more stable, like a 3-fund portfolio.
And even then, you should heed Mark Cuban’s advice, when he says,
If you’re a true adventurer and you really want to throw the Hail Mary, you might take 10 percent [of your savings] and put it in bitcoin or ethereum… But, if you do that, you’ve got to pretend you’ve already lost your money.”
Why do I think it might be worth investing in bitcoin?
Well, over the past few years, bitcoin seems to have proven itself enough that it does present an interesting case of diversification with serious upside.
A bet on bitcoin is a bet that more people are going to use or invest in bitcoin. And with the increasingly digital world, it’s not that hard to imagine a totally virtual currency.
On the high end, experts estimate there’s no more than 75 million people currently invested in or using bitcoin. But there’s over 7 billion people in the world.
Remember, bitcoin’s supply is limited by the code to no more than 21 million bitcoins, ever.
The upside case is that bitcoin gets adopted as a true world wide currency. If that happens, 100 times as many people will share the same limited number of coins, so the value of bitcoin would presumably increase by at least the same amount.
Of course, that’s a huge if.
Personally, I don’t see how bitcoin could be adopted as a true currency as long as its price still jumps around so much day to day. Who’s going to use a currency when you’re not sure if it’s going to be worth 30% more tomorrow?
What seems much more likely is that bitcoin becomes a sort of “digital gold.” That is, a store of value which also comes with the bonus of some potential upside. With the vast majority of bitcoin activity so far coming from buy and hold investors, this seems the much more proven and likely path at this point.
If that’s the case, then bitcoin’s limited supply is extremely appealing. For one, this makes it similar to gold. And just like gold, people seem to flee to it when they’re worried about big picture concerns. (Like the U.S. Government going wild printing trillions upon trillions of new dollars, an act which poses a very real concern of future inflation and/or serious devaluation of the US dollar.)
Secondly, the Fed’s government imposed mandate is to target a 2% inflation rate each year. By definition, that means that our cash becomes 2% less valuable year after year.
But because of bitcoin’s limited supply, it’s a actually a deflationary asset… meaning inflation actually makes it more valuable.
As the government prints more money, and more money floods into the financial markets, some of that money flows to bitcoin, which remains limited at its 21 million total coins. Using this logic, you can envision a long term situation where bitcoin’s value rises at a minimum of 2% per year.
Speaking of the long term, bitcoin has actually held up surprisingly well. Bitcoin is certainly still in its infancy, but in just 7 years, it’s gone from a fringe marketplace for illegal side hustlers to being accepted as a legitimate business by JP Morgan.
That’s during a time in which the US stock market experienced one of it’s wildest corrections in history. And sure, bitcoin experienced a bit of a flash crash during the initial coronavirus panic, too, but it’s since recovered fully.
At times, the asset class has even moved extremely uncorrelated with the rest of the stock and bond market.
For all those reasons, I think bitcoin presents an interesting diversification tool for an already established portfolio. It also serves as a hedge against monster black-swan type risks, like the entire collapse of the USD dollar. Unlikely? Probably. But man, that would suck if it happened.
So, how much will I invest in bitcoin?
Billionaire hedge fund manager Paul Tudor Jones recently made waves when he announced he’s got around 1-2% of his portfolio in bitcoin, and for me, that sounds about right.
In response to that, I saw a funny twitter comment that said: “Just because this billionaire admitted he invested 2% of his portfolio into bitcoin, a lot of regular people are going to invest 100% of theirs.”
I don’t want to make that mistake.
At my current net worth, 1-2% is just a couple thousand dollars. Would I lose sleep if a $5,000 bitcoin investment went to zero?
Not really. In fact, I don’t think it’d impact my current or future plans much at all.
Would I feel really bummed if I missed out on another lost million dollar opportunity, in the event the coin increased 100-fold again?
Yes. Very much so.
When the downside is a 1-2% loss, and the upside is potentially massive gains, the next logical question is what’s the probability? Or even, what’s the likelihood that bitcoin is worth the same or more in the future than it is today?
Personally, my belief is that there’s a greater than 50% chance that bitcoin is worth more in the future than it is today. In which case, the expected return is skewed far higher than the risk.
This means that logically and mathematically, I feel I have to invest a very small portion of my net worth in the asset. Both as a speculative play and as a hedge against catastrophic events.
So, that’s what I’m doing…
But what do I know? I’m just a guy who already lost out on a million dollar investment opportunity! 🙂
Resources from this article:
- Kraken.com is my favorite way to buy bitcoin.
- Ledger and Trezor are the best offline bitcoin wallets right now, in my opinion.