What is the smartest way to invest in Bitcoin?
Crypto-assets (crypto) mean digital assets including cryptocurrencies, coins or tokens. They digitally represent your ownership of a value or rights to something. They may or may not be backed by physical assets.
Crypto is a high-risk investment. The value of crypto is very volatile, often fluctuating by huge amounts within a short period.
More than with any other investment, you must be prepared to lose what you invest.
How crypto works
What is crypto
Crypto-assets (crypto) describe an asset class that includes cryptocurrency, digital tokens and coins. It does not exist physically as coins or notes, but as digital tokens stored in a digital “wallet”. These digital tokens rely on cryptography and technology such as blockchain for security and other features. Crypto may or may not have an actual asset behind it.
Crypto is used for payment systems, to execute automated contracts, and run programs. Anyone can create a crypto-asset, so at any time there can be thousands in circulation.
Hear how crypto-assets work and what to think about before you invest.
Why crypto is so volatile
The price of crypto can fluctuate at extreme levels often based solely on market speculation. Factors that can influence the price of crypto include:
- media focus
- public announcements
- individuals with large amounts of a crypto-asset who promote or influence it through social media
So if you buy crypto-assets, be prepared to lose everything that you put in.
How crypto is used
Cryptocurrencies were first developed as a digital currency to use as money. Some stores accept crypto as payment for goods and services. Some ATMs let you withdraw it as physical money.
But crypto is not legal tender in Australia and is not widely accepted as payment. Most people don’t use it for everyday transactions. It is not the sort of investment to use to build your savings.
Once you invest there are no regulatory restrictions on how your funds are used. In some cases, your funds may be used for other investments, such as loans. This may jeopardise your investment.
Buying and storing crypto
You can buy or sell crypto on a trading platform using money. Or buy or sell it directly.
Crypto is kept in a unique digital or software wallet (hot) or hardware (cold) wallet. Each wallet has private keys (unique codes) that authorise transactions on the blockchain network.
A hardware wallet stores these private keys on a secure device not connected to the internet. This can protect the wallet from hackers.
A software wallet is held by an individual or by a crypto trading platorm on your behalf. This can simplify buying, selling and storing crypto, but is not a regulated service. So you may not be able to recover the crypto if the trading platform fails.
Types of crypto-assets
Each crypto-asset has different capabilities. Most were not created to be investments.
There are no universally defined categories of crypto-assets. Some common types are listed below, but this does not cover them all. New cryptos are created all the time, but many aren’t well structured and don’t last.
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What are they
Assets designed to act as a medium of exchange, with transfers enabled on blockchains. Cryptocurrencies have no intrinsic value and are only worth what people are willing to pay for them.
Examples include: BTC, ETH, Litecoin
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What are they
A ‘Stablecoin’ is a marketing term for crypto that aims to maintain a stable value relative to a specified asset, or basket of assets.
Many aim to track the value of a government issued currency (for example, USD). Some track other assets such as gold, equities, bonds or other crypto.
Stablecoins try to stabilise their market value by:
- being physically backed 1-for-1 by an external asset, such as government-issued currency, gold or securities
- being physically backed by a variety of assets where the value of these assets is intended to be greater than the value of the Stablecoin on issue
- using algorithms to control the available demand and supply of the asset, such as minting additional assets or changing an interest rate for holding the asset
Examples include: Tether, USDC, TrueAUD, DAI
Non-Fungible Tokens (NFTs)
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What are they
NFTs are tokens which record ownership of an object using blockchains. Each NFT is unique (hence they are not ‘fungible’). However, owning an NFT may not give you exclusive rights to the underlying asset.
Examples include: Board Apes, game tokens
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What are they
These are tokens created through participating in decentralised finance (DeFi) protocols. Each token will have unique features based on the DeFi protocol that it relates to.
Other token types
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What are they
There are a broad range of terms for other types of tokens. Some types include:
- utility tokens — allow you to undertake certain activities, or perform an action, in a crypto project, such as being exchanged for a service
- governance tokens — these allow you to participate in the running of a crypto project
- community (or membership) tokens — ownership gives you access to the community
Why investing in crypto is high-risk
Crypto is largely not regulated
Many crypto-assets and other digital assets are not commonly considered to be financial products. Because of this, the platform where you buy and sell crypto may not be regulated by ASIC. So you may not be protected if the platform fails or is hacked.
When a crypto-asset fails, you will most likely lose all the money you put in. In most countries, crypto is not legal tender. You’re only protected to the extent that crypto fits within existing laws.
The value depends largely on popular opinion
Investing in crypto-assets is highly speculative. The market value can fluctuate a lot over short periods of time. It is affected by things like media hype and investor opinion.
The price of unbacked crypto may depend on:
- its popularity at a given time (influenced by factors like the number of people using it)
- how easy it is to trade or use
- the perceived value of the currency
- its underlying blockchain technology
Your money could be stolen
Be aware that a hacker can potentially steal the contents of your digital wallet.
Crypto systems allow users to stay relatively anonymous and there is no central data bank. So if a hacker steals your crypto, you have little hope of getting it back.
Using a wallet held offline, a ‘hardware wallet’ or ‘cold storage’, may offer more protection.
Crypto-assets can be hard to understand.
There is usually no product disclosure statement or prospectus that explains clearly how the crypto works. Developers may issue a ‘whitepaper’ to describe it, but these can vary in format and information.
A crypto-asset’s code may not be available to review. Or it may be written in obscure computing language. The underlying code of the crypto may also change over time.
To access a crypto network, you may need special software and need to know how transaction fees operate. Unfamiliar users run the risk of:
- sending a transaction to an incorrect address
- over-paying on transaction fees called ‘gas’ (sometimes by thousands of dollars)
- not paying enough for a transaction fee (and so losing the fee and transaction)
Crypto scams are increasing
Scammers use crypto because transactions are not easy to recover and have limited oversight. Money can quickly be sent overseas and is very hard to trace.
Read more about crypto scams and what to watch out for.
Rhett is scammed $97,000 by a fake endorsement
Rhett saw an article on a news website about ‘The biggest deal in Shark Tank history, that can make YOU rich in just 7 days! (Seriously)’
The news article was really an advertisement. It took Rhett to a website that included endorsements from Shark Tank judges for Bitcoin trading software. The endorsements were fake.
Rhett was interested in trading bitcoin, so he provided his contact details. Soon, an Account Manager named Max began calling Rhett. Max called often, pressuring Rhett to open a trading account and make a deposit. By depositing between $40,000 and $50,000 upfront, Max promised Rhett he could earn at least $15,000 per month.
Max promised Rhett that the money he deposited would be safe because he would have total control of the account. “It’s more or less moving your money in your left pocket from your right pocket,” Max said. Max promised Rhett that he could withdraw his money whenever he wanted to.
Max eventually convinced Rhett to open an account and deposit $40,000. Rhett started trading bitcoin, but things didn’t go to plan, and Rhett started losing money. Max encouraged Rhett to deposit more money and promised Rhett that he would be able to withdraw the money he needed in a week.
Rhett deposited more money in the hope he could recoup his losses. Rhett ended up depositing and losing a total of $97,000.
The future of bitcoin & cryptocurrency: 2022 and beyond
Bitcoin has been making waves throughout 2021 and its valuation has pushed to levels never seen before. In this article we look at the future of bitcoin and what you can expect in 2022 and beyond.
If you’re not quite sure about bitcoin and the cryptocurrency space in general, it’s important to know some essential details about these digital currencies as, while they can seem appealing, they might not all be as rosy as they come across.
What is bitcoin?
Bitcoin is the largest and most popular cryptocurrency. These are digital currencies that, unlike the Great British Pound, don’t have any physical kind of exchange.
We’ve already covered many of the basics of bitcoin and whether or not you should buy it, but with 2021 proving to be such a bumper year for bitcoin, it’s important to stay on top of the changing environment that bitcoin currently operates in.
So, if you’re new to cryptocurrencies, bitcoin is a payment method that is entirely digital and requires no physical exchange. While many people buy bitcoins as a broadly safe and decentralised payment method, many other people buy and sell bitcoin as a way of making money.
Is bitcoin a good investment?
There are few ways to answer this question, but as even just this year has shown, bitcoin is a very volatile asset to purchase. This is always something to keep in mind when considering to invest in bitcoin for the future.
While in both the first and second halves of the year, bitcoin has been sitting at around the £40,000 mark, in the mid-point of the year, almost half of this value was wiped off in a very short space of time.
This mean that while some people buying bitcoin got a better value initial investment, other people were looking at a substantial value depreciation.
Overall, bitcoin and other digital currencies are very risky investments. Whether you’re buying bitcoin to purchase goods, or simply are hoping to hold this asset until you sell it for more money, there is no guarantee you will get any of your money back. If you’re thinking about buying bitcoin, there are some important safety steps you should bear in mind:
- Where will you store your bitcoin? Is it secure?
- How much risk are you willing to take on? If you lost your money, how seriously would you be affected?
How has bitcoin performed in 2021
Price wise, bitcoin has had a bumper 2021 and has reached new highs. As of November 2021, one bitcoin is valued at around £40,000, whereas in July of the same year, it was worth less than half this amount, at around £21,000.
As with most years, the valuation of bitcoin has varied dramatically, making price volatility a constant feature of bitcoin.
This being said, there is no doubt that 2021 has been the year that bitcoin has pushed beyond its traditional pricing limits, inevitably making many more people interested in digital currencies as a whole. Partly because of this, bitcoin is also increasingly being adopted by many big banking institutions and even countries as legal tender.
Growing interest amongst the public means that many of the rules, regulations and guidance around bitcoin is changing though, so if you’re considering buying bitcoin now or in future, it’s vitally important you take on the best advice from a dedicated personal finance adviser. Preferably one who is familiar with digital currencies and how to maximise the benefit of these investments.
How is bitcoin regulated in the UK?
Bitcoin is by and large unregulated in the UK. Digital currencies are classified as property and any website or exchange selling them is regulated by the Financial Conduct Authority (FCA), while both the FCA and the Bank of England have issued various pieces of guidance, advice and warnings.
Moreover, if you were to invest in bitcoin and were to fall victim to a scam, or unfairly lose your money, you will not be able to take your case to the Financial Ombudsman Service (FOS).
Due to growing popularity of bitcoin however, it’s entirely likely that the regulations around bitcoin could change further in the not so distant future, which will almost certainly have an effect on the price of bitcoin.
For example, when China decided to crack down on digital currencies, bitcoin lost thousands of pounds of value in a matter of weeks. With the regulatory environment changing all the time, it’s important to continually keep a close eye on the changing picture in order to protect your money as best as you can.
What will the future of bitcoin look like in 2022?
With bitcoin currently at record highs, the chances of a price crash seem greater than ever as some investors decide to take the profits they have made.
Cryptocurrencies are an unpredictable asset class and nobody really knows just how high the price of bitcoin could go. But with the prices so high and governments looking at how best to go about regulating these coins, the risk of investing in bitcoin are very high.
As always with investing, it is impossible to really tell how 2022 will look for digital currencies. But with certain trends occurring repeatedly throughout the history of bitcoin, there are some reasonable predictions.
Bitcoin Future Predictions
Firstly, price volatility will likely remain, resulting in drops and surges in price. Secondly, changes to how cryptocurrencies are regulated should be expected, considering many changes are already occurring on a fairly regular basis.
Thirdly, the mainstream adoption of cryptocurrencies will continue. Many big companies currently allow customers to pay with bitcoin, with more joining all the time. More and more people are becoming interested in bitcoin, resulting in banks and companies integrating cryptocurrency services into their operations.
What is the safest way to invest in bitcoin?
If you’re looking to invest in bitcoin, it’s more important than ever to exercise safe investing. You’ll need to go to a cryptocurrency exchange that allows you to buy bitcoin. And when you are buying, remember to:
- Only invest what you can afford to lose
- Spread your investments between different asset classes with different levels of risk. With bitcoin being a risky investment, consider putting some of the rest of your money into a less risky ISA, for example
- Have a reliable place to store your bitcoin, such as a digital wallet, and ensure your password is safe and cannot be stolen or forgotten
With all investments, particularly ones as risky as bitcoin, it’s vitally important to have the right financial advice.
If you found this article helpful, you might also find our cryptocurrency tax guide and non-fungible tokens article informative, too!
With an independent financial adviser who knows your financial situation and personal needs, you’ll be able to manage your money safely and securely. Unbiased has thousands of dedicated professionals, so you can find your next financial adviser right here.
How (and Where) to Invest in Cryptocurrency
Although cryptocurrency has only been around for a short time, it has expanded into a wide, convoluted universe that can be difficult to understand for the uninitiated. But with Bitcoin and other cryptocurrencies seeing wild fluctuations in price, there’s an opportunity for big gains, if you can stomach the risk. Digital platforms like Coinbase and Robinhood have made it significantly easier for people to invest in popular cryptocurrencies like Bitcoin. However, the process is still slightly more complex than acquiring a traditional currency. A financial advisor can help you create a financial plan to help you reach your crypto investment goals.
What Is Cryptocurrency?
There are thousands of different cryptocurrencies available today, and it can be tricky to nail them all down with a single definition. Broadly speaking, though, a cryptocurrency is a digital currency that is encrypted and often decentralized. Bitcoin, the first and most recognizable cryptocurrency by far, is based on blockchain technology, a permanent, decentralized ledger system.
While Bitcoin is the most popular and most valuable cryptocurrency out there, it’s led to the creation of thousands of alternatives, or altcoins. There are different kinds of altcoins. Some are close variations of Bitcoin, like Bitcoin Cash or Bitcoin Diamond. Others focus on privacy, like Monero and ZCash. Some are named after Greek Gods (Apollo Currency), reptiles (Komodo) or even internet memes (Dogecoin). It’s a weird, wild world.
Most people only have an interest in holding on to Bitcoin or another popular currency, Ethereum. Still, some speculators attempt to buy low and sell high on more obscure cryptocurrencies. The hope is to get rich quick by getting in early on the next Bitcoin.
Regardless of what currency you invest in, the common denominator is volatility. Any cryptocurrency has value only as long as people perceive it to have value. While this is technically true of any currency, it’s more pertinent with cryptocurrencies because they aren’t backed by a government or a precious metal (like gold), as most currencies are. This makes it a much riskier investment, as many investors and speculators have learned the hard way.
What About NFTs?
Because NFTs, which are short for non-fungible tokens, have value they are sometimes thought of as a type of cryptocurrency. Though both NFTs and cryptocurrencies are digital assets that are traded using blockchain technology, they should not be confused. The term “non-fungible” is significant because it denotes assets that have no trading equivalent; each NFT is one of a kind and has a unique value. That’s what distinguishes them from cryptocurrencies, which are fungible, meaning one person’s Bitcoin is worth as much as another person’s Bitcoin.
NFTs can be digital messages, audio files, virtual real estate, images, videos and real-world assets that have been tokenized. Some of the most notable examples of NFTs that have recently sold for millions include Jack Dorsey’s first tweet and a digital art collage of images from artist Beeple.
How to Invest in Cryptocurrency
In simple terms, you need a place to buy it and a place to put it. The most popular place to purchase cryptocurrency is cryptocurrency exchanges.
There are several different exchanges to choose from, with the most popular being Coinbase, GDAx and Bitfinex. These exchanges allow you to purchase currencies like Bitcoin and Ethereum with a debit card. With most popular currencies, including Bitcoin, you can buy fractions of a coin, so you don’t need to invest thousands of dollars to get in the game.
If you’re interested in purchasing altcoins, odds are you’ll need some Bitcoin or Ethereum to make that purchase. As a general rule, you can’t buy altcoins with fiat currency (that’s how crypto enthusiasts refer to paper money, like dollars or euros). But that may change in the future.
Exchanges make money by charging fees for conducting transactions, but there are other websites you can visit to interact directly with other users who are looking to sell cryptocurrencies. LocalBitcoins is one popular example. The process will likely be more drawn out than with an exchange, and there is the added risk of dealing directly with a stranger whose currency you can’t verify. If you’re new to cryptocurrency, you’ll likely want to use an exchange.
One other option that’s becoming more prevalent is the Bitcoin ATM — there were more than 50,000 U.S. locations in April 2022. You can use them to purchase Bitcoin and send it to your wallet.
How to Store Your Cryptocurrency
When we say “send it to your wallet,” we don’t mean you put your Bitcoin into an actual wallet. To store your currency, you need a cryptocurrency wallet, which is necessary to securely store the code that makes up your cryptocurrency portfolio. You can have either a software wallet or a hardware wallet. Software wallets are necessary to enable active trading, as they make accessing your currency much easier. If you sign up for a Coinbase account, you automatically receive a Coinbase software wallet.
Hardware wallets are physical devices — they look a bit like USB drives — and they are more secure than software ones. You can use them for a currency that you don’t expect to need frequent or easy access to. Think of a software wallet as a checking account, whereas the hardware wallet is more like your savings account.
Should You Invest in Cryptocurrency?
The cryptocurrency fervor soared after the value of Bitcoin rose above $30,000 in January 2021. And within three months, it more than doubled to $64,642.40. This is almost 19 times higher than its valuation in early 2019 ($3,500) and almost four times as high as its previous 2017 peak ($17,000). But after Nov. 7, 2021, when it reached $65,466.84, things turned south. By April 22, 2022, Bitcoin closed at $39,508.61. On Aug. 15, 2022, it had tumbled to $24,015.17 – a low not seen since December 2020.
So like any other investment, you should weigh the potential gains against your own risk tolerance. If you tend to be more risk-averse with your investments and you’re looking to build wealth over decades, cryptocurrencies probably aren’t for you. No one can accurately predict what will happen to the market for cryptocurrencies. Yes, that’s technically true for all investments. But other markets — say, the stock market — grow much more consistently, with significantly less volatility.
Indeed, it may be misleading to even call it “investing” to buy Bitcoin. It would be more accurate to refer to it as speculation. Still, if you’re willing to take a risk and you believe the current Bitcoin price is poised for a rally then by all means give it a try. Bitcoin has now been around for 10 years — longer than many expected it would last.
A future with Bitcoin as some sort of worldwide reserve currency seems increasingly unlikely day by day, especially given the Federal Reserve’s interest in a digital dollar. But it’s not necessarily unreasonable to expect that it will retain some value for the foreseeable future. The same can’t be said for some of the more obscure altcoins, though.
The most important thing, as with any potential investment, is to have a clear idea of the risks you’re taking. You shouldn’t put yourself in a situation where your financial health is dependent on the success of cryptocurrencies. However, if you’re well aware of the risks and you want to give it a shot anyway, you may get lucky.
Tips for Investing Responsibly
- Investing in cryptocurrencies can be an intriguing prospect for a portion of your portfolio, but you should make sure to diversify your investments with other holdings. A financial advisor could advise you on asset allocation and help you create an investment plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals , get started now.
- How much you invest depends on how much risk you are willing to take, and how long your time horizon is. Our asset allocation calculator will help you align your investing strategy with your risk tolerance.
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