Before you even consider bitcoin investment, whether by buying on an exchange or through mining, you should know the basics.
What Are Bitcoins?
Bitcoin is a configuration of cryptocurrency that can be transferred using decentralized peer-to-peer networks.
Bitcoins exploded in popularity as a medium of exchange after a significant rise in value in late 2017, with a single coin worth over $13,000 at that time. This newfound recognition left many confused about the future of privacy policies, banking regulations, and even innovation in technology. Today some companies accept payment via bitcoin. However, it is illegal to buy and sell them in some countries.
The First Cryptocurrency
No one knows who created bitcoin. However, it is considered the first working cryptocurrency, with other forms referred to as “altcoins.”
Bitcoins are virtual coins, which removes the need for a bank to move and store money. Despite the lack of physical presence, bitcoins hold value, and you can trade them like silver or gold. You can use them to purchase goods and services or hold onto them, hoping their value will increase.
One Major Mistake in Bitcoin Investment
You may have heard the story of James Howells, a British IT worker who got rid of a mistake of a hard drive containing 7,500 bitcoins in 2013. At that time, a single bitcoin was worth about $130. He had hoped to trade his cryptoassets once the price increased. A single bitcoin is now worth about $10,000.
If you already hold a self-directed individual retirement account or self-directed IRA, then cryptoassets may be worth adding to your portfolio. A self-directed IRA offers greater security than a standard online wallet, and not just because you won’t lose your bitcoins by accidentally throwing them away. An additional benefit is that any assets held in your IRA are securely protected if you ever have to file for bankruptcy.
What is Cryptocurrency?
Bitcoin is a type of cryptocurrency, but what is cryptocurrency indeed? Cryptocurrencies are lines of code created by a computer that carries material worth. These lines of code are generated with high-performance computers, although that was not always the case (more on that below). Cryptocurrency or digital currency is created using mathematical calculations. It’s then policed by millions of computers that operate on the same network, called miners. Due to the digital nature of the currency, bitcoins are not physical currencies, although they can be exchanged for cash.
The Origins of the Term
“Crypto” originates from the term “cryptography,” which is the art of solving or writing codes. With cryptocurrencies, computer code is used to protect money. Think of a digital version of The Da Vinci Code. Cryptography is used to protect transactions made in digital coins. The same cryptography also controls the creation of new coins.
Governing bodies have no control over cryptocurrencies, which is what made them so famous initially.
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Most cryptocurrencies are created with a market cap in mind to ensure their production decreases over time, intending to avoid loss of value. Market cap is a measure of the value of a stock or, in this case, a digital currency. If there are 100 tokens of a coin outstanding, and they are trading at $10 a coin, the currency has a market cap of $1,000. To put that into perspective, there are about 17.8 million bitcoins in existence, and the price is around $10,000 at the time of writing. Therefore, bitcoin’s market cap is roughly $180 billion.
Alternatives to Bitcoin
Bitcoin is the standard and most well-known cryptocurrency. The creators of many other cryptocurrencies hope to follow in its success, with a countless number of alternatives now available. The next big thing may be released tomorrow, so it pays well to be informed about the other options. Bitcoin leads when it comes to several users, market cap and value, although some alternative coins are endorsed for additional features. The most popular alternative is Litecoin, which is often referred to as the silver to bitcoin’s gold. Its value per coin is around $43 to bitcoin’s $10,000.
Another option to consider is Ethereum Classic or ETC, as it is listed on many reputable exchanges. If you think bitcoin to be like a landline telephone, you can compare ETC to a smartphone. The emphasis is on doing what bitcoin can do and more. Ethereum Classic currently sits at $6 per coin. So far, no currency has removed bitcoin from its throne.
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Bitcoin Investment in the Media
The use of bitcoin can be controversial. From 2011 to 2013, the cryptocurrency gained a reputation for being the payment choice of criminals. Many criminals would buy coins in batches of millions of dollars to move money outside the eyes of law enforcement and tax collectors. This helped the value of bitcoin reach the heights it is at today.
As with any financial asset, the threat of being scammed is genuine. Investors, both new and experienced, can lose thousands of dollars without sufficient security measures in place.
Banks and law enforcement have no control over digital coin accounts. Thus, some might see them as the modern-day equivalent of gold nuggets during the Wild West era.
The Bitcoin Heist
You may see an advantage in having no regulation, but that gives you no protection. In 2014, a bitcoin heist was carried out against Mt. Gox, which was the largest bitcoin exchange at the time. Hackers stole 850,000 bitcoins (around $480 million at the time) from the exchange. The difficulty in tracking the coins led to much speculation as to who the hacker was. Many suggested it was Mt. Gox’s owner. The actual hacker was caught in 2017, thanks to an international task force. However, many feel that the initial domestic investigation, if handled more efficiently, could have resulted in a quicker resolution. There have also been multiple Ponzi schemes using bitcoins. A Ponzi scheme involves the promise of high returns for investors with minimal risk.
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Let the Bitcoin Investment Begin
How do I make them?
Now that you understand what a bitcoin is let’s explain how you can acquire some. Then you can decide whether bitcoin is your type of investment.
We know of three principal ways to acquire bitcoins:
- discover bitcoins through mining
- buy them on an exchange
- accept them for goods and services
Let’s have a closer insight into the primary methods below.
What About Bitcoin Mining?
Mining is the term used for the discovery of new coins, like mining for those gold nuggets we mentioned from the Wild West days. Mining is the process of discovering new bitcoins using computers, so put away your pickaxe. To find new bitcoins, a miner would run a program using his/her computer, which would decrypt the private key. When that program has cracked the code, the miner is gifted coins for their work. These codes are not simple and grow in complexity with each passing transaction. The current number of attempts required to crack these codes is nearly 1.8 billion. To achieve this, a miner lets their computer run continuously over at least two to three days.
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Mining Equipment is Costly
Before bitcoins became so popular, buying a standard gaming PC would provide efficient computing power for the purpose. Nowadays, specially built computers are required to make a profit with heavily invested miners running multiple set-ups at one time. The demand for the type of machines with the necessary computing power has caused an increase in value for high specification computer parts. The average cost to mine a single bitcoin is about $5,000. Buying a computer or mining rig costs around $12,000. In addition to a robust computer set-up, miners require an encrypted bitcoin wallet such as Trust and a mining program.
What if you are not a computer person, and mining appears too complicated and expensive? There’s nothing to worry about. There are other ways to obtain bitcoins if you do decide to invest in the cryptocurrency.
Buying Bitcoins on an Exchange
Like when investing in stocks, you can buy and sell bitcoins on an exchange. However, this way of acquiring them is not a risk-free business. The price of a coin, like stocks, is continuously changing. You should consider the general price movement of the coins. You must also be prepared for financial risk. If you buy with the value too high, then you may lose when you sell. Trends can be analyzed to predict price movements. This method has made people a lot of money. As stated above, each coin was worth $130 in 2013. Thus, if you had the foresight to buy, then you would now have a hefty return on your investment.
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Accepting Bitcoins as a Payment Method
As bitcoins became fashionable, many companies take them as one of their payment methods. Some companies have even opted to pay their employees in coins. Many sites that pay you to watch advertisements or provide paid surveys will offer bitcoins. (Click here for all you need to know about paid surveys.) If you feel it is more beneficial to accept digital payments, then you can ask your clients to pay you in bitcoins.
Alternative Ways of Acquiring Bitcoins
Besides the three main ways to obtain bitcoins, there are some untraditional methods, such as:
We advise against this. However, we are here to inform rather than make decisions for you. Some online gambling sites can offer your reward in the form of bitcoins. Some consider online bitcoin casinos as the future of gambling.
This method is best suited for those with a large bitcoin wallet because there can be a considerable risk and significant expenses in chasing outstanding loans. A bitcoin loan is the same as any other. The lender and borrower agree upon an amount, plus interest. However, the decentralized nature of bitcoin means a loan can be issued without the need to validate it. It is an excellent alternative to waiting for the exchange price to rise. It enables you to use your coins and see an increase in value rather than sitting and waiting. There are multiple lending platforms available with the average interest rate being 15%. Unfortunately, as stated, the security you get with a standard loan is not there.
Furthermore, this market is relatively new, so scam artists can take advantage of this investment method. However, with the know-how, there is a substantial profit to be made with this potential scheme. This is one of the ways to make money online. See here for other methods to cash in on your free time next to a computer.
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When should I start acquiring bitcoins for investment?
No one can give you an answer that will be 100% accurate, and if they claim they can, then they are lying. All we can do is analyze the history of the market and make educated guesses. For example, anyone who had the foresight to buy bitcoins and then sell them by December 2017 would have seen huge profits from their investment. The trading price hit a record high of $19,891.
Investors and financial analysts were concerned about the massive rise in the value of a single bitcoin. Between 1994 and 2000, there was what is now known as the dotcom bubble. Many internet-based companies witnessed a rise in the value of their stocks at that time due to the internet’s rising popularity. In March 2000 though, that bubble burst. Stock prices plummeted, and many online companies were forced to close down.
Experts expected a similar fate for bitcoin, and they were right. The bubble burst in 2018. The value dropped. They estimate that the cryptocurrency’s market cap lost about $342 billion in the first financial quarter of the year. The value has started to rise since then, although it has yet to see the value witnessed in 2017. In July 2019, bitcoin dropped from $12,300 to $10,000. However, this is close to double what a coin was worth in May 2019.
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So they say now is the time for bitcoin investment?
Some general investment advice is that the price of a bitcoin will keep rising, with some suggesting up to $60,000. As in 2018, a crash may follow again, so do not invest more than you can afford. Some feel bitcoin will sustain another crash and drop as low $5,000. That would be a great time to buy because it is almost certain to rise by 2020. The question you should ask yourself when setting out to purchase bitcoins is not “Will the market crash?” but “When will the market crash?”
I have bitcoins, so what should I do now?
You can hold on to them, hoping to profit, or turn them into cash. This can be done using a special bitcoin ATM or via a bitcoin exchange (where you can also purchase coins using your credit/debit card). The next step is to sell your bitcoins and have the money transferred to your bank account. The process usually takes anywhere from one to five days for the amount to reach your bank account. Like any form of income, tax is still applicable. The amount owed can vary per state.
Do you still have doubts about investing in bitcoins?
We cannot give you a piece of specific advice. It is proven that you can make a lot of money from investing at the right time, but the reverse can also happen. However, we can help you feel comfortable enough to make your own decisions on investment opportunities.
Social media and even professional investors call it a fad or a trend. Like it or not, bitcoin is here to stay and will remain the currency of choice for many. Bitcoins are easy to transfer from country to country with no interference from the banks or their monetary policy. The internet made information easily accessible to a global community. Bitcoins do the same for the global economy.
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Consider the risk when investing in bitcoins.
The most significant risk to be concerned about is the price volatility. Like precious metals, the value of a coin is based on supply and demand. When demand is met, people sell, and the value drops before balancing out and then rising again. However, unlike stocks, it is more difficult to predict because there is no physical entity behind the coin. Sometimes it is better to cash in early and add to your bank account rather than sticking with a continued rise that will eventually drop.
It might not be worth the effort to go out and buy an expensive computer set-up because it is unlikely that you will see a return on your investment. If you have funds to spare, then purchasing bitcoins from an exchange may be a better way to go. However, do not expect to get rich overnight. That is not to say that it can’t happen with the expected climb.
If you want to get into the cryptocurrency market, bitcoin is not the only cryptocurrency available. It is just the most popular. It holds the highest value compared to any other digital currency, but you may be able to find a profit with lesser-known forms of coins. An ETF or exchange-traded fund is another alternative. You can buy shares of a bitcoin ETF for your portfolio. You can trade Bitcoin ETFs through traditional stock exchanges instead of having to deal with cryptocurrency exchanges.
Will you be investing in bitcoins or another cryptocurrency? If so, how do you plan to do it? Do you think the market will suffer another “burst of the bubble”? Feel free to share your opinion below.