All you need to know about investing in Bitcoin

Bitcoin has been one of the most trending investments in the last 10 years. (Rawpixel pic)

One of the most trending investments in the last decade has been Bitcoin, the “digital gold” of the 21st century.

This guide explains everything one needs to know about investing in Bitcoin.

The world’s first cryptocurrency

Bitcoin is the first cryptographic digital asset that is built and exchanged on a decentralised peer-to-peer network using distributed ledger technology known as the blockchain.

In 2008, Satoshi Nakamoto, a cryptographer whose real identity remains a mystery, published a whitepaper titled Bitcoin: A Peer-to-Peer Electronic Cash System where he described the mechanisms of the first completely decentralised digital payment system and its native currency Bitcoin.

In the nadir of the global financial crisis and the US stock market crash, crypto enthusiasts saw Bitcoin as a much-needed alternative to the fiat currencies issued and controlled by governments and as the future of an outdated financial system.

To create scarcity and prevent inflation in the future, Nakamoto hard capped the total Bitcoin supply to 21 million BTC.

Today, over 85% has been mined, but experts predict that the remaining Bitcoins won’t be mined before 2140 because the difficulty of mining keeps increasing. Afterwards, there will be no new bitcoins.

Blockchain technology and Bitcoin mining

Nakamoto was not the first software developer to try to design a functional digital payment system or a form of digital money.

However, he was the first to find the solution to the double-spending problem and create a payment system based on cryptographic proof instead of trust in intermediaries (read: banks).

In his whitepaper, Nakamoto described a revolutionary new technology called blockchain, a public ledger that consists of chained blocks of data (hence the name).

Blockchain technology is a public ledger that consists of chained blocks of data. (Pixabay pic)

The ledger stores every Bitcoin transaction and prevents third parties from making any changes or removing data.

Blockchain is also where mining Bitcoins takes place. This is done by “miners”, volunteers who operate the network’s nodes and spend great amounts of computational power to run the incoming data through a hash function and solve a complex algorithmic problem.

When the majority of the nodes accept the solution, the transaction is verified and enters the new block. The lucky miner wins a Bitcoin reward for the job.

Where can Bitcoin be bought?

Cryptocurrency exchanges: The most common platforms for Bitcoin purchases are the crypto exchanges.

The Securities Commission Malaysia has approved three Bitcoin exchanges that are recognised as registered digital marketplaces: Luno Malaysia, SINEGY Technologies, and Tokenize Technology.

Luno is a reliable trading platform free deposits and withdrawals and can be made and Bitcoin can be bought and sold for inexpensive fees.

It applies 2FA and cold storage to protect customer funds. Security is the No 1 priority when looking for crypto exchanges. Just remember what happened to Mt. Gox.

On a global level, Coinbase and Binance are the two most widely used trading platforms. US-based Coinbase offers prominent cryptos at an industry average fee of 1.49% and 3.99% for card payments or PayPal. Coinbase is unavailable in Malaysia, but Binance is and has a better choice of altcoins and affordable rates.

Traditional Stockbrokers – Robinhood: Fans of traditional stockbrokers, would be happy to know that some, such as Robinhood, eToro, and TradeStation support Bitcoin purchases.

The fee-free stock brokerage, Robinhood, has allowed Bitcoin trades since 2018. Primarily designed to be used on mobile phones, it recently launched a desktop platform.

Bitcoin ETFs: An exchange-traded fund closely tracks and mimics the price of an asset. A Bitcoin ETF would mean indirectly purchasing Bitcoin with an ETF of the value of Bitcoin without worrying about security issues or digital wallets. Moreover, if the investor thinks that the price of Bitcoin is about to fall, they can short sell shares of the ETF.

Bitcoin futures: Futures are contracts that allow Bitcoin investors to speculate on the future Bitcoin price. This is similar to commodities or stock futures. TradeStation and Binance are among the platforms that support Bitcoin futures.

Bitcoin ATMs: Another option to buy or sell Bitcoin is to use a Bitcoin ATM, but do be aware that most of them accept card payments only. There are no legal crypto ATM in Malaysia at this point in time.

Peer-to-Peer Platforms: P2P platforms are a popular option for buying Bitcoin. Exchanges like LocalBitcoins list thousands of Bitcoin offers with buyers and sellers that accept different payment methods. One can even find someone in the vicinity and agree to meet in person and pay cash.

Where can Bitcoin be stored?

Bitcoins should be safeguarded in a proper digital wallet that does not store the actual coins (they are intangible and virtual, of course) but the private key, the encrypted wallet address that gives access to the balance.

There are three popular types of Bitcoin wallets:

  • cloud-based,
  • software
  • hardware wallets
Once the Bitcoin account has been opened, there are several storage options. (Rawpixel pic)

Cloud-based and software wallets are designed by crypto exchanges or third-party providers and can be accessed online via a computer or mobile phone.

Although convenient, these wallets are liable to cyberthreats and malware, which is why they are recommended for temporary use only.

Hardware wallets are portable USB-like devices that store the private key offline, which significantly reduces the chances of hacking attacks and malware.

Popular and affordable hardware wallets include Ledger Wallet Nano S, Ledger Wallet Blue, and Trezor.

Before investing in Bitcoin

Once the right platform has been identified, creating a Bitcoin account is quite simple and straightforward. Before starting the registration process, it is important to have all documents at hand.

Every registered exchange has to comply with international anti-money laundering policies that require them to perform know-your-customer checks on all customers.

One will need to provide personal information, a copy of a government-issued ID, utility bill, and link one’s bank account or debit card to fund the account.

Using a credit card to make crypto purchases is not advisable as borrowing money to invest in a risky asset has proven to be a bad idea.

This can easily lead to overspending, which is why it is better to invest with savings only.

When investing online, make sure the internet connection is secure and private. Avoid making purchases via public WiFi networks when on the go.

Finally, be aware of potential market schemes. One such example is the “pump and dump” scheme, when experienced investors try to mislead novices into investing in a certain cryptocurrency in order to boost its price and sell its positions.

As long as one is cautious and does thorough research of the cryptocurrency market in advance, whether one engages in day trading or holds onto digital currencies long-term, Bitcoin investments have the potential to provide highly lucrative returns.

Other popular cryptocurrencies to consider investing in are Ethereum, Bitcoin Cash, Ripple, and Litecoin.

This article first appeared in MyPF. Follow MyPF to simplify and grow your personal finances on Facebook and Instagram.