What is the Bitcoin exchange consideration?

Digital currencies hold great promise, and investors may be drawn to drawn to Bitcoin as a speculative asset that could potentially deliver some very promising returns. However, those who are just starting out investing in Bitcoin, which is the first digital currency to scale, could potentially benefit from keeping several key considerations in mind.

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Do Your Homework

This may sound obvious, but investors should conduct thorough research before getting involved with Bitcoin. This adage of "do your homework" is true for all assets. However, Bitcoin is a highly complex investment, and building up expertise surrounding this digital asset can take time.

As a result, doing one's homework may be even more crucial for those considering Bitcoin. There are countless resources available, among them many websites delving into the digital currency and its underlying technology.

In addition, interested investors would benefit from reading the original Bitcoin whitepaper.

Potential investors should keep in mind that because the blockchain provides the underlying basis for Bitcoin, it is crucial for them to understand this distributed ledger.

Risk Is Inherent To Investment

Risk is inherent to investment. In other words, an investor could potentially generate some very compelling returns by putting their money into any asset. However, they could also lose everything they invest.

Market observers, analysts and even regulators have warned about risks that are specific to Bitcoin. William Galvin, secretary of the commonwealth of Massachusetts, spoke out regarding this digital currency, warning that "Bitcoin is just the latest in a history of speculative bubbles that most often burst, leaving the average investors with a worthless product."

In addition to noting the cryptocurrency's sharp volatility, he elaborated: "Going back to the 1600s with tulip mania to the present Bitcoin craze, chasing the next best thing will, more often than not, end in disaster for the average investor."

Bitcoin Is Highly Volatile

Investors thinking about getting involved with Bitcoin should keep in mind that, at times, the digital currency has suffered severe price fluctuations of robust gains and notable declines.

Bitcoin surged in 2017, rising from less than US$1,000 at the start of the year to around US$20,000 in December, only to lose close to half its value when to fell to nearly US$11,000.

CryptoCompare CEO and co-founder Charles Hayer described this sharp fluctuation as: "A manic upward swing led by the herd will be followed by a downturn as the emotional sentiment changes." He added, "A lot of traders have been waiting for this large correction.

Diversification Is Key

One good way to manage the aforementioned risks is to diversify. The basic idea behind diversification is combining assets in such a way that a decline in the value of one component is offset by gains in others.

For example, if an investor set up a portfolio that contained 20% Bitcoin, 20% emerging-market stocks, 20% U.S. stocks, 20% bonds and 20% commodities, a 10% decline in Bitcoin would ideally coincide with a corresponding increase in the other components.

While this is the ideal setup, things frequently do not work out this smoothly in practice. Even so, investors can look at the performance of different asset classes to determine how best to combine them into a diversified portfolio.

Picking The Right Exchange

Picking the right exchange is very important. Digital currency exchanges have suffered many hacks over time, with more than three dozen of these attacks taking place between 2011 and late 2017.

In early 2018, hackers stole more than US$500 million worth of Bitcoin from Japanese exchange Coincheck.

At the time, this was the largest hack of a digital currency exchange, surpassing the amount stolen from Japanese exchange Mt. Gox in 2014.

While an exchange's security is one major variable that should be factored into selection, it is not the only one. Another serious consideration is what trading a particular marketplace will offer. For example, an exchange may give investors the ability to buy and sell Bitcoin. However, it may also offer Bitcoin derivatives, such as bitcoin futures.

Using Wallets

Another variable that investors should consider is which wallets, if any, they will use. There are many different wallets available, all with varying levels of security, differing features and different eases of use. Would-be investors should keep in mind that the more secure wallets are frequently more technical, while wallets that are less secure are usually less technical.

Investors who are concerned about security may consider hardware wallets, devices that hold one's private keys offline.

The simple fact that these wallets store key information offline instead of online prevents them from being vulnerable to hackers.

Alternatively, they may look at desktop wallets, which can provide them with full control of their Bitcoin.

Additional Security Methods

Once an investor has selected a method of storing their Bitcoin, there are several different methods they can use to make their digital currency more secure. One popular and effective approach is two-factor authentication, which involves providing an extra layer of security by requiring not only a username and password, but also an additional piece of information.

One way to obtain two-factor authentication is by using Google Authenticator, an app that generates codes that are then used to provide the second layer of authentication.

Because Google Authenticator is not tied to an individual's phone number, the individual can avoid having their Bitcoin stolen even in the event that they lose their password and their phone number is accessed by a nefarious individual.