Analyses
03
Feb
bitcoin investing

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Bitcoin investing

BITCOIN INVESTING is popular, especially among young investors. Investing in Bitcoin can be easily done with various financial instruments. The traditional way to invest in Bitcoin is to buy bitcoins from online exchanges. Nordnet offers an easy and safe alternative for Bitcoin investors.

If you are interested in Bitcoin stocks, there are several different options on the market. Bitcoin derivatives are popular among professional traders. Investing in Bitcoin is not difficult, and there is the right service and the right investment instrument for everyone.

Bitcoin investing is growing in popularity

Bitcoin investing is popular, especially among young investors. There are already hundreds of millions of Bitcoin investors in the world. The number doubled in the early 2020s!

Bitcoin investing really 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 2020-2021 raised its popularity again.

According to estimates, there are approximately 400,000-450,000 Bitcoin investors in Norway. The number is quite respectable when you take into account that there are about one million equity investors. Bitcoin has gathered its supporters in ten years while stocks have been traded for over 100 years in Scandinavia.

This article introduces Bitcoin investing at a general level. We go through different methods to invest in Bitcoin and compare the pros and cons.

We have also published an article on how to buy Bitcoin. There you will get step-by-step instructions on how the purchase process takes place. You can also find beginner’s guides on popular crypto exchanges by clicking Reviews from the top menu.

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

  • Cautious buyers
  • Traders
  • The HODLers

The group of cautious buyers also includes beginners who are about to buy their first bitcoins. In addition to this, the group has many Bitcoin investors from the traditional investment world who cautiously acquire bitcoins for their portfolios. This group has typically a Bitcoin position of less than five percent of the entire investment portfolio.

Traders are professional investors. They actively trade bitcoins by using futures and leverage. This is the group of investors that moves the price of Bitcoin in the market. They make the biggest profits and also suffer the biggest losses.

The third group is the so-called HODLers who are often so-called Bitcoin Maximalists. This group only buys bitcoin but does not sell it. HODLers believe in a larger Bitcoin revolution and accumulate bitcoins over a long period of time in their cold wallets.

Investing in Bitcoin can be done in many different ways

Investing in Bitcoin can be easily done with various financial instruments. Ten years ago, investing in bitcoin meant a laborious process of acquiring “physical” bitcoins in one’s wallet from foreign exchanges. Nowadays, the situation is much better from the investor’s point of view.

Bitcoin investing has evolved in recent years. The industry has grown enormously, and we have seen many new services born. New investment instruments have also become available 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 own risk and investment profile. There is nothing preventing you from using different instruments in investing in Bitcoin and thereby spreading the risk.

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

Investing in Bitcoin the traditional way

The traditional way to invest in Bitcoin is to buy bitcoins from online exchanges. For a long time, this option was the only way for an ordinary person to invest in Bitcoin.

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

Traditional Bitcoin investment can be easily done in Finnish trading places. Coinmotion and Northcrypto are both very safe and easy to use. They are under the strict supervision of the Finnish Financial Supervisory Authority.

Below is a picture of the front page of Northcrypto.

northcrypto

One of the key features of Bitcoin is the ability to manage your assets independently without the intervention of third parties. This is only possible when buying real bitcoins and transferring them to your own wallet. For many, this is the only acceptable way to invest in Bitcoin.

Bitcoin exchanges are open for trading 24/7/365. You can buy or sell your coins at any time. You can also move bitcoins from your own wallet unhindered. You have full control over your funds.

The downside of this investment method is the technical risks and the financial issues of the exchanges. The year 2022 has seen many large-scale bankruptcies in which millions of investors have lost their money. There are also risks in using your own wallet if you are careless, especially with the storage of private (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 have to also do tax calculations independently. This topic is covered in more detail at the end of the article.

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

Nordnet Bitcoin is a safe alternative

Nordnet offers an easy and safe alternative for Bitcoin investors. It means investing in Bitcoin using tracker products (derivatives) that Nordnet offers. What makes this form of investment easy and popular?

Nordnet is Scandinavia’s most popular stockbroker. It is also a publicly listed company on the Stockholm stock exchange. Many Scandinavians have accounts at Nordnet and manage their investment portfolio there. It is quite natural that such an investor would also like to manage his Bitcoin investments on the same platform.

You can invest in Bitcoin at Nordnet through different instruments. The picture below shows some tracker certificates for Bitcoin.

dogecoin price nordnet

The idea of tracker and ETF products is the same: they follow the price of Bitcoin. The investor, therefore, can reach the same end result as by buying bitcoins in the traditional way.  

The disadvantage is that trading is only possible during the stock exchange opening hours. This means weekdays and office hours. However, the Bitcoin price fluctuates 24/7 and usually even more on weekends even more than on 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 goes bankrupt that offers the ETF?

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

Investing Bitcoin in Nordnet 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 different options on the market. Bitcoin stocks give you the benefits of Bitcoin’s price development through indirect investment. You are buying publicly listed companies whose businesses are strongly connected to Bitcoin.

For many, investing in Bitcoin via the stock market means the same as buying Microstrategy. This is Michael Saylor’s company, which became famous in the fall of 2020. At that time, Saylor became the first CEO of a publicly listed company to speak in favor of Bitcoin.

Microstrategy owns more bitcoins than any other listed company. The value of the Bitcoin portfolio is so high relative to the rest of Microstrategy’s business that many consider the MSTR ticker to be like a Bitcoin ETF. The Bitcoin Treasuries website lists not only Microstrategy but also the holdings of other exchange companies.

Another popular way is to buy shares of Bitcoin mining companies. It is easy to see why these stocks move in tandem with the price of Bitcoin. Riot Blockchain Inc. is one of the most well-known Bitcoin mining stocks.

riot blockchain

Mining companies have proven to be dangerous investments in the bear market of 2022. Many well-known companies have even gone bankrupt. This happened because mining companies were investing too much in infrastructure during the bull market of 2021.

As competition has intensified, the profit margins of miners have decreased, and companies that have expanded too much have not been able to pay back their loans. Be careful with investing in Bitcoin mining companies!

The third option is to invest in Bitcoin exchanges. So far, there is only one publicly listed company on the market, the American Coinbase. In theory, an investment in Coinbase should be safer than in Bitcoin, because a Bitcoin exchange makes money even in a bear market.

Unfortunately, the bear market of 2022 has proven this theory wrong. Although Coinbase makes money regardless of the price of Bitcoin, the bear market kills the investing activity, which means that trading volume has collapsed. Coinbase was also investing too much in infrastructure in 2021 and had to make massive cuts in expenses in 2022.

Investing in Bitcoin through stocks doesn’t look like a particularly good idea in a bear market. It is worth considering these options when the market has turned to a new upward trend. Then the stock of Microstrategy or Coinbase may well rise faster than the price of Bitcoin.

The Bitcoin derivatives market is hot

Bitcoin derivatives are popular among professional traders. Derivatives are products known from the traditional financial world, which get their price based on the underlying asset. For example, the price of Bitcoin futures moves hand in hand with the actual Bitcoin price. The term derivative means that trading is not done directly with bitcoins, but with instruments derived from its price.

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 volumes of derivatives trading are many times higher compared to spot trading.

Popular instruments are options and futures. Below is a picture of the Binance derivatives market. Binance is the market-leading Bitcoin exchange.

binance futuurit

Derivative trading has several differences compared to spot buying. In general, derivatives trading is faster-paced trading, where positions are held 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, there are both long and short options available. This means that it is possible to make profits when the market is falling (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. Sounds great, but the same works in the opposite direction. A drop of one percent will drop 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.

Investing in Bitcoin – summary

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

The situation was different ten years ago. Today, the services have developed enormously. Various investment instruments are also available, but traditional Bitcoin investing is still going strong! Investors can also choose from a wide selection of Bitcoin wallets.

The biggest challenges can be found on the mental side. Bitcoin’s volatility has not gone away over the years. Although the market moves less on a daily basis 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 get also 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. You can find a lot of information on the subject at our website.