So you’ve decided to buy Bitcoin or any other cryptocurrency. After doing your research and speaking with some of your friends, you think it looks like something you would like to put your money in. Now before you start, I advise you to read this Bitcoin and Cryptocurrency buying guide.
But before you do that, there are a few things you should know about cryptocurrency. The market is generally very positive about its future, but researching both sides is important. Hopefully you understand the economic, sociological, and technological reasons behind buying cryptocurrency, as we are going to focus on it from an investing point-of-view in this article.
How to Buy? Bitcoin and Cryptocurrencies buying guide
There are several ways to go about buying Bitcoin, but the top two ways are purchasing on an exchange and buying from another Bitcoin holder. Online purchases are usually done through exchanges or platforms which charge a small fee because it is all automated. One of the biggest exchanges is CEX.IO. It operates in most countries around the world and offers a good selection of crypto coins for buying with fiat money. The killer feature of CEX.IO is that you can buy any cryptocurrency in just a few clicks with your credit card – it works much the same as regular shopping online.
When you buy from another investor, you end up using a website like LocalBitcoins, which puts your funds into escrow and manages the difficult part for you. Because of the higher time investment by the other party (e.g. meeting with you, confirming the transaction) this method generally costs more. Both methods will work, but your main takeaway should be that things are not as straight cut as investing in the equity markets. Manage your downside risk, and you’ll be fine.
Cryptocurrency Exchanges Aren’t Perfect
If your past experience is with the equity markets, then there are some key differences you should be aware of. The main one is that exchanges can be compromised, resulting in the loss of tons of money. Looking at the past few years, there have been several major “heists” that resulted in the loss of customers’ money (NEM, Mt. Gox, etc.). You would think the exchanges would be the most secure places to keep your cryptocurrency, but they act as honeypots that attract hackers looking to make obscene amounts of money.
This knowledge factors into a larger point. Custody of your cryptocurrency is your own responsibility and requires a lot of extra security and management know how. You can either store your funds in a mobile wallet (your phone), a desktop wallet (your computer), an exchange wallet (online where you bought the cryptocurrency), or in a hardware wallet (a device that is offline and stores your cryptocurrency).
As with everything, each method has its own risks and benefits. You would do well to research the differences, and even then, it might be best to mitigate your risk by spreading your investment across several different wallets.
Bitcoin is Extremely Volatile
Depending on what day you read the news, Bitcoin will either be up a lot or down a lot. The price changes a rapid amount on a day-to-day basis because it is still in the early stages of being adopted. Every day, more people decide to invest in Bitcoin, thus changing the demand function for the security.
At the same time, there are sometimes massive sell-offs based on market sentiment or the perceived threat of regulation. Sometimes the swings in the price of Bitcoin can come down to something as simple as a comment by a major figure in politics, business, or even pop culture. Only a small part of population invests in the cryptocurrency so that the changes in price end up much more exaggerated than most investors are used to.
You should treat investing in Bitcoin the same way you would treat investing in an early stage start-up. There is a lot more risk, but also a way larger potential for reward. We are not saying whether you should invest or not, but you should be away of the risk profile of your potential acquisition.
Cryptocurrency Regulation is Unclear
At the present moment, the regulation of Bitcoin is not entirely clear. Many have been struggling to understand what triggers a taxable event, and the rules around whether a cryptocurrency is a security or not are still in a state of uncertainty.
And after you think of regulation on a macro-level, you need to realize on a micro-level there are none of the same protections that you receive when investing in equities.
Understanding the Risks of Cryptocurrency
The two major salient points you should understand from above is that there are differences between Bitcoin and the equity markets you likely have previous experience with. These differences aren’t just in the risk of the investment, but also in how you go about buying and storing it.
Bitcoin is still in the early stages of adoption and has not gone mainstream yet. It still takes a significant amount of research to learn how to buy and hold it, and you should be treating your investment as venture capital money. You have the potential to lose all the money you invest, but you also have the chance to multiply it. The best course of action is to invest a sum of money you would be comfortable losing.