Bitcoin… Cryptocurrencies… Blockchain. You have heard these trendy words, that might make you sound like a tech nerd with a sprinkle of business savvy vibe. Truth is, all of them are confusing while it has been created in 2009, it took a while for it to be taken seriously. Some early visionary investors, (or plain lucky ones), made their fortune very early on with this. But like any investment you do, only invest in something you fully understand. Bitcoin is often considered as the new gold.
So before talking about how to invest in Bitcoin or other cryptocurrencies let’s talk about what is at stake, and why cryptocurrencies are such a big deal.
Table of Contents
Table of Contents
What’s a currency after all?
A currency is a money “currently” in use. Traditional currencies are held and governed by financial institution (read traditional currencies, FIAT currencies like the Euro, US Dollar, Yen etc…).
But way before that, for 4000 years on planet Earth, people used cowries shells as a currency. Unlike modern-day money printing machines, these beautiful shells could not be manufactured. Which meant there was a set amount of them.
2000 years later, in Egypt, wheat was the currency. It was portable and you could exchange it against a service, or some other goods. This is how most of the trades happened for the longest time, through exchanges of goods or service.
Later, gold became a standard because of its purity and rarity. With gold and silver, we saw the emergence of coins. This made it easier to count and exchange. A coin had a set weight of gold.
Later, when you owed money to someone, it was written down on a piece of paper, a ledger. And then when you would payback, then this transaction would be added to the list. In itself, this piece of paper only has the value you are willing to believe in. Today, governments issue their own bills (money bills), and because we do believe in our governments, we believe in these national currencies. But in the end, you are just giving value to a worthless piece of paper.
I remember when I was in boarding school, a Russian friend of mine gave me a bill of 120 Russian rubles. I thought I was the king of the world! Turns out 120 rubles does not take you far. In fact, people in the street were already using more the US dollars, because they lost faith in their own money. This is just to say that traditional money currencies are only backed by the confidence we give them and the value we are willing to give them.
Institutions have been playing with that trust to finance businesses, corruptions, bailouts etc…, you name it. To do so, they have been printing much more bills in circulations than the existing value of that money. This is what led to inflation. So much, in fact, that looking at $100 in 1919, it equals $1491 in 2020 dollars.
What would happen if, during a global recession (sounds familiar?), people stopped believing in their countries’s money? They would still need a system to exchange and trade, right? But they would not want it to be led by a government. They would want it to be transparent and cut the middle-man. Enters Bitcoin.
What is Bitcoin?
Bitcoin is an alternative type of payment that is digital (you cannot hold a Bitcoin in your hand) and is conducted outside the mainstream financial infrastructure. It allows one person to exchange money directly with another person. It was created in 2008 by a mysterious guy (or gal or group of people) named Satoshi Nakamoto who also created the first blockchain database.
The blockchain is basically a list (a ledger) on which each transaction is recorded using cryptography.These entries cannot be modified. The blockchain is decentralized through a peer-to-peer network. Every transaction is recorded on this public record. Circulating on a large numbers of servers, it makes the ledger intractable to shut down, and impossible to corrupt. This is what makes decentralized finance (DeFi) amazing.
No one heard from Satoshi Nakamoto in many years. We don’t know his identity, nor if he is dead or alive. We just know that his stash of Bitcoin has remained untouched since January 2009.
How is a Bitcoin manufactured?
Nakamoto made it so there is only a set amount of Bitcoins that can be mined (manufactured), 21 million to be exact. This is to keep banks in check and not allow to arbitrarily issue fiduciary media.
Bitcoin is made through the process called “mining”, by solving a very complex equation. While fully digital, the creation of a Bitcoin is intrinsically linked to a real cost: the processing power and heavy electricity consumption linked to solving that equation through powerful machines.
“Crypto-miners” are rewarded with a fraction of the Bitcoin when the equation is resolved. Called “halving”, that reward is cut in half every four years. Which means the value of the Bitcoin theoretically can only go up. The last Bitcoin will be mined in 2140.
Why invest in Bitcoin?
Lately, Bitcoin has been heavily used in hyperinflated countries like Argentina or Venezuela, where some basic imported consumer goods like let’s say a Big Mac, could cost one month of salary in traditional currency. Bitcoin has brought an alternative mean of payment with relative fair-exchange as not controlled by an unstable government or a bank. In fact Bitcoin ATMs are common thing in these countries.
Bitcoin has not yet received widespread adoption in North America and Europe, but however has become a popular investment globally. Because of the tech behind it, it has one of the highest investment volatility factor. But again, with great risk, can come great reward. And the opposite. To give an example, if you would have invested $100 in Bitcoin in 2011, you would have around $3 million by at price of April 2020.
Nothing can predict the success or failure of Bitcoin. But it is still very interesting to own, and brings an alternative asset to your portfolio. Like with Gold or REIT, it gives you some diversification. In fact, some will say “Bitcoin is better than gold”. It is commonly said in the Bitcoin community “only invest what you can afford to lose”. All this is of course just another way to reach financial freedom faster.
How to invest in Bitcoin?
Investing in Bitcoin is as easy as trading your Dollars for Euros, except the fees are much lower. You need a cryptocurrency exchange platform to buy your Bitcoins (or fraction of) and a crypto wallet to hold it.
Cryptocurrency exchange platforms
There are many crypto exchange platforms, these options are the simplest and most trust-worthy.
- Coinbase –probably one of the most popular, and very beginner-friendly. After plugging your bank info/credit card and verifying your identification you can invest in whole Bitcoins or just a fraction of one. Coinbase can also serve as crypto wallet;
- Binance is the other major player out-there, since 2017. It is one of the platforms used by the pro. Don’t let yourself intimidated by its looks. It also works for beginners. The big pros are much lower fees, and access to much more cryptocurrencies and advanced tools. Is it safe? Yes, but you should never leave your crypto on an exchange anyway. See below about hard wallet.
- Coinmama–is another popular and simpler platform. Their fees are higher but fewer identification requirements. You can only buy Bitcoin, Bitcoin Cash, Ethereum, Ethereum Classic, Litecoin, ADA (Cardano), and Tezos. You will need to register;
- Robinhood– the brokerage account so popular amongst millennials offers a crypto buying option. However, you can only sell and buy on Robinhood. Meaning whatever crypto you have is tied to your Robinhood account, and cannot be transferred to an exterior wallet or pay a someone.
For more advanced users there is Kraken. While it allows more currencies with lower fees than Coinbase, it is more designed for advanced users with large trading use.
Crypto wallets
Just like with real cash, you need to store your crypto somewhere. While it can be stored on the exchange you are using, it is recommended not to. Because that simply means you do not have access to the private keys (you need both private and public keys to do a transaction). The exchange does, which means they are the one actually owning your crypto. The exchange promises to give you whatever you are owned should you ask. But if a malicious person hacks into the exchange platform, then he/she have access to your private keys and your crypto could be gone. This has been seen in the past with Coincheck (hacked – $530 million went missing) and Mt Gox that simply disappeared from one day to the next, stealing EUR 460 million worth of Bitcoins.
Having a crypto wallet allows you do own the private keys. If the exchange gets hacked, your crypto remains safe because the hacker will not have access to your private keys.
You have to main types of wallets. Soft wallets are digital wallets that live online, making your crypto fully accessible if you want to use it or sell it.
Because Bitcoin has high anonymity, it is also more prone to hacking. Which is why there is also hard wallets. These basically allow you to download your crypto on an external device. Hard wallets are the safest way to hold your crypto. Of course, if you lose it, then your crypto is unretrievable.
Soft-wallets
- Coinbase Wallet – Coinbase as it is as simple as it gets, and represents an all-in-one solution. Coinbase Wallet allows you to connect seamlessly with your Coinbase account.
- Trustwallet – Owned by Binance itself, it is a safe one to use
For good preventive security measures, make sure you always activate 2FA on all your accounts. Check out our crypto wallet guide here.
Hard wallets
Ledger Nano X is a small USB key-like device. This is minimalist high-tech wallet packs a punch and is the first & only certified hardware wallet on the market by ANSSI, the famed French cybersecurity agency. It supports over 1250 crypto assets. Once your Bitcoin (or cryptos) are on it, they are no longer online, and cannot be stolen. Of course if you lose your Ledger Nano X, then your coins are gone forever – just like a real wallet!
Alternative way: BlockFi
BlockFi is a new platform founded in 2019. It is backed by Coinbase Ventures and Consensys, which is a powerful vote of confidence from some of the brightest minds in the cryptocurrency space. It allows:
- To invest and earn up to 8.6% on your crypto (Bitcoin, Ethereum, Litecoin, USDC or GUSD only). You could see it as a high yield savings account for your crypto, but with a much higher rate interest;
- Take crypto-backed loans, meaning you can borrow US dollars (or other FIAT currencies) against your crypto assets.
A lot of crypto investors invest in Bitcoin (or others coins) speculating on the fact that their assets might have a huge gain in the future. While this is highly speculative, it can also take many months, to years to get to that point. So instead of letting that crypto sit in your wallet doing nothing, why not putting it where it can generate some extra cash? So this is especially interesting for long term investors that do not plan on selling their crypto soon.
The platform is super easy to use. You just need to sign-up, verify your ID, deposit the amount of crypto you want to be invested, and voila!
Whatever platforms you decide to use, keep in mind that Bitcoin is not backed by banks. This means it is not insured should you lose your key or access to your crypto wallet or get your account hacked and crypto stolen. It’s your job to keep it safe. Blockchain is the breakthrough technology of the future, Bitcoin remains a fascinating asset to look into, and a potential for reaching financial freedom faster.
So, ready to join the financial revolution?
*originally published on Millennial Meta.