The Ultimate Step-by-Step Guide For Investing In Bitcoin and Cryptocurrencies
If you have landed on this page, the chances are that you have already heard about the rise of cryptocurrencies. In truth, they are one of the hottest online investment assets available today, offering some of the best possible returns, both short and long term. Cryptocurrency advocates believe there will come a time in our world when these digital assets will replace fiat currencies such as GBP, USD and EUR to create a free, decentralised digital economy.
If you are thinking of incorporating cryptocurrencies as part of your online investment portfolio, you should be prepared for a white-knuckle ride of emotions. It is an asset class that’s not for the faint-hearted. Nevertheless, although they are considered highly volatile assets, they can deliver whopping returns on investment. It is not unheard of for traders to reap the rewards of 3-400% ROI within a few days.
A lot of it depends on knowing the right crypto coins to invest in and the best places to do so. That’s where we come in…
Imagine, taking your hard earned money and putting it in digital assets with no real intrinsic value. You would have to be mad. But mad or not, you would be in good company. Every day, people collectively take millions and invest in cryptocurrency. This is reflected in the total market cap, which continues to fluctuate in a high-volatile market.
Bitcoin is well and truly in the public sphere. The average person you speak to on the street has never heard of an altcoin, and I would be more surprised if they are aware of the long-term potential of the blockchain. Knowing about cryptocurrencies this early puts you at a massive advantage. Buying Ethereum, IOTA, Ripple, Power Ledger, or Civic now, is as good, if not better, an opportunity as buying Bitcoin in 2011 – 2013. But in a bear market with bargain prices, maybe Bitcoin now is a great opportunity.
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!
How to get started with cryptocurrencies by investing online
There are two primary methods for investing in cryptocurrencies online:
Crypto exchanges are becoming the leading marketplace for the buying and selling of digital assets. Once transactions have been made by individual investors, each acquisition is then registered and stored via the appropriate blockchain network. Some cryptocurrency exchanges also have their own dedicated crypto wallets where you can store the assets you buy on the platform.
As these crypto exchanges have steadily grown in popularity, the variety of trading pairs available has also expanded over time. A trading pair is the price of two assets in relation to one another e.g. BTC/USD (Bitcoin/US Dollar). Trading pairs exist between cryptocurrencies and fiat currencies, as well as crypto/crypto trading pairs e.g. BTC/ETH (Bitcoin/Ethereum).
The second option for cryptocurrency investors is to buy and sell digital assets using contracts for difference (CFD) brokers. CFD trading is a highly leveraged, potentially lucrative trading product. CFDs allow investors to speculate on the price movements of a digital asset such as Bitcoin, instead of physically owning and storing BTC. CFD traders never own the underlying asset and they aren’t directly trading the asset in question; they are merely speculating on whether its market value will rise or fall over time.
It’s important to note that although CFD trading can be highly profitable, users can also stand to lose more than their initial capital. It’s therefore vital to trade cryptocurrency CFDs with a well-regulated, responsible broker.
Investing In Cryptocurrency is Investing in the Blockchain
The cryptocurrency markets might support and breath lives into the blockchain but they also distract from just how monumental this technology is. Assign a fixed amount of gas to ensure determinist contracts don’t get stuck in an infinite loop, doesn’t have the same ring to it as buy Bitcoin and hold. The Bitcoin Handbook is a great resource for beginners or experienced investors.
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.
Blockchain: tech revolution
The blockchain is, in fact, changing the status quo in the tech industry. Big companies like IBM, MasterCard, Microsoft and Facebook are developing decentralised solutions based on blockchain technology. This disruptive solution is not only Bitcoin’s biggest perk but is available for altcoins and, basically, any system adaptable to decentralisation. Learn more in our Blockchain Guide.
We have built an entire subculture around the money and narrowed people’s perspective of the blockchain. There are hundreds, thousands, and one-day millions of cryptocurrencies each with their own unique use case for the blockchain.
But hey you just want to make money and invest in cryptocurrencies why should you care about the blockchain?
You need to understand how it all fits together. I will meet the ignorant investor halfway. It is Fomo (fear of missing out) and hype that pumps coins, but people hold and trust the coins that they see value in.
The value is created by the relationship between technology, the people, and the institutions. What does this crypto do? how is it used? who is going to use it?
Do your own research!
There are all kinds of determinants that influence the value of cryptocurrencies. This is why you need to extensively research every coin that you invest in. Bitcoin’s latest explosion seems to be a result of mainstream adoption and the pending release of the Lightning network. If you are actively learning and researching crypto, you would have had a greater chance of buying Bitcoins before the breakout.
Innovation or News about Innovation Increases the Price of Cryptocurrency
A major shortcoming of Bitcoin’s blockchain is the time it takes to complete transfers. The blockchain is very congested and this inhibits its adoption because people are waiting hours and sometimes days to receive their coins.
Imagine all of the Bitcoins that weren’t bought, all the trades that were never sent, and all the opportunities missed because of these slow transaction time. It isn’t that big a jump to say improving the technology will increase that value. Something you need to understand is that the protocol hasn’t been released yet.
So why did the price increase so much?
It is an unspoken mutual agreement and the general consensus among traders that everyone will buy cryptocurrency and hold before a big release that pushes the price up. People bought because they knew that other people knew other people were going to buy.
Put saddles on those sheep and ride them to greener pastures.
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 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 controls 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 on the purchase at a certain price. This results in 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 the 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, most cryptocurrency exchanges are not regulated. 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 one 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.
Investing In Bitcoin sounds Interesting, but What about the altcoins?
Any other crypto coin different from bitcoin is called an altcoin. Newer altcoins are a high-risk investment, but they also have a stronger possibility of surging significantly. Some people like to invest in well-established altcoins like Ethereum or Ripple while some people like smaller ones like IOTA, 0x or Basic Attention Token. The fearless investors go ahead and buy cryptocurrencies before they come to the market, during the initial coin offering (ICO). That being said, pick your own strategy, make proper research and manage your risk accordingly.
Mining Scarcity and Circulation
Everything I have spoken about so far focuses on what affects the demand and what makes traders buy, but traders are only half of the equation.
The price of a cryptocurrency, is also affected by the supply?
Miners, mine blocks, and they are rewarded with coins. The amount of computing power and the hashrate determine how difficult it is to mine a block.
What is a block on the Bitcoin blockchain
- New blocks are added to the ledger by miners
- A block is part of the chain (block-chain)
- blocks contain the transactions, and they update the ledger according to computational difficulty
- Miners solve blocks via a proof of work protocol
- Blocks are getting harder to mine
It is getting exponentially harder to mine Bitcoin and create new blocks. Has it clicked yet? As Bitcoin is more widely adopted and demand increases, supply will gradually decrease. That’s the perfect storm for bullish behaviour, and it is also how the thing that doesn’t really exist creates scarcity and gives itself value.
How to Invest in Bitcoin and other Cryptocurrencies?
To invest in Cryptocurrency you first need a place to buy cryptocurrency. There are a number of ways to do this. Cryptocurrency exchanges like Etoro, Bittrex, LocalBitcoins, and Coinbase are popular exchanges where you can buy cryptocurrencies and cash out into local currency.
Another great option for fiat purchases is Luno.com an emerging Coinbase alternative serving important regions in Europe, Asia, and Africa. Luno sells Bitcoin and Ethereum. They have a great web platform and mobile app, both with full functionality. Even in nations like the US where the service is not available, the Luno wallet is still offered. For more details, read here our guide or learn from Luno.com.
Depending on the exchange and the rules and regulations for whatever country you live in, you might need to verify your identity before you can trade on an exchange. This can take anywhere between a few hours to a couple of days. Read and understands the verification process before committing to an exchange. Some will ask you to upload ID, like a drivers license, and others will even have their customer support call you before removing your transaction limits.
Another important consideration when buying cryptocurrency is if the cryptocurrency exchange will accept your prefered payment method. It is notoriously easy to initiate a chargeback for credit card payments, so exchanges are reluctant to let you buy cryptocurrency with them.
If you are using an obscure payment method, you always have the option of local trades or Localbitcoins.com. You can buy cryptocurrency on the exchange platform from other traders, and this means you can buy Bitcoins with everything from direct bank deposits to Amazon gift vouchers.
Quick Example of investing in Bitcoin using eToro
Coinlist’s preferred method of investing in Bitcoin and cryptocurrencies is to use derivatives. You can use options, futures contracts or underlying assets. The big advantage of eToro underlying assets is that you can convert this “contacts” to real crypto coins with the new eToro Wallet feature. If you want to invest in crypto with eToro, 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.
How To Hold Cryptocurrencies in a Wallet
Once you have found an exchange, and you all verified, you need a wallet to store the coins. A wallet is a piece of software used to send and receive transactions. You have a wallet address and this is what you give to the exchange when you want to send your coins. Likewise, you need someone else’s wallet address if you want to send them coins.
A lot of exchanges have hot wallets on the actual site. You can keep your coins in these wallets, and if you’re day trading and want to quickly convert altcoins to follow the pumps it’s a good way to go. The disadvantage is that exchanges are targeted by hackers and your exchange wallet is always connected to the internet.
Then you have exchanges like Coinspot that has wallets on the exchange, but they store coins offline in their own cold wallets.
How to Build a Profitable Cryptocurrency Portfolio
Maybe you have just started trading, or you might be slowly building up your portfolio putting aside a little from your weekly payslip.
I am going to give you some helpful tips to build what I think is a solid portfolio. But first, a disclaimer: I am not a licensed financial advisor. The views expressed here are my own. I don’t have a single trading qualification or an academic background in finance, investing, or cryptography.
Yes, I do have a snazzy portfolio and some real-world experience. I wouldn’t have written this if I didn’t think it could help someone.
Why You Should Backup Your Portfolio and Invest in Bitcoin or Ethereum – Aim for 40% – 50%
Satoshi Pie Portfolio Example
Highly regarded Redditor’s Portfolio
The Token Fund’s Investment Strategy
What Do all of These Portfolios Have in Common?
They all have between 29% – 50% Bitcoin, and with the way the market is at the moment, this just makes sense. I highly recommend that you do the same.
You might think IOTA is a good cryptocurrency buy. Go for it Invest in all the ICOs and altcoins that you want but Bitcoin and Ethereum are the Gold and Oil of the crypto-world.
What Other Cryptocurrencies Should You Invest In
Let’s bring that chart back for a second.
The Next most “Hodled” (held) Cryptocurrency in Your Typical Portfolio is Ethereum.
If you follow any of the expert traders on Etoro or crawl Reddit for hour after hour, you will learn that ether is also a very stable coin. Everyone who is anyone predicts that this coin is going places, and while it isn’t as mainstream as Bitcoin, it has phenomenal technology behind it.
Why You Should Invest in Ethereum?
Two reasons, smart contracts and the ERC20 tokens.
The goal of Ethereum was to build decentralised applications on a blockchain. It’s a pretty complicated idea, and it is every trader’s decision to know as much or as little about it as they want, but when Vitalik Buterin, AKA Crypto Jesus, originally proposed the idea of Ethereum in 2013, he started something.
Bitcoin will make you rich, but it isn’t going to change the world; Ethereum just might.
Ethereum has two types of accounts. The first is just normal accounts held by people. They have an address and can send and accept ether.
The second type of account contains a contract. It still has an address, and Ethereum treats it the same as the first type of account, but it contains code. An Ethereum style if/else statement that can send ethers to other address and perform computer-like functions. The real potential of the blockchain is decentralised computing and information, and Ethereum helped humanity realise that goal.
What about Ethereum’s ERC20 Tokens?
The ERC20 tokens power DApps (decentralized apps) on the Ethereum blockchain. Tokens like Golem and Power Ledger use these tokens for all kinds of applications. It is a formalized standard that governs how applications are launched on the blockchain, and they are used to do cool things like track electricity and distribute information to IoT (Internet of Things) devices.
Ethereum is The Most Functional Cryptocurrency
Ethereum processes more transactions than Bitcoin and every other digital currency combined and with an ever-increasing number of ICOs launching on the main Ethereum network thanks to their contracts and ERC20 tokens, this will probably continue to be the case. So you see, Ethereum is a pretty sound investment.
What about IOTA?
IOTA is an exciting project trying to establish itself as a transaction method between internet of things (IOTs) devices. The IOTs is a security nightmare.
Computers and networks are hacked through computers, webcams, and routers. It is an expensive problem that IOTA hopes to solve; preferably before we have smart fridges and self-driving cars.
What Makes IOTA Unique is Its Use of DAG technology or as IOTA likes to call it Tangle.
Tangle is like the blockchains distance cousin. It hasn’t been proven, but there is an impressive team working on it, and they are making some impressive claims.
It is marketed as the third generation cryptocurrency, but what is tangle?
Tangle is similar to the blockchain but there are no miners, fees, or blocks. It does use cryptography, distributed consensus for proof of work, and it’s still a decentralized network of nodes.
The tangle is correctly called a DAG or Directed Acyclic Graph. If it does what they claim, then it basically solves the three biggest limitations of blockchain technology. It’s like hitting two birds with a network of millions of decentralized nodes (cringe)
Blockchains three biggest problems according to IOTA
- Transaction Times
- Fees and Microtransactions
Top 15 Cryptocurrencies to Invest in
- Power Ledger
In my opinion, these are all a good cryptocurrency buy. If you are investing in cryptocurrencies, remember that ICOs and altcoins like the ones mentioned about can carry more risk, but higher risk can lead to a higher return. Getting in on that untested coin is a vital part of cryptocurrency investing, but if you are going to adopt high-risk strategies and invest in cryptocurrency before the masses arrive, you must be strategic with your cryptocurrency buy.
My Two Philosophies to Not Lose all Your Money When Investing in Cryptocurrencies
1)Buy Cryptocurrencies low and sell them high
Warren Buffett famously said that “The stock market is a device for transferring money from the impatient to the patient.” The same is true with crypto.
When you first start trading you’re in the honeymoon period. It is only natural to take your money out of this and put it into that and it’s gone. Day trading is great for short term gains, but you need to really know what you are doing.
If you want to make money with cryptocurrencies, you need to give it time. Invest in coins with good teams, solid technology, and a decent amount of hype behind them and just walk away. Store them on a paper wallet, put that in a briefcase, and bury that in the garden. Pablo Escobar style.
The total market cap of crypto is exploding and everything good is going up. If you are patient, you will be rewarded.
2) Learn Everything You Can
Sir Issac Newton said that “If I have seen further it is by standing on the shoulders of giants.” Follow influencers on Twitter, chase the hype on Reddit, read everything that you can get your hands on, and tap into crypto’s main vain.
Etoro is a great resource and social exchange for following expert traders. But seriously who knows where you crypto journey will lead. You might launch your own ICO, one day, or get the latest ASICs rig and generate passive income while you sleep. We live in fantastic times, and all the information you need is literally at your fingertips.
Some Final Thoughts on Cryptocurrency investing
So you have decided to invest cryptocurrency? You have read our cryptocurrency buy guides, and it’s time to take the plunge. That first time you crypto invest you are now part of something bigger than yourself. You will inevitably have to convince all your friends to buy cryptocurrency too, but I promise you it is intoxicating. It doesn’t matter if you choose to invest cryptocurrency like it’s a retirement fund, or you want to day trade, it will be many a month before the first thing you do in the morning is something other than check the charts to see where the market is at. Remember, pay attention to the charts, get involved in the community. From the moment you learn how to buy cryptocurrency until you sell them all and move to the moon, you never stop learning.
Investing online FAQs
Are cryptocurrency investments low-risk?
It would be wrong to suggest investing online in cryptocurrencies was a low-risk strategy. These digital assets are at the forefront of a new fintech revolution, with the potential to create a truly digital economy. However, with revolution comes uncertainty, and the price of Bitcoin and other leading crypto coins fluctuates wildly at times due to their unprecedented nature.
Is it important to have an exit strategy when investing online in cryptos?
There will definitely be crypto tokens that you won’t want to store forever. In fact, some you might only hold onto for a matter of hours due to their volatility. It is definitely a good plan when investing online to set a plan for taking profits or implementing stop losses if the price of your asset goes against you.
What does trading leverage mean when investing online in cryptocurrency?
Some cryptocurrency exchanges and brokers will allow crypto traders leverage or a margin. Put simply, crypto investors can leverage their existing cryptocurrency or fiat currency by borrowing funds to enhance their investment power. For instance, if you invest £25 and leverage 5:1 to purchase £100 worth of Ethereum (ETH), your exchange will insist that you pay them back £100 plus transaction fees. Leverage gives investors a chance to maximise profits, but it can also magnify losses too.
Why are some cryptocurrencies labelled a ‘bubble’?
In recent times, financial experts – some of which predicted previous global financial crises – have likened Bitcoin and other leading cryptocurrencies to bubbles. In the context of the global economy, a bubble is an asset where its price far exceeds its intrinsic value. Experts believe the likes of Bitcoin are bubbles simply because the basis of its value is unclear, aside from supply and demand. The value of cryptocurrencies in general is hard to determine because they are so unprecedented. That’s what makes them such volatile yet exciting assets for investing online.
How many cryptocurrencies exist to invest in online?
Every day it seems like a new digital asset is unleashed to the world. At the time of writing, there are more than 1,600 active cryptocurrencies available to invest in online. Bitcoin is the largest by market capitalisation, followed by Ethereum, Ripple and Bitcoin Cash.
Is there any way to spot a good cryptocurrency to invest in?
The best way to spot a good cryptocurrency buy is to research things like the team behind it, the use case, and find out if they have a working product. I often invest in cryptocurrencies that don’t have a working product yet, but I want to see a prototype or at the very least just a good amount of progress towards one.
How to approach cryptocurrency investing?
approach cryptocurrency investing like you would invest in stocks or bonds. Buying cryptocurrency is more exciting, and a good cryptocurrency buy can appreciate in value faster than your average share, but it is still going to take time. One of the most common mistakes made by new traders when they first start to invest in cryptocurrency is that they are too flaky. When buying cryptocurrency you have to commit to that coin. If you always pull your money out and put it in the next pump you will lose money to transaction fees, and this is makes buying cryptocurrency very risky.
What should I know before investing in bitcoin and altcoins?
Everything you possibly can. If your mentality is quick ‘invest cryptocurrency now,’ you haven’t taken the time to learn about the market. You need to know what cryptocurrencies to watch, and the best cryptocurrencies to invest in. Making pablum statements like buy low and sell high is all good and well but if you don’t understand market cap and what gives cryptocurrencies price, you will struggle to come to meaningful conclusions about the market.
What are the best cryptocurrencies to invest in?
The cryptocurrencies to invest in are those with low cryptocurrencies prices that don’t represent their worth. Take Omisego (OMG) for example, it is one of the best cryptocurrencies to watch and a good cryptocurrency to buy because it has an impressive use case, and over 50,000 merchants already planning to join the platform as soon as the user’s side of the application is released in Q1 of 2018.