What’s the best way to start in Bitcoin?

What’s the best way to start in Bitcoin?

David      

Bitcoin is possibly the most fashionable investment of the past decade. It has appreciated in value by anything from 717,900% to just shy of one billion percent (depending on your starting figure) over the last 10 years or so. Either way, it's one of the best-performing financial assets in recent history.



Buying and investing in bitcoin

Assuming that they're willing to accept the risk, investors interested in buying and investing in bitcoin have a number of options at their disposal. Each has its own advantages and disadvantages.

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Bitcoin trusts and funds

For those who aren't keen on the idea of actually handling or owning bitcoin themselves, one simple option is to buy shares in a publicly traded bitcoin trust. Similar to ETFs or mutual funds, these offer a portfolio that holds or trades the currency.

"The easiest way to buy bitcoin is through the Grayscale Bitcoin Trust (GBTC) because it tracks the cryptocurrency and trades via the traditional financial market," says Ari Wald, the MD of the Institutional Portfolio Strategy team at Oppenheimer & Co.

Besides the Grayscale Bitcoin Trust (which is by far the largest), other bitcoin trusts or funds include:

  • ETC Group offers an "exchange-traded cryptocurrency" product that tracks bitcoin and is listed on the Deutsche Börse XETRA.
  • 3iQ's Bitcoin Fund, listed on the Toronto Stock Exchange.
  • CoinShares has several bitcoin tracker funds listed on the NASDAQ/OMX exchange in Stockholm.
  • Wisdom Tree owns a physically-backed bitcoin exchange-traded product listed on Switzerland's SIX exchange.

What to know before investing in bitcoin

Despite being over a decade old, bitcoin remains a relatively immature asset. There's less trading volume on its markets, which means it's less liquid, and the price changes can be volatile. It's therefore hard to predict how it will behave from one month to the next.

Here are some tips for reducing your exposure to risk while also increasing your exposure to potential gain.

Keep it safe and secure: Crypto-exchanges still continue to suffer the occasional hack even today. Since bitcoins do not exist in physical form, seasoned bitcoin investors store them in digital wallets. A hardware wallet is a handheld, offline device that securely stores the private key necessary to transfer your bitcoin holdings from one place to another. Ledger and Trezor are two reputable brands.

"If the amount you store is going to be a lot, you may also want to add a seed backup," advises Mow. A "seed backup" is a backup of the phrase (i.e. a set of words) that lets you access your bitcoin wallet. Many investors holding large quantities of bitcoin engrave their seed phrases onto metal plates and then store these plates somewhere safe (such as a bank deposit vault).

Likewise, you should plan on doing all of your investing from a secure internet connection. In general, trading or buying bitcoin on a public WiFi network makes you more susceptible to attacks from hackers.

Start small, rather than big: Given its short history and still highly unpredictable behavior, it's usually wise to keep your initial investment in Bitcoin relatively limited. Even experienced investors (e.g. hedge fund manager Paul Tudor Jones) have allocated just a single-digit percentage of their capital to bitcoin while keeping the rest in less volatile assets. And, despite the hype and forecasts, maintain your investment discipline, buying only what you can afford to potentially lose and not getting swept up by promises of gigantic upswings.

Bear taxes in mind: Even though it's a currency, the IRS considers bitcoin to be property rather than money, so it's subject to the same tax treatment as other investment assets. Bitcoin taxes can be triggered by trading, exchanging, or simply spending the cryptocurrency (if it's increased in value since you bought it). So documenting every transaction is essential. The good news is that bitcoin profits are taxed at the special capital gains tax rate, which is often less than ordinary income rates.

Have a buy-and-hold mentality: Unless you're prepared to watch the market daily and move at a moment's notice, investing in bitcoin should really be undertaken for the long term. "Bitcoin's heightened day-to-day volatility makes this especially true," says Ari Wald.

In other words, it's not really advisable to buy bitcoin expecting to sell it a day, week, or month later, as investors found when the cryptocurrency tanked by 50% in two days in March. However, the fact that bitcoin recovered following this crash to hit a new all-time high in November and then December shows the virtue of patience.


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