Should you be Investing in Bitcoin?

Should you be Investing in Bitcoin?

At the time of writing, the price of Bitcoin is $959. There has been a steady and unstoppable increase in the famous cryptocurrency since the turn of 2015, over quadrupling in price from a low of $214 (12/01/2016). This huge increase has been enough to grab the attention of investors, speculators, and the wider public. If you are considering investing your cash into this so called ‘digital gold’, below is a short introduction on how to purchase Bitcoin.

For my take on whether Bitcoin is a wise investment, please see this article outlining my reservations. I am of the opinion that there are major risks and rewards, and suggest that you educate yourself before parting with your cash.

What is Bitcoin?

Put in simple terms, it is a payment system where a Bitcoin is a specified unit. The difference between Bitcoin and traditional fiat is that Bitcoin is a decentralized digital currency, whereby the recording of the transactions is not completed by a central administrator such as a bank. Instead, in order to record transactions, a series of ‘miners’ verify and record transactions onto a ledger which records all of the movements of Bitcoins between different users. This ledger is often referred to as the Blockchain.

Bitcoin has revolutionised the concept of money through the ability to make and receive payments anonymously. Additionally, there is a finite supply of Bitcoins, making it resistant to inflation and interference from central banks or financial institutions. These unique attributes have caused the currency to go from an almost nil market capitalization in 2010 to over $15 billion in 2016.

The above is a very simplified description of Bitcoin, and the implications of the underlying Blockchain technology are huge, expanding way beyond the realms of Bitcoin. If you would like to learn more then I suggest the following link is a good place to start.

How Can I Store Bitcoin?

Firstly, all Bitcoins need to be stored in a wallet, much like a real wallet but in a digital format. A wallet will have a unique address and unique password. The address is used to send Bitcoin from one wallet to another, whilst the password is used so only the owner of the wallet can access their coins. There a two types of wallets available – a web wallet, and a software wallet.

A web wallet can be created in one of two ways:

  1. On an exchange – This is not advised due to obvious risks associated with storing your currency on exchange in a relatively unregulated market. See the recent Mt. Gox scandal that brought Bitcoin to its knees. If you absolutely must store you currency on an exchange, I would advise using Poloniex or Kraken, who have an easy to use wallet.
  1. Other – Although there is a huge range of wallets available, if you must create a web wallet, then Coinbase is likely to be your best bet. This is one of the few websites not to have had a major hack and is well known within the Bitcoin Community.

Another type of wallet is a software wallet, which needs to be installed. This is the most secure way to store your Bitcoins, as they are not being held by a third party. See this site for a range of trusted Bitcoin wallets for you to choose from.

WARNING: As Bitcoin wallets are password protected, if you lose your password you will NOT be able to recover your Bitcoins.

How Can I Buy Bitcoin?

You will need to ensure your wallet is set up before purchasing Bitcoin, as you will need to provide your wallets address to any site you are purchasing from in order to receive the coins.

If you are based in the UK, there are two main sites that you can purchase Bitcoins using GBP:

  1. Bittylicious – I have personally used this site for its convenience. You can buy Bitcoins in an instant, it is an easy to use platform, and I have never experienced an issue through this process. However, it is more expensive than other platforms. If you are looking for the cheapest Bitcoins then elsewhere is advised.
  1. Bitbargain – This connects buyers and sellers of Bitcoins through a marketplace. The registration process is slightly more onerous than for Bittylicious, although there appears to be better deals available if you are willing to look for them.

If you are based in the US, there are many more options, although I would advise using Coinbase due to its popularity. Another good alternative is Kraken, an exchange where you can use USD to purchase Bitcoins. However, ensure that you move your Bitcoins to a non-exchange based wallet regardless of which method you use to purchase them. For a detailed listing of US wallet options, see this useful site.

How Can I Trade Bitcoin?

Bitcoin can be traded against traditional currencies – typically USD, and also against other cryptocurrencies such as Ethereum & Monero. Although I would not advise trading Bitcoin to most people, there are two exchanges I have personally used that I would suggest if you are intent on trading:

  1. Poloniex – A US based exchange used to trade a huge range of cryptocurrencies including Bitcoin against other cryptocurrencies. The interface is clean, simple to use, and there is the option to loan your bitcoins for others to margin trade. Unfortunately, there is no opportunity to trade against fiat currencies such as USD.
  1. Kraken – Another US based exchange. Although the interface is not as clean as Poloniex, it does enable trading Bitcoin against fiat currencies.

Although there are likely plenty of honest exchanges out there, I would advise against using others due to a history of hacking issues. Even large and trusted exchanges have fallen victim. For example, Mt. Gox & Bitfinex were once large and trusted exchanges that have experienced massive losses – $350m & $66m respectively. History has shown that no exchange is foolproof, so you must be willing to accept this risk if you wish to trade via an exchange.

Disclaimer

I am not to be held liable for any of your investment decisions, and I am not an investment adviser. Do your own research and make your own decisions before making any kind of financial commitment.

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