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Home>Daily Capital>Investing & Markets>How to Invest in Bitcoin

How to Invest in Bitcoin

Created in 2009, Bitcoin is the most popular and valuable digital currency on the market. Recent data shows that about 46 million Americans — or 17% of the adult population — have Bitcoin in their investment portfolio. And a far greater percentage want to learn more about it, including how to invest in cryptocurrency.

Before you invest in Bitcoin, or any investment for that matter, it’s important to understand what you’re getting yourself into. In this guide, you’ll learn the basics of Bitcoin, how to buy Bitcoin, and whether it’s the right choice for you.

Personal Capital’s Crypto Tracker can help you track the performance of your Bitcoin and other digital assets.

What to Know Before Investing

As with any investment strategy, it’s important to do your research and have a plan before you get started. Here are a few things to consider before you invest in Bitcoin.

How Bitcoin Works

Bitcoin is a digital asset that runs on blockchain technology. It uses a decentralized, peer-to-peer network to facilitate instant trades with no middlemen and minimal fees. Regardless of the common term cryptocurrency, the federal government classifies it as a commodity.

Bitcoin is becoming increasingly popular as a payment method. Hundreds of online stores accept Bitcoin as a form of payment. However, in most cases, investors use Bitcoin as a way to grow wealth in the same way they might with stocks.

Read More: Understanding Bitcoin Taxes: What You Need to Know Before Investing

Bitcoin in Your Portfolio

Before you start investing in Bitcoin, it’s important to consider what role you want it to play in your overall portfolio. Diversification is a core principle of investing — the more diversified you are, the more you’re able to spread out your risk. Just as you wouldn’t invest 100% of your money into a single stock, you also probably wouldn’t want to invest 100% of your money into Bitcoin. Instead, as with other speculative investments, limit your investment to an amount you can afford to lose.

What You’ll Need to Invest

Investing in Bitcoin is fairly simple, and you’ll only need a few things. First, you’ll need to provide personal identification when you open your account on a trading platform. You’ll also need a payment method, which could be a bank account, credit card, or debit card — though keep in mind there may be a fee for certain payment methods.

You’ll also need a place to securely store the private keys needed to access your Bitcoin holdings — this is commonly known as a crypto wallet. Your wallet can be online in the form of an app or the exchange where you buy Bitcoin. Or you can use a hardware wallet, known as a cold wallet, which is more secure.

How to Invest in Bitcoin

Ready to start investing in Bitcoin? Here’s your step-by-step guide to buy Bitcoin and craft your investment strategy.

Step 1: Sign Up for a Bitcoin Exchange

When it comes to purchasing stocks, bonds, and other traditional investments, you must sign up with a brokerage account. Bitcoin is no different, and you’ll have to sign up for a trading platform. A few online brokerage firms like Robinhood and Webull allow you to trade Bitcoin, but there are plenty of trading platforms designed specifically for cryptocurrencies. Some options include Coinbase, Binance US, and Gemini.

Step 2: Get a Bitcoin Wallet

Before purchasing your Bitcoin, you’ll want to make sure you have a safe place to store it. One option is to hold your Bitcoin on the exchange or or mobile app where you buy it. You could also use a hardware wallet, which provides an added layer of security.

Step 3: Place Your Bitcoin Order

Once you’ve signed up for a trading platform, connected your payment method, and set up your cryptocurrency wallet, it’s time to place your order. You don’t need to buy an entire Bitcoin; some exchanges or apps allow you to buy as little as one dollar worth.

Keep in mind that there are ways to purchase Bitcoin without buying it directly.Some publicly traded stocks have indirect exposure to Bitcoin, such as Microstrategy or Bitcoin mining companies that run computer centers to earn Bitcoin. Another option is buying a fund such as GBTC, BTFD, or BITO, which offers exposure to Bitcoin’s price movement without actually owning the bitcoins themselves. Finally, you could invest in an actively managed stock fund that includes blockchain companies, such as BLOK, BKCH, or VBB.

Step 4: Devise Your Bitcoin Strategy

It’s important to have a strategy for your investments so you know how to respond to changes in the market. In general, there are three strategies you might consider:

  • Buy and “Hodl”: Hodl is an intentionally misspelled version of the word “hold.” Hodl is used to describe a cryptocurrency strategy of buying and holding an investment for the long term. Investors who are particularly bullish on Bitcoin might use a buy-and-hold strategy with the belief that it will gain a lot of value in the future.
  • Long position: A long position is when you invest with the belief the price will increase. If you take a long position on Bitcoin, you might hang onto it until it experiences a price surge and then sell at least some of your holdings.

Is Bitcoin a Good Investment?

You might be asking yourself whether Bitcoin is really a good investment and worth adding to your portfolio. Ultimately, no one can answer that question for you. But we can share a few pros and cons to consider as you make your own decision.

Before investing in Bitcoin or any other asset, it’s critical that you understand what risks you’re signing up for. Because the fact is that every investment comes with a level of risk. There are a few particular risks to pay attention to:

  • Volatility: It’s no secret that Bitcoin is a volatile investment. Bitcoin has lost half its value or more in a matter of weeks or months many times in its history.
  • Lack of insurance: Traditional investments are insured by the Securities Investor Protection Corporation (SIPC), meaning investors are made whole if the brokerage firm goes under. However, Bitcoin and other cryptocurrencies don’t have the same protection currently.
  • Hacking: Just like any other online account, your exchange or app credentials are vulnerable to hacking, so it’s important to practice good security habits like using a password manager and two-factor authentication.  And because Bitcoin transactions are typically irreversible, there’s little recourse if your exchange account is hacked and Bitcoin transferred elsewhere. Two ways to mitigate this risk are to use a secure internet connection and store your Bitcoin on a hardware wallet instead of on an exchange.
  • Debt: Most trading platforms allow you to buy cryptocurrency with a credit card. While this might seem like a good idea if you feel confident that your Bitcoin portfolio will earn money, it’s a dangerous game to play. Credit cards are a form of high-interest debt, and it’s not advisable to take on that added risk for a volatile investment (or any investment for that matter).

That’s not to say that Bitcoin has done poorly as an investment over time, but it all depends on when it was purchased. Those who purchased Bitcoin in January of 2017 or earlier would have seen major gains up until May of 2022, but those who purchased Bitcoin in March of 2021 would have seen losses over the same period. Just like with any investment, hoping for quick gains may not be the best strategy.

Ultimately, Bitcoin is a speculative investment, so you should proceed with caution and be prepared for volatility. If you invest with money you can afford to lose, the volatility shouldn’t cause any worries.

Next Steps for You

Bitcoin has only been around since 2009, but it’s become increasingly popular, making its way into more and more investors’ portfolios. It’s important to know exactly what you’re getting yourself into before buying Bitcoin, so before buying you should do your research around how it works and how to secure it properly. Just as important is understanding your investment performance.

Want to learn more about Bitcoin and other digital assets? Check out our free guide to crypto investing.

Get Your Guide to Cryptocurrency Investing

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

JJ Lester, CFP® is a financial advisor at Personal Capital. Prior to his work at Personal Capital, JJ served both as an estate specialist at Oppenheimer Funds and financial advisor through LPL Financial. JJ holds an M.S. in Management from The American College of Financial Services and a B.A. in Psychology from the University of Colorado, Boulder.
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