Has the cryptocurrency’s recent rebound piqued your interest? Here’s a primer for latecomers just now tuning in.
One minute Bitcoin’s price is up. The next it’s down. First Elon Musk loves it. Then he isn’t so sure. Some countries are embracing Bitcoin as legal tender. Others have some serious questions.
Bitcoin has been on a wild ride over the past few years. Five years ago, a single Bitcoin was worth around $1,000. In 2021, that value skyrocketed to almost $70,000. It has fluctuated a lot since then, but few other assets have seen such appreciation — and gyration — as the world’s largest cryptocurrency.
When Bitcoin’s price tanks, you’ll often hear a favorite refrain of crypto advocates: buy the dip.
But how? If you’re new to Bitcoin, it may seem like there’s no clear starting point. Your brokerage may not offer you the option yet. We can bring you up to speed.
Cryptocurrencies have a reputation for being difficult to understand, so don’t be embarrassed if you’re wondering. The Harris Poll recently found that 61% of people who had heard of cryptocurrencIt doesn’t help that the internet is littered with often contradictory, difficult-to-verify information. Every time Dan Herron typed “how to invest in Bitcoin” into Google, he got “10 million sources and no authority.
”This concerned the financial adviser at Elemental Wealth Advisors in San Luis Obispo, California. He wanted to learn about the cryptocurrency for his millennial clients and, of course, had been watching the asset’s price rise. A two-day Bitcoin conference he attended left him with more questions than answers — and a sense that the culture around the currency might be a little too “bro-tastic.”
Then he found Coinbase Inc. The digital currency exchange — the largest in the U.S. and most commonly used in the U.K. — increasingly represents the mainstream route for individual investors to buy Bitcoin in many countries.
The bourse went public in April 2021. Coinbase’s direct listing was taken as a sign that crypto had made the investing mainstream. After all, it would be a public company, subject to the intense regulatory and reporting scrutiny of conventional large firms.
Bitcoin’s price has tumbled since that time, as has Coinbase’s share price. And it’s not the only game in town. Other major exchanges include Kraken, Bittrex and Binance, the world’s largest spot crypto exchange by trading volume.
The case for Bitcoin as a longer-term investment
Some, including Herron, see Bitcoin as part of a broader investment strategy, particularly for younger investors who have a time horizon of 25 to 30 years and a penchant for digital finance.
He wouldn’t recommend anybody rush to put their emergency savings in the cryptocurrency. But he does see it as part of an overall mix that might “juice your returns a little bit.”
“You might consider it if you have the ability to maybe put 5% of your portfolio in there, and just let it rise and see what happens,” he said.
Bitcoin is sometimes referred to as “digital gold.” Many advocates claim that the cryptocurrency is a good hedge against inflation, which has been surging lately. Their logic is that, because Bitcoin is designed to have limited supply, it can’t be devalued by a government or central bank distributing too much of it.
Yet more recently, experts have questioned Bitcoin’s utility as an inflation hedge, cautioning that it comes with its own risks. Case in point: the price of Bitcoin has fallen about 30% since its recent high in early November, even as inflation has surged to 7.9%.
Others worry about its volatility
Dana Menard, the founder and CEO of Twin Cities Wealth Strategies Inc., is bullish on the currency’s performance but has regulatory concerns.
“Without the SEC’s blessing, the difficult thing for Bitcoin is the lack of oversight and Wild-West speculation that has caused prices to make large moves in short periods of time,” he said, referring to the U.S. Securities and Exchange Commission.“Without the SEC’s blessing, the difficult thing for Bitcoin is the lack of oversight and Wild-West speculation that has caused prices to make large moves in short periods of time,” he said, referring to the U.S. Securities and Exchange Commission.
President Joe Biden signed an executive order in March 2022 directing government agencies to focus more on cryptocurrencies, but it fell short of providing clear guidance on future regulation. The directive calls for studies and policy recommendations on issues ranging from a digital U.S. dollar to combating illicit finance.
Menard also urges caution when consulting advice about Bitcoin online. “It’s unregulated, so anyone and everyone can give advice,” he said. Not everyone will have your best interests in mind.
“To me it looks like fool’s gold,” said Mike Caligiuri, founder and chief executive of Caligiuri Financial in New Albany, Ohio. The fee-only planner worries foremost about the currency’s volatility. “It’s a relatively new asset class that has a relatively unproven track record.”
Because of this, Caligiuri takes issue with a common refrain of Bitcoin advocates: that it serves as a helpful hedge in a portfolio because it is not correlated to the performance of stock or bond markets or commodities. “Investors do not only want assets in their portfolio that are not correlated,” he said. “They want assets in their portfolio that are both not correlated and assets that they believe with a high degree of certainty will increase over time.
”Buying Bitcoin: The Basics
What Are You Actually Buying?
Not a physical coin. “It’s literally just a number,” said Carsten Sorensen, an associate professor at the London School of Economics who leads a course on cryptocurrency. Depending on how much you want to spend, you can buy one Bitcoin, 10 Bitcoin or a fraction of a Bitcoin. According to its founding protocol, only 21 million will ever be minted.
Because Bitcoin can be divided out to eight decimal places, small fractions of a whole can be purchased. So, if you bought $100 worth of the cryptocurrency when it was trading at around $19,000, you’d get roughly 0.0053 of a Bitcoin.
I’ve Heard About Bitcoin Wallets. Do I Need One?
Yes and no. If you use certain brokers such as Robinhood, you can purchase without setting up your own wallet. Robinhood holds custody of the coins. But if you want to buy Bitcoin on your own, you have to set up a wallet.
In general, a wallet is the address where your Bitcoin lives. Wallets are what they sound like — places to store currency — but, in the case of Bitcoin, they’re virtual. Some popular wallets include Blockchain.com, Exodus, Electrum and Mycelium. You can access them on your phone or computer. But if you lose your keys, you can lose access to your assets.
Hardware wallets, which are places to store your Bitcoin that are completely severed from the internet, add an extra layer of protection from hackers. The good news is that opening many wallets is free. You may pay a minimal fee to move Bitcoin into or out of a wallet.
If you’ve read about Bitcoin, you’ll know that it has a reputation for anonymity. Wallets allow for this. You need a wallet to transfer Bitcoin, but you don’t need to link your name or phone number to many wallets.
How Do I Buy Bitcoin?
As mentioned above, your most likely destination is a Bitcoin exchange. (Yes, you may have seen in-person Bitcoin vending machines, but these are mostly novelties.)
You’ll create an account and enter a payment method. At reputable exchanges you’ll be asked for information such as your bank account details or a debit or credit card. You’ll then need to prove your identity with a driver’s license, ID or passport. After you’ve been verified, you can start buying Bitcoin with your chosen payment method, transferring it to your personal wallet and watching with greater interest as its price fluctuates.
Can I Buy Stuff With My Bitcoin?
Sure. Some vendors have started accepting it as payment. These range from small shops to a Swiss ski resort. But most people don’t really use Bitcoin to buy things, and instead use it as an investment or a store of value — in the way people purchase gold but don’t use it to buy everyday objects.
Some skeptics doubt the cryptocurrency will become a universal currency any time soon. But Bitcoin as a means of payment got a boost in 2020, when PayPal Holdings Inc. announced in October that it would allow customers to use it and other virtual currencies to shop at the 26 million merchants on its network. In 2021, Elon Musk said Tesla Inc. would allow transactions in Bitcoin, then backtracked on environment concerns, only to reverse course once again on the condition that mining as done with more clean energy.
What About a Bitcoin ETF?
One of the most eagerly anticipated developments in the world of exchange-traded funds was the approval of an ETF linked to Bitcoin. After almost a decade of waiting, that finally happened in 2021. For many years, financial firms claimed that creating Bitcoin-linked funds would make it easier for investors to access the cryptocurrency. That may have been true before it went mainstream, but the argument has lost some steam as platforms for buying and selling crypto have become more common.
Still, the appeal of Bitcoin-linked ETFs has persisted. The ProShares Bitcoin Strategy ETF, the first one listed in the U.S., debuted as the second-most heavily traded fund on record.
What’s unique about this ETF and its peers is that they actually track Bitcoin futures, not Bitcoin itself. While it might seem like semantics, there are important differences between a fund tracking futures instead of holding actual Bitcoin. You can read all about those differences — as well as the pros and cons of buying a Bitcoin futures ETF — in this helpful guide.
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