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bitcoin investing

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Bitcoin investing explained

Bitcoin investing is popular, especially among young investors. Various financial Instruments can be used to invest in Bitcoin.

Buying bitcoins from online exchanges is the traditional way to invest in Bitcoin.  Bitcoin ETFs and trackers are an easy and safe option. If you are interested in Bitcoin stocks, there are several options on the market. Bitcoin derivatives are popular among professional traders.

Everyone who invests in Bitcoin must also manage to file a tax return. Investing in Bitcoin is not difficult; there is the right service and investment instrument for everyone.

Bitcoin investing is growing in popularity

Bitcoin investing is popular, especially among young investors. Hundreds of millions of Bitcoin investors are already worldwide, and the number doubled in the 2020s!

Bitcoin investing hit the mainstream media during the bull market of 2017. At that time, you could find daily headlines about Bitcoin even in your local newspaper. The bear market of 2018-2019 took Bitcoin investing into oblivion for a while, but the bull market of 2021 raised its popularity again.

According to estimates, more than 200 million people have invested in Bitcoin. A similar number have invested in other cryptocurrencies but not in Bitcoin.

This article introduces Bitcoin investing at a general level. We discuss different Bitcoin investing methods and compare their pros and cons.

We have published a separate article on How to Buy Bitcoin. There, you will get step-by-step instructions on the purchase process. You can also find beginner’s guides on popular Bitcoin exchanges by clicking Reviews from the top menu.

Different types of Bitcoin Investors

In our opinion, Bitcoin investors can be divided into three different categories.

  • Cautious buyers
  • Traders
  • The HODLers

The group of cautious buyers includes ordinary investors who are about to buy their first bitcoins and companies from the traditional investment world who acquire bitcoins in their portfolios. This group is the oldest in age profile, and the share of Bitcoin in the entire investment portfolio is typically 1-5 percent.

Traders are professional investors. They actively trade bitcoins and use futures and leverage. These individuals move the Bitcoin price and react to news and other significant events. Traders make the biggest profits from Bitcoin and suffer the biggest losses during periods of high volatility.

HODLers are a third distinct group who are often Bitcoin maximalists. These so-called buy-and-hold investors buy bitcoins regularly and may never sell them. Many HODLers believe in a wider Bitcoin revolution in the future. They accumulate their Bitcoin position over a long period and store the coins in a cold wallet.

Some investors also fall between these groups, but the division describes typical Bitcoin investors quite well.

There are many ways to invest in Bitcoin

Various financial Instruments can be used to invest in Bitcoin. Ten years ago, investing in bitcoin meant a laborious process of acquiring “physical” bitcoins in one’s wallet from exchanges. Nowadays, the situation is much better from the investor’s point of view.

Bitcoin investing has evolved tremendously in recent years. The industry has grown a lot, and we have introduced new services. Along with investment opportunities, various instruments have become accessible to ordinary investors.

It is important to remember that there is no one right way to invest in Bitcoin. Each investment instrument offers pros and cons. The investor must choose the method that suits his risk and investment profile. Nothing prevents you from using different instruments to invest in Bitcoin, spreading the risk.

Next, the article goes through four alternative ways to invest in Bitcoin.

Investing in Bitcoin the traditional way

Buying bitcoins from online exchanges is the traditional way to invest in Bitcoin. This option was the only way for an ordinary person to invest in Bitcoin for a long time.

We believe that every Bitcoin investor should learn the traditional way. If you want to invest using other instruments, you can try it with small amounts. Buying “real” bitcoins and transferring them to your wallet is part of understanding the technology.

Below is a picture of the front page of Coinbase, one of the biggest Bitcoin exchanges in the world.

coinbase front page

One of Bitcoin’s key features is the ability to manage your assets independently without third parties. This is only possible by buying real bitcoins and transferring them to your wallet. For many, this is the only acceptable way to invest in Bitcoin. However, it is understandable that newcomers first store their bitcoins in the exchanges.

The disadvantage of traditional investment methods is the technical risks and issues at exchanges. The year 2022 saw several large-scale bankruptcies, causing millions of investors to lose money. Using your wallet can also be risky if you are careless about storing recovery keys.

We have written a comprehensive article about Bitcoin wallets. This article goes through the differences between storage methods in more detail.

When you buy bitcoins from an exchange, you must also do tax calculations independently. This topic is covered in more detail at the end of the article.

The traditional way of investing in Bitcoin offers freedom and responsibility. This option is not suitable for everyone but is the only option for the most hardcore Bitcoin investors.

Bitcoin ETFs

Bitcoin ETFs and trackers are an easy and safe option.  This form of investment is especially popular with stock investors, as it offers many advantages compared to traditional Bitcoin investing. What makes this form of investment easy and popular?

Millions of investors already have a brokerage account in a local business or places like eToro or Fidelity. Buying Bitcoins from the same place where you also make other investments feels comfortable. There is no need to register new accounts, and it’s easy to keep track of your portfolio this way.

Whether you can invest in US-based Bitcoin ETFs or some tracker products depends on your location. The idea is the same; you can buy an instrument that tracks the price of Bitcoin.

Below: Bitcoin ETFs listed at etfdb.com.

bitcoin etfdb

The disadvantage is that trading is only possible during the stock exchange’s opening hours, which are weekdays and office hours. However, the Bitcoin price fluctuates 24/7 and usually even more on weekends than weekdays.

In addition to this, you have to pay fees on an annual basis. It is good to go through the terms of each investment instrument separately. There is also the issuer risk, i.e., what happens if the company that offers the ETF goes bankrupt?

There are also advantages. Your investments cannot be hacked, and you don’t have to worry about storage, i.e., a Bitcoin wallet. In addition, many brokers send the information about your transactions to the tax authorities, so you don’t have to tinker with Excel or tax programs.

Investing in Bitcoin through ETFs and trackers is popular for a good reason. It’s a good and safe way to bring the benefits of Bitcoin’s price development into your portfolio.

Bitcoin stocks: hit or miss?

If you are interested in Bitcoin stocks, there are several options on the market. Bitcoin stocks benefit from Bitcoin’s price development with an indirect investment. Investing in Bitcoin is done through publicly listed companies whose business is strongly linked to Bitcoin.

Let’s go through a few different options for Bitcoin stocks.

For many, investing in Bitcoin through stocks means the same thing as Microstrategy. This is Michael Saylor’s company. Saylor became famous in the industry in 2020. At that time, Saylor became the first CEO of a publicly listed company to make a stand for Bitcoin.

Microstrategy owns more bitcoins than any other listed company. Their value is so high relative to the rest of Microstrategy’s business that many consider the MSTR ticker like a Bitcoin ETF.

Another popular option is mining companies, whose share price reacts very strongly to Bitcoin’s price movements. These companies can be seen as leveraged bets on Bitcoin. However, they have their risks for the investor.

Mining companies proved to be dangerous investments in the bear market of 2022. Many well-known companies even went bankrupt. This is because mining companies invested too much in their infrastructure during the bull market of 2021. As competition intensified, profit margins decreased, and companies that invested too much could not afford to pay back their loans.

The third option is to invest in Bitcoin exchanges. So far, only one listed company on the market, the American Coinbase. Theoretically, an investment in Coinbase should be safer than Bitcoin because such a company makes money even in a down market.

However, the bear market of 2022 has proven this idea wrong. Although Coinbase makes money regardless of the price, the bear market does not attract people to trade, which means trading volumes collapse.

The Bitcoin derivatives market is hot

Bitcoin derivatives are popular among professional traders. Derivatives are products known from the traditional financial world, and their price is based on the underlying asset. For example, the price of Bitcoin futures moves in tandem with the spot price of Bitcoin.

The Bitcoin derivatives market has grown massively since the bull market of 2017. At that time, the market was full of small investors who mainly did spot Bitcoin purchases. The structure of the Bitcoin market has changed significantly since then. Nowadays, the volume of derivatives trading is many times higher than in spot trading.

Options and futures are popular instruments. Below is a picture of the Binance derivatives market, the market-leading Bitcoin exchange.

binance futuurit

Derivative trading has several differences compared to spot buying. In general, derivatives trading is faster-paced, with positions from a few minutes to hours, days, or weeks. The investor tries to benefit from market trends and trades his position continuously.

With the help of derivatives, both long and short options are available. This means it is possible to make profits when the market falls (shorting). Many traders also use leverage. This feature is available to up to 100x.

For example, if you use 10x leverage, a one percent increase in the Bitcoin price will increase your position by 10 percent. This sounds great, but the same works in the opposite direction. A one-percent drop will decrease the value of your position by ten percent.

Bitcoin investing with derivatives is not for beginners. The use of leverage, in particular, involves significant risks. The good side is the huge profit potential with leverage and the opportunity to make money when the Bitcoin price moves down. The downside is increased risk and possibly bad tax treatment in CFD trading.

Paying Taxes on Bitcoin Investments

Everyone who invests in Bitcoin must also manage to file a tax return. If taxation and investing in Bitcoin seem difficult, consider investing in ETFs or stocks. Then, you don’t have to worry about calculating capital gains using crypto tax software.

It’s good to remember that the HODLers don’t have to worry about taxes. Capital gains are only accrued when you sell your bitcoins. There is no taxable income if you buy bitcoins and don’t sell any coins.

Generally, Bitcoin’s taxation is the same as that of other cryptocurrencies. Capital gains obtained with Bitcoin are taxed like those obtained from Litecoin, Ethereum, or Solana.

Beginners must remember that Bitcoin exchanges are not likely to send information about your transactions to the tax authorities. You should check the situation with the exchanges you use. In any case, Remember to file a tax return every year!

Investing in Bitcoin – summary

Investing in Bitcoin is not difficult; there is the right service and investment instrument for everyone. Investing in Bitcoin is as easy for beginners as buying stocks or using an online bank.

The biggest challenges usually come from the stress caused by the volatility. Bitcoin’s volatility has not gone away over the years. Although the market moves less daily than before, Bitcoin’s price can still collapse by 60-70 percent in one calendar year. This is tough even for an experienced investor.

Investors also get greedy during bull markets. Managing your Bitcoin position is not as simple as it sounds. Even experienced traders have difficulties controlling their emotions.

We recommend investing in small amounts, like doing monthly savings. This is also called DCA or Dollar-Cost Averaging. Buy bitcoins for a small amount once a week or once a month. Grow your position slowly and learn more about Bitcoin as a technology.

We recommend larger investments (more than 10 percent of the portfolio) only after you have gone through a big bear market (more than 50 percent decline).

All in all, investing in Bitcoin is a fascinating endeavor. Our website has a lot of information on the subject.

My experiences of Bitcoin investing

Finally, I will share my Bitcoin investment experiences, which I have accumulated since 2017.

First of all, I can say that starting to invest in Bitcoin was a long process. I heard about Bitcoin at the beginning of 2016, but I made my first investments only in the summer of 2017. Understanding Bitcoin was difficult, and I was horrified by the price increases I had already seen.

Can the price of Bitcoin really go much higher from here?

I made this reflection myself when Bitcoin’s price was a few thousand dollars. Many investors thought the same thing when Bitcoin’s price was a couple of dollars or tens or hundreds. The same thought goes through new Bitcoin investors when the price is tens of thousands of dollars.

As mentioned above, the DCA is the best way to jump on the bandwagon. Start with a small purchase, and as you gain experience, you can invest in more. With monthly or weekly investments, you get a decent average price for your purchases over a longer period.

The first bear market was the hardest for everyone, including me. It was the crash of 2018. Since then, the price movements of Bitcoin (or other cryptos) have no longer made me nervous. I see every dip as a good place to buy.

In my opinion, investing in Bitcoin without a clear vision is impossible. Such a vision can only be found by studying and understanding Bitcoin over time. That’s why it’s good to start with small steps and increase your understanding of Bitcoin.

The longer you hold Bitcoin, the more experience you will gain in Bitcoin investing and the better Bitcoin investor you will become. Enjoy your trip, and remember to watch out for various scams!

AboutBitcoin Team

Hey! We're the AboutBitcoin squad, a team of crypto lovers who've been all about cryptocurrency since 2017. Every week, we drop the latest news and cool insights from the crypto world. Come hang with us as we dive into the crazy, ever-changing scene of cryptocurrencies – it's gonna be an awesome adventure!