How to invest in Bitcoin

Published : 25 July 2018

Bitcoin has been the subject of increasing attention over the last few years. The price has risen drastically, partly due to the hype. If you invested 30 dollars in May 2010, you’d have almost 150 million dollars now. Yes, you read that right.

In 2017 the currency has experienced extremely high increases, with sudden drops along the way. Overall, the value has increased by 1300%. This naturally caused millions of new investors to appear, and the demand for buying bitcoin is higher than ever before.

 

How to buy bitcoin?

Bitcoin can be traded on a number of exchanges around the world. Be sure to find a platform that follows financial regulations.

There are two ways of getting bitcoin.
1. The easy way: Speculating on the price via a contract that follows bitcoin’s price
2. Buying bitcoin and opening a so-called wallet to store them (more difficult)

If you wish to solely speculate on the price developments – and you have no plans of paying with bitcoin – then we recommend simply buying a contract that follows the price. This method has a number of upsides. Among others, you don’t have to familiarise yourself with how to open a wallet and other technological subtleties that come with actually owning bitcoin.

You can protect yourself in many ways. Some platforms follow the EU financial regulations, which ensure that you can get your money back in case of an extreme situation, such as the platform going bankrupt.

This is not guaranteed on the newer bitcoin exchanges.

With speculation, you’re also less vulnerable to a hacker attack. You probably already know that the Mt Gox exchange got hacked back in 2011, and the users lost close to half a billion dollars. There is also the risk of theft, as the Bitfinex exchange found out. There was nothing for the users to do – the money was lost.

These issues are avoided when speculating with a contract. Here’s how to do it.

The easy way: buying bitcoin with a contract

If you trade bitcoin via a contract, you can reduce the risk connected to trading bitcoin. And it is much easier to get started.

If you don’t use your bitcoin for anything and want to only speculate on the price, we do not recommend buying actual bitcoin. You get exactly the same increase in value with a price-following contract – without the risk of trading on an unregulated exchange.

How much does it cost to buy Bitcoin via a contract?

There is only one cost when buying Bitcoin via a contract called spread. It is the difference between purchase and sell prices.

Here is an example from eToro. When you search for “bitcoin” or “btc” will show a graph where the following is only on the top.

Let’s take the example above. Bitcoin can be bought here for 14593.64 and sold/shorted for 14310.75. When you short, you assume that the market will go downward. The difference between the purchase and selling prices is circa 280, or about 1.9%, which is the expense paid by an investor or trader when making a trade.

In addition, you should be aware that if you want to short bitcoin there is an “overnight fee”. Therefore, a small fee is paid daily. You do not pay an overnight fee to buy. This means that the opportunity to go long or to bet that the market goes upwards is the choice that is most suitable for long-term investment.

 

What is bitcoin, and how does it work?

Dorian Satoshi Nakamoto has been wrongly named as the founder of Bitcoin. He rejected it and said that he had never heard of Bitcoin.

Bitcoin is a new currency that was created in 2009 by a person using the alias Satoshi Nakamoto. It has never been discovered exactly who that person is, or even whether it’s just one person (or a group). Over time many people were mistaken for being Nakamoto, but nothing could be proven.

Part of bitcoin’s attraction is the fact that transactions can be carried out without middlemen, such as a bank. Bitcoin can be transferred directly from person to person, which has numerous advantages. Among others, the fees are lower compared to a normal transfer. At the international level, you can use bitcoin, for example, to shop for furniture on Overstock, or to book hotels on Expedia.

Naturally, a part of the attraction relates to the possibility of earning money by investing in the currency. In 2017 alone the cryptocurrency has risen over 1000%, and some analysts keep exceeding each other’s estimates for how high bitcoin can go, while others remain sceptical. At this point in time, bitcoin has gotten the label of “digital gold”, which means that it is primarily an asset, a way to invest or store your money.

Bitcoin is a decentralised currency that utilises the so-called blockchain technology, which makes it impossible to double-spend your money. Normally, you are able to copy anything that exists in a digital format, but it cannot be done in this case.

Among virtual currencies, blockchain is used to ensure this. When you use bitcoin, the transaction is sent out to the bitcoin network, where so-called “miners” verify the transfer. There is also no need for a third-party, such as a bank, to verify the transaction, as that is done by millions of computers on the bitcoin network. All the transactions are logged and made accessible in a kind of open ledger, that ensures their validity and protects against fraud.

You can see a short video about bitcoin below:

Every time a transaction takes place, all the information – such as the source, destination, date and time – will be combined in a so-called block. The block contains this transaction together with other similar ones that have recently been sent to the network. Validation of the transaction lies in a cryptographically protected block, that is checked and confirmed by the collective computing power of miners.

“Miners” are people that use a part of their computer power to solve complex mathematical problems. When the problem is solved, the whole block and all its transactions will be verified as legitimate. The miners are rewarded for their work with bitcoin.

Then, the given block is combined with the last block, and a public, open chain available for everybody to see is created, although the names of the people involved in the transactions are not public. This process continues endlessly, and blockchain is thus expanded and copied onto millions of computers. This ensures that the latest available version of the open ledger exists everywhere on the net, and thus it is virtually impossible to reverse the transactions that have already been written into it. To be able to redo a transaction, a hostile would have to control over 51% of the computers in the network – which, in practice, is next to impossible.

The reason why so many believe that blockchain has value is the fact that the technology makes it possible to make value transfers without a third-party, like a bank. At this time, it’s also much quicker than the alternatives.

 

Why buy bitcoin?
Naturally, part of bitcoin’s charm lies with extreme price increases that the currency has witnessed in recent years. While many traditional investors have laughed at the currency and cried “bubble”, bitcoin has risen over 1000% in 2017.

One of the strongest criticisms came from the head of the JP Morgan Chase investment bank, Jamie Dimon. Below you can see a graph of his opinions over time, where he has gone from saying anything from “the bitcoin will not survive”, to “bitcoin is a fraud” later. At the beginning of 2018, he said that he regrets having called bitcoin a fraud.

In the meantime, his daughter has bought bitcoin.

Bitcoin has been approved to be traded as a future on CME and CBOE exchanges, which means that bigger investors have the possibility to expose themselves to bitcoin now.

While earlier bitcoin has been marketed as an effective way to handle and transfer money between each other, there are now other cryptocurrencies that can be expected to be better at it. However, bitcoin can be seen as an alternative or supplement for gold, as a way to stole value. As the supply of bitcoin is capped at 21 million, it will then always remain constant. But as long as demand is rising, so will the price.

Bitcoin has also begun to be used as a payment method in many places around the world.

Where can you pay with bitcoin?

Liberal Alliance – you can pay with bitcoin for your membership
Hungry.dk – buy a pizza and pay with bitcoins
Dell – international computer company
Microsoft – users can pay with Bitcoin in Xbox and Windows store
Bloomberg.com – big financial medium
Virgin Galactic – the entrepreneur Richard Branson’s firm, that among others owns Virgin Mobile and Virgin Airline
Zynga – mobile game

In addition, some countries like Switzerland and Japan are far ahead in accepting bitcoin as a payment method for all services and products around the world. But the actual use of the cryptocurrency is still quite small compared to how much it was discussed.

What bitcoin’s exchange rate?

The exchange rate for bitcoin can vary a little exchange to exchange. Below you can see the actual exchange rate of the biggest exchanges.


The price of bitcoin itself can vary from exchange to exchange, but it generally follows the same trend, with smaller price variations. Recently, it could be seen that the prices on the South Korean exchange are particularly high, due to especially large demand. You can find an average of bitcoin exchange rates and other cryptocurrencies on coinmarketcap.com.

 

How to earn/mine bitcoin?

As mentioned earlier, bitcoin is registered on the blockchain – a decentralised ledger, where all bitcoin transactions are written down in blocks. These blocks are added to a chain, and hence the name “Blockchain”. “Miners” verify these blocks and by doing so earn bitcoin (or another cryptocurrency).

Nowadays “bitcoin mining” demands big, expensive computers, as more complex mathematical problems need to be solved to verify a block of transactions. Calculations become increasingly difficult over time and thus require increasingly expensive and powerful machines. As a rule, they cost thousands of dollars. But only a few years ago you could do the calculations on an ordinary PC.

Thankfully, you don’t have to solve the complicated calculations yourself, the computer does it for you. You add it to the network, download the right software, and let it run. The machines use a massive amount of energy, make quite a lot of noise, and generate a lot of heat.

The process is called “mining” because, similar to oil or gold, it has a finite supply. Only 21 million bitcoins will be created. When a miner verifies a block, he or she will get a little share of bitcoins as a reward. It is the only way to create new bitcoins. And they cannot be duplicated. Until now, there are around 16,8 million bitcoins in circulation, and if the development continues at its current pace, it will take 100 years before we reach 21 million.

The amount of bitcoin received by the miners is halved every four years. It has happened twice in the history of bitcoin, the last time in 2016. Current reward equals 12,5 bitcoins for each block that’s “mined”, and thus verified. There is now more competition than ever before, when it comes to mining bitcoin. And the more miners come into the network, the more complicated the process to solve the mathematical problem becomes.

Currently, there is a huge “gold rush” in China, where most miners reside. And companies that develop advanced mining equipment have become very profitable. The biggest seller of mining equipment is Bitmain from China. The company develops microchips. The American company AMD and Nvidia have also profited from the bitcoin boom, as their graphics cards can be used by mining computers.

If you’re interested in getting started with mining bitcoin or another cryptocurrency, start here.

 

What is a wallet, and how to use it?

If you wish to invest in bitcoin the easy way, without actually owning bitcoin, you don’t have to read this section. It is intended for those who want to own actual bitcoin and use it, for example, as a payment method.

A bitcoin wallet is a software that ensures access to your bitcoin. Bitcoin itself is not stored anywhere. There is a so-called “private key”, a long, secret code that gives you access to your bitcoin. A wallet gives you the possibility to send and receive bitcoin, and it can come in many forms; as a desktop software, mobile software, web software, or as a hardware wallet.

A bitcoin wallet is also called a digital wallet. If you want to own bitcoin, a wallet is an important step (unless you want to invest in a contract that follows the price). A wallet is a counterpart of a physical purse. But instead of actually physically storing your bitcoin, the wallet contains relevant information about the secure “private key” that gives you the option to transfer funds.

Desktop wallet is installed on an ordinary computer and gives the user full control over the wallet. It gives the possibility to create a bitcoin address that can be used to send and receive bitcoins. It also gives the user the ability to store their private key. Some of the best-known desktop wallets are Bitcoin Core, Armory, Hive OS X and Electrum.

Mobile wallet can perform the same functions as a desktop wallet, and it can help you pay directly anywhere. It can also give you the opportunity for easy mobile payments via an NFC scan or a QR code. Bitcoin Wallet, Hive Android and Mycelium Bitcoin are some of the most popular mobile wallets.

Web wallet gives the option to use bitcoin everywhere, from any browser or mobile. If you choose a web wallet, you should be aware that the wallet stores your private key online. Coinbase and Blockchain are popular wallets providers.

Hardware wallet. There is a smaller selection of hardware wallets compared to the alternatives, but more are on the way. A hardware wallet can store your private key electronically, and facilitate payments. A good example of a hardware wallet is Ledger Nano S.

It is essential to store your bitcoin in a secure way. Some of the most used safety habits are: use a strong password for your wallet, and choose “cold storage” – it will store your private key offline, where hackers cannot get access to it.

 

How to exchange bitcoin?

Reading various forums on the Internet, you may get the impression that it’s hard to exchange your bitcoin or to get rid of them again. This is naturally completely wrong. Millions of trades between for example bitcoin and dollars are carried out every day. And if you trade on one of the big bitcoin exchanges, you can exchange cryptocurrencies into dollars or euros immediately.

One of the biggest exchanges for buying and selling cryptocurrencies is Kraken.com. However, we do not recommend using this platform, as extreme increases in customers can make it difficult to get answers to all your questions We had the misfortune to experience an accidental log out from our account, and it took 12 days to get in contact with customer support.

Therefore, we recommend buying bitcoin as a contract – our so-called “easy way”. In this way, you get the same percentage increases when you trade bitcoin or other cryptocurrencies. Moreover, you don’t have to open a wallet and are under a lower risk of a hacker attack.

Furthermore, when you trade on an exchange platform, you may have issues with getting the money back into your bank account, as many banks refuse to accept profits from cryptocurrency speculation. However, regulated exchanges pose no such risk.

Interested in bitcoin? You should also read about Ethereum, labelled by some as “the next bitcoin”.

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