How to Buy, Sell, Trade, and Invest in Bitcoin Explained: Everything You Need to Know About Investing in Bitcoin
In the future there might be other ways to invest in Bitcoin, but here in late 2017 the above two options are essentially the only two. Luckily however, while there is essentially only one stock that holds Bitcoin (called GBTC), there are a number of exchanges and brokers to choose from.
With those facts in mind, below are some quick and simple steps from going from knowing nothing about cryptocurrency to holding bitcoin or shares of a bitcoin security.
What is Bitcoin? Bitcoin is a type of cryptocurrency. Essentially that means it isn’t an actual coin, instead its a bit of code, stored in a digital wallet, that connect back to a specific transaction on a public record of transactions called a blockchain. That code represents ownership of a portion of Bitcoin, and that portion can be traded in-part or in-whole at the current market price for another cryptocurrency or currency via a cryptocurrency exchange, and goods and services using a cryptocurrency wallet (for example a Bitcoin wallet). All of that is then encrypted in a few ways via cryptography (hence the term “cryptocurrency”). You don’t have to understand any of that to trade Bitcoin, so let’s not focus on it here.
The Essentials of Investing in Bitcoin
To invest in bitcoin, do one or more of the following (TIP: Each option below is listed in order or premiums paid, ease of use, and flexibility.
The GBTC trust trades at the highest premium but is ultra simple and flexible, Coinbase charges fees higher than most exchanges but is the simplest option for owning actual Bitcoin, and using a wallet and exchange (like Coinbase’s GDAX) is the most complex solution, but also the solution with the lowest fees):
- Sign up for a Brokerage account if you don’t have one (so you can trade stocks). Wait for the sign up process to complete. Buy/Sell the GBTC bitcoin trust. TIP: GBTC trades at a high premium, but has a number of perks to balance this. I can’t cover them all here. Learn more about the GBTC bitcoin trust and its pros and cons.
- Sign up for coinbase (a wallet-and-exchange-in-one solution). Wait for the sign up process to complete. Buy/Sell Bitcoin, (and/or Ethereum and Litecoin), trading USD for cryptocurrency. TIP: I strongly recommend Coinbase to get your feet wet. Its simple, flexible, and results in owning actual bitcoins. Many who trade cryptocurrency will do all three options we are listing, so going with coinbase out of the gate isn’t a bad move.
- Sign up for a wallet and exchange, for example the official Bitcoin wallet Bitcoin Core and a reputable exchange like Kraken that accepts USD (Kraken is one of many choices). Wait for the sign up process to complete. The steps differ by the exchange, but essentially you deposit USD into your account, trade USD for Bitcoin, then transfer the Bitcoin out of the exchange into your Bitcoin wallet. Or, when you want to sell, sell your BTC on the exchange and then transfer your USD back to your bank account (just like you would do with a traditional security). TIP: Different exchanges work differently, some you’ll need a specific type(s) of wallet, some will offer a wallet. In any case, you should have a wallet you can transfer funds into.
NOTE: Some states (like Washington State and New York) and some regions are strict on what exchanges can operate there, for those states GBTC and Coinbase are good options.
TIP: If you have another cryptocurrency and just want to change it into Bitcoin, you can use a service like ShapeShift.
NOTE: There are also cryptocurrency IRA options. To take advantage of this, one needs an IRA, which isn’t an option for all investors. Learn more about cryptocurrency IRA options at Investopedia.
TIP: This page is a part of series on investing in cryptocurrency. See our page on how to trade cryptocurrency in general.
How to Invest in Bitcoin By Buying BitCoin Directly Using a Wallet and Exchange
The following two step guide will walk you through how to get Bitcoin, and how to buy/sell Bitcoin on an exchange.
STEP 1: First you need to choose a Bitcoin wallet and Bitcoin exchange (which means you should probably take a moment to brush up on what cryptocurrency wallets are and what cryptocurrency exchanges are). With that said, the simplest solution for a new investor is to set up a coinbase account. They are essentially the #1 choice in the U.S. for a reputable wallet-and-exchange-in-one solution that allows conversion into US dollars (USD). If you sign up for coinbase, you have a wallet and exchange to use all within a self contained system (which is very useful). As an added bonus coinbase pairs well with many major wallets and can be used to transfer coins into other exchanges that don’t accept USD. With that said, coinbase also charges some hefty fees for its ease of use. If you don’t go with coinbase, choose the official Bitcoin wallet Bitcoin Core and consider using one of the top exchanges (like Bittrex or Kraken). TIP: You need to use an exchange that let’s you deposit USD (or your preferred currency).
STEP 2: Buy and Sell Bitcoin. Once you have your wallet and exchange setup (which includes waiting for your information to be verified and bank and/or credit card to sync up) you are ready to trade Bitcoin. Buying Bitcoin on coinbase is very simple but limited, you buy the market price, pay a premium, and that is it. Meanwhile, buying on an exchange is like buying a stock, you either set a limit order to buy (which essentially states about how much you are willing to spend) and then if there is a seller the transaction goes through (with the exchange acting as a middle-man).
WARNING ON TAXES: Cryptocurrency is taxed like property (you’ll owe the capital gains tax and you must keep a record of transactions to report to the IRS), but the rules are murky. If you are sitting in one coin (for example, Bitcoin) keeping a record of transactions for the IRS is straight forward, you record your loss/profit when you sell and then account for it in the calendar year you sell. If you get into high frequency trading, day trading, or any complex trading… then you need to take time to really understand the current rules and regulations. Every trade from one cryptocurrency to another or to USD is a taxable event, and some suspect that the rules of like-kind exchange will not apply! Learn more about cryptocurrency and taxes.
TIP: Cryptocurrency can be volatile and you get nickeled and dimed with transaction fees and premiums. Make sure you are clear about what type of buy or sell you are doing. If you do a market buy when prices are swinging you could end up buying high. Also factor the fees in, you will always end up paying more than the market price (especially with coinbase, as for all the upside of ease of use, the downside is its fees). In other words, if you want to sell for a profit, you need to consider profits after fees for buying and selling.
How to Invest in Bitcoin By Buying BitCoin Directly Using The GBTC Trust and Stock Market
How to invest in Bitcoin via the stock market. NOTE: GBTC generally trades at a high premium. That may be a deal breaker for some investors. Make sure you fully understand GBTC before investing.
STEP 1: First you need a brokerage account so you can trade stocks on the stock market. So that means signing up with a Merrill Edge, E*Trade, Charles Schwab, Fidelity, etc account. You can use an existing 401k as well. If you have a bank that offers this service, for example if you use Bank of America, then consider using that.
STEP 2: Buy and Sell the GBTC Trust. Buying and selling a stock is almost exactly like using coinbase to buy Bitcoin. Fill out a form, set a limit or market order, and buy away. When you are ready to sell, fill out another form, and sell at a market or limit price. TIP: Some brokers will let you buy the market price on GBTC… but like with bitcoin exchanges, this is a bad idea. Always set a limit price on volatile stocks to avoid spending more than you need (if the only order open is a much higher price, a market order could result in you buying that order).
TIP: On both the stock market and cryptocurrency exchanges you can do some funky things like buy options or do margin trading. You should not do these things unless you really know what you are doing.
WARNING ON BUBBLES: Cryptocurrency already saw one bubble back in 2013, and it could be in another one here in late 2017. Never invest more than you can afford to lose on a risky asset like cryptocurrency. If you bought at the height of the 2013 bubble then sold low, you took a big hit. If you bought at the height of 2013 and sat on your coins until 2017, then you doubled your money (which means you did better than the S&P). If you put down more than you can afford to lose or sit on for 5 years, you are playing with fire. Some people get rich playing with fire, others get burned. Take some time to brush up on the nature of bubbles before investing; don’t play scared, play smart. If we see a crash, get ready to sell quick at a loss or sit on Bitcoin for years if not forever. TIP: Consider dollar cost averaging into Bitcoin (putting your yearly budget in over the course of the year and buying the average price). Or, consider putting a portion into bitcoin and keeping another portion out incase it crashes (so you can trade at the new lower price). In these ways you can “hedge” against the volatile market.
"How to Invest in Bitcoin" contains information about the following Cryptocurrencies: