How to invest in Bitcoin

How to invest in Bitcoin

Bitcoin is on fire. The cryptocurrency soared to one record after another in late 2020, and early 2021, dominating headlines and hogging attention on financial news shows. As bitcoin surged past $50,000, many investors were kicking themselves for missing out – and wondering how to get in on this new asset class.

Even as bitcoin gains mainstream acceptance, the digital currency remains both unusually volatile and, for the uninitiated, difficult to play.

 

Should you buy bitcoin?

Bitcoin has been around for a decade. The digital cash emerged after the financial crash, and it first grabbed the attention of technologists, libertarians and those skeptical of central banks.

Over the years, bitcoin and rival currencies have been through several cycles of boom and bust. The latest surge, which began during the coronavirus pandemic, has been especially dramatic.

Here are three math-based guidelines to consider before adding bitcoin to your portfolio:

  1. You do not have any bad debt (debt at an interest rate over 5%).
    • Why: debt over 5% should always be avoided. Pay this down first.
  2. You have at least two months reserve in your checking / savings account.
    • Why: you need a stable cash reserve for emergencies.
  3. You have built up at least $500,000 in the Vanguard All World equity index
    • Why: You need to first build a solid base. Then you can consider adding in other investments.

 

How Much Should You Invest in Bitcoin?

No less than 2%

If all of these apply and you take the plunge, be sure to devote at least 2% of your net worth to bitcoin. Any less than that, and you won’t reap the diversification benefits offered by the cryptocurrency.

No more than 20%

On the other hand, don’t devote more than 20% of your net worth to bitcoin. Yes, the cryptocurrency could outperform global equities, but it could also significantly underperform.

Tip: Consider building your position slowly
Be extremely cautious about jumping in after the recent surge. You goal as an investor is to buy low and sell high, not the opposite.

  • Consider a target in the 5% to 10% range.
  • Consider only buying 50% of your target position now and the rest later.

 

How do you buy bitcoin?

Buying bitcoin remains a bit complicated – and that’s a big part of the reason the digital coin is still an instrument of speculation rather than a form of currency used in everyday transactions. Regulators have blocked attempts to offer the digital currency via an exchange-traded fund. And there are no physical coins to buy.

Tip: Consider visiting with a pro
If you are investing more than $50,000 or more than 5% of your net worth you should visit with a fee-for-service professional to better understand the risks and benefits of the various investing options.

Here are a few approaches:
PayPal: The widely used app lets you buy and sell bitcoins, making transactions almost as easy as sending money to a friend. PayPal collects commissions ranging from 1.5% to 2.3%, depending on the size of the transaction. PayPal also lets you buy and sell several other cryptocurrencies.

Coinbase. The best-known of the digital currency exchanges, Coinbase serves as a place to store bitcoin and other digital coins. Making sense of the fee structure can be a daunting task. Coinbase competitors Gemini, Kraken and others also provide a similar service.

Robinhood. In addition to letting investors trade stocks, Robinhood lets you buy and sell cryptocurrency.

Interactive Brokers. This brokerage offers a twist: While it doesn’t sell bitcoin directly, it does let customers buy futures contracts based on bitcoin. For a fee of $15, you can buy a contract with exposure to five bitcoins.

Bitcoin ATM. Illustrating bitcoin’s growing pains, some entrepreneurs have begun operating bitcoin ATMs. The vending machines let you visit a physical location to buy a virtual currency. This might not be the best option – vending machines charge the highest fees are among any of the options listed here.

Funds. There are a variety of funds that have exposure to bitcoin and other cryptocurrencies. I recommend that you speak with a professional to learn more about these options.

 


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