As Bitcoin gains popularity as an alternate asset class, there are several ways how to invest in Bitcoin, but as an investor, it is important to note the pros and cons of each, and also learn to protect yourself. This should not be construed as an investment advice in Bitcoin. The post will just help you how to invest in Bitcoin if you’ve already decided to invest in it.
Why Bitcoin?
I assume you’ve already decided to invest in Bitcoin based on your research. Bitcoin is a lot of things to a lot of people – it is a currency that can be used to pay merchants, online and offline, and reduce transaction times to minutes instead of days with credit cards. Bitcoin is an asset class for investors looking to diversify their holdings. Bitcoin is ‘digital gold’ with predictable supply programmatically controlled, and can be a store of value during times of high inflation (think countries like Argentina or Venezuela). Bitcoin is a protocol for value transfer over the internet and enable new innovations in the ‘internet of things’ space and micropayments.
It is important to note that Bitcoin can be all of the things above, and that’s what it derives its value from. As an investor, you perhaps don’t need to know the intricate details of everything Bitcoin does, but it definitely helps to know, at a high level, why Bitcoin is valuable at all in the first place (this is, after all, the first step in the investment process).
Bitcoin as an Asset Class
Before learning how to invest in Bitcoin, it is important to formulate how you view your investment in Bitcoin. Remember that Bitcoin has historically been extremely volatile with wild price swings. If you can’t handle this, it is best to steer away from Bitcoin as an asset class. Also, keep in mind the investment time-frame that you’re looking at. Is it 1 year or 30 years? A lot of things can happen in long time-frames, especially in fast-changing technology fields.
It is also good to learn about the supply-side of Bitcoin. This will help you know the current inflation rate around Bitcoin. Even though ultimately only 21 million Bitcoins will ever be in existence, they are not all available today. They are created through a mining process (which is too big a topic to explain here), and the current rate is 25 Bitcoins about every 10 minutes. This corresponds to an inflation rate of around 9% per annum.
This rate is going to be cut in half sometime in the middle of 2016. Here’s a countdown, which will give you an approximate date. Unlike most other asset classes, Bitcoin’s inflation is known in advance, and there is no way to increase its supply outside of this schedule.
How to Invest in Bitcoin
The best way to invest in Bitcoin is, in my view, to directly buy Bitcoin. There are many well-established companies today that will sell you Bitcoin for dollars or Euros. If you’re in a country serviced by Coinbase (like United States, United Kingdom, most of Eurozone countries, Singapore), it’s easiest to buy from there. With Coinbase, you can buy Bitcoin directly from your bank account and store it in their online wallet, or have additional security in their vault. There are other options as well, depending on the country you’re in. See the page on Buy Bitcoin to find more options.
The next step is to determine if you want to hold your Bitcoins online with a provider like Coinbase or transfer them to your own wallet. The advantage of holding it in your own wallet is that you don’t have to worry about a company freezing your funds, or going out of business or anything else – you are in complete control of your Bitcoin and can spend them as you see fit. However, on the downside, it is very important to take good security precautions if you hold your own Bitcoins, because if you are careless and get hacked, you will lose all your Bitcoins with no protection or resources to help you regain your funds. If you plan to invest a lot of money in Bitcoins, consider buying a Bitcoin hardware wallet like Trezor or Ledger or KeepKey.
Another way to gain exposure to Bitcoin is through funds. This is not a very developed market yet, and therefore very illiquid. However, one big advantage is that you can hold it in such accounts as your IRA or retirement account, thus gaining a small exposure to Bitcoin for retirement accounts. GBTC is the only one available today in the US. The Winklevoss brothers are working towards a Bitcoin ETF but that’s not live yet.
Finally, remember never to invest more than you can afford to lose in a volatile, high-risk investment like Bitcoin.
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