How to invest in Bitcoin
There is arguably no one who knows an investment opportunity better than Richard Branson. The serial entrepreneur has made a name for himself in spotting gaps in the market and understanding how to profit from them.
He is quoted as saying “Blockchain is an economic revolution” and highlights the huge industry around Bitcoin especially. This acknowledgement from business leaders such as Branson shows you the reach Bitcoin has had and what a potential it now has, not only as a speculation asset but also as an investment asset.
Why invest in Bitcoin?
Why is Bitcoin now being considered as a viable investment? When you invest in any asset, you are speculating that the price will rise over time. You must feel that there is inherent value in the asset you have invested in.
For investment trusts and other big scale investors, they must see value in Bitcoin. And they are correct in this view. Bitcoin is the first cryptocurrency that was developed, it was the pioneer of the blockchain. The blockchain is the inherent value that Bitcoin has, being such an innovative idea has sparked a shift in thinking within the financial sector. This is a sector that has been stuck doing traditional procedures for years and is stubborn to change.
Bitcoin joined the party and has rocked the boat considerably. There are high flying CEOs coming out slamming Bitcoin and there are others coming out with nothing but praise.
JP Morgan CEO, Jamie Dimon, claims Bitcoin is a ‘fraud’ that will eventually blow up however ex-head of AOL IM, Chamath Palihapitiya, says “it’s a huge deal, a huge huge huge deal”. And actually continues to say “I own Bitcoin in my hedge fund, I own Bitcoin in my fund, I own Bitcoin in my private account”.
And in fact, despite Jamie Dimons claims, JP Morgan actually helps its clients to buy and invest in Bitcoin. Bitcoin investment trusts are becoming readily available for clients and people are now getting exposure to Bitcoin through Bitcoin investment trust stock!
Bitcoin price growth
Bitcoin has seen meteoric growth in 2017, outperforming all traditional investment vehicles. With an increase of over 700% in 2017 alone, the trajectory of this market does not look like it plans to slow any time soon.
One of the biggest pieces of advice beginners are always told is, ‘the trend is your friend’. This means that you should not try to be the cleverest person out there and try to pick a top or bottom of a market. Go with the crowd, the crowd ultimately are the volume driving the market, so why not follow?
Bitcoin has basically been going up its whole life. Like every market, there were periods of stagnation, however the overwhelming direction has been up. Trying to be ‘the guy’ that picks the top will cost you in the long run.
Invest in BTC Vs Trade BTC
The main difference between investing and trading is the time scale.
Invest in Bitcoin
As an investor you are looking to the longer term. Often this is referred to as longer than 6 months however if you were to talk to big time investors like George Soros or Warren Buffett, they would say long term is 10 years plus. Warren Buffett is famed for saying “only buy something that you’d be perfectly happy to hold if the market shuts down in 10 years”.
This is relevant to Bitcoin because should the exchanges shut down, the currency can still be used to purchase goods and services. Not only that but the technology of the blockchain is set to stay for good.
Trading anything refers to someone who is trying to take advantage of a price fluctuation in a market. The direction does not matter, simply that they can profit in the short term is the aim.
Trades can last for seconds or months, the longer you hold onto it the more it will turn into an investment rather than just speculation. Trading can be very lucrative, with professional traders looking at making 10% a month, however this does require them to be at a computer screen for the majority of the time. Compared to an investor who can simply buy the asset and has as much free time as they want. There are then compromises for those who want to profit from both.
Providers like eToro offer copy trading, where you can copy those professional traders, whilst at the same time investing in cryptofunds, which will help you diversify your cryptocurrency portfolio.
Where to invest in Bitcoin?
Investing in Bitcoin is like investing in anything, there are multiple ways you can profit from the growth of this cryptocurrency. You can invest in the actual cryptocurrency itself, you can buy stock in something that has exposure to Bitcoin, you can derivatives of the cryptocurrency itself. These options are fairly common across all assets, which one suits your investment portfolio will depend on your requirements.
Invest and own Bitcoin
You can own Bitcoin directly. Owning the asset requires you to open a wallet, which can be complex although there are now services out there that can talk you through the whole process
Exchanges are the most common way of buying Bitcoin directly and there are two types of exchange; Centralised exchanges (CEX) and Decentralised exchanges (DEX).
- Centralised exchanges have a central authority that control the exchange, making sure transactions are executed as per the order.
- Decentralised rarer because they simply match a buyer to a seller and allow the two parties to decide on a price.
This type of investment is not regulated, thus does open you up to counterparty risk. Should anything happen to your wallet or password, there is no central organisation holding the exchanges or wallet providers to account, so you can lose your entire cryptocurrency portfolio.
Invest in Cryptocurrency funds
Cryptocurrency funds or Bitcoin investment trusts are modelled in the same way as mutual funds or exchange traded funds (ETFs).
You can deposit your cryptocurrency into an account that is managed by an experienced investment manager or team. They can, on your behalf, trade your cryptocurrency. They will take a commission on profits and likely charge you a fee. This option is often only used by those with significant cryptocurrency portfolios because the fees would wipe out a large portion of the profit for smaller accounts holders.
You can also buy shares in companies that have exposure to cryptocurrencies. This company may well be an investment firm who actively trade in Bitcoin or other cryptocurrencies.
Exposure to Bitcoin essentially means that should the price of Bitcoin move, your investment portfolio is affected, either negatively or positively.
Invest in Bitcoin CFDs and other derivatives
Investing in Bitcoin derivatives is a form of investing many people use. It entails buying some sort of contract that agrees the purchase at a certain price. This results you not actually owning the underlying asset or underlying cryptocurrency. Bitcoin CFDs, Bitcoin Contracts for Difference, can be bought and profit can be made on the fluctuation of cryptocurrency.
Advantages to buying a Bitcoin CFD
- Leverage – You can use leverage provided by the broker you invest with. This means that you do not need to front the whole position size. When buying Bitcoin directly you must put all the money up, when investing in Bitcoin CFDs, you only need to put a fraction down. The broker will compensate the rest depending on the leverage levels you agree.
- Regulation – As highlighted earlier, cryptocurrency exchanges are not regulated and so do not fall under any central bodies remit or authority. This automatically means your investment has other risk elements to factor in before that of price fluctuations.
- Higher return potential – If you own Bitcoin directly and it doubles in value in on month, your investment will double. If you invest through CFDs and you are leveraged 2:1, your investment can quadruple. Furthermore, caution must be advised, with higher returns comes higher risk. You can lose your investment faster.
- Lower fees – Cryptocurrency funds can be very expensive, charging high percentages of your return, whilst cryptocurrency exchanges can charge what they like in transaction fees. Buying through a broker is considerably cheaper, with brokers like eToro only charging a spread and no additional fees.
How to invest in Bitcoin
Coinlists preferred method of investing in Bitcoin is to use derivatives. You can use options, futures contracts but we advise CFDs for beginners. Once of the main reason we prefer CFDs is because the start-up process is very simple and easy, which makes life a lot easier for newbies to invest in Bitcoin.
Investing in Bitcoin is different to trading Bitcoin. Trading Bitcoin means you are constantly in and out of the market. Investing in Bitcoin means you are in it for the long haul. You are advised to deposit and forget.
The process is as follow:
- Open a brokerage account.
- Fund with the amount you intend to invest in Bitcoin.
- Identify a level you are not willing to let the market get to as a point to get out of the market should any disasters happen.
- Open a trade proportionate to your account size. Place a stop loss at that point you identified in the point above.
- Leave alone based on your investment plan. An investment plan will be a pre-determined period of time you intend to hold for or a pre-determined level you expect the market to get to, for instance $20,000 in Bitcoins case.
Best Cryptocurrency to invest in 2020
We have highlighted Bitcoin as a potential investment opportunity but there are lots of other cryptocurrencies on the market that offer great growth potential. Investing in Ethereum, investing in Ripple, investing in Bitcoin Cash, the list is endless of potential cryptocurrencies.
Why diversify your cryptocurrency portfolio?
Diversifying any portfolio is imperative. It spreads your risk across various markets and means that should one run into a problem and its price decreases significantly then your other assets can cover its losses.
You should think about your investment portfolio as 100%. What percentage are you going to invest in which cryptocurrency? An example might be:
Bitcoin has the most market share and is actively being used as a currency, so it is advisable to have a high portion of your portfolio in Bitcoin. If only to invest quickly into another cryptocurrency you see as a potential investment opportunity.
So, what other Cryptocurrency should you invest in?
Investing in Ethereum
Ethereum is currently sitting second in the cryptocurrency market cap table and has all the attributes to pile the pressure on Bitcoin as the leader of the gang.
The Ethereum team have developed a blockchain that can be used by other cryptocurrencies. This is a highly attractive feature because it means those who want to develop their own cryptocurrency do not have to spend the time designing their own blockchain but can use the Ethereum platform.
Currently we are seeing conveyor belt of ICOs cropping up. The majority of these are now using Ethereum’s blockchain to develop their technology on.
The more companies that do this, the more that will rely of Ethereum and ultimately increase the value of Ethereum. Investing in Ethereum should certainly be on your radar if it isn’t already.