- Bitcoin - What You NEED To Know Before Investing in Bitcoin
- Making an Informed Choice
- Choosing the Right Index
- Choice of Wallet
- The Reputation of the Wallet Provider & Offline Options
- Can You Time the Bitcoin Market?
- Bitcoin Mining Is Not for Amateurs
- Taxing Times
- Is Risk Free Bitcoin Investment Possible?
- Published by
- Parvinder Singh
Bitcoin - What You NEED To Know Before Investing in Bitcoin
Almost everyone now wants to invest in Bitcoin.
Actually, the entire cryptocurrency space has seen phenomenal rise in interest.
This is after the huge price rise in the recent history.
In 2017 alone, Bitcoin prices doubled in value.
But again in just one month, the value dropped by 50%.
So in many ways, investing in Bitcoin is all about grasping the basics of cryptocurrency.
It goes without saying that the Bitcoin rates are very volatile.
The Bitcoin market is largely unregulated.
Moreover, this cryptocurrency trade is banned in many countries.
So when you are looking at investing in Bitcoin, you have to consider many facts.
The most important elements are the risks that you have to consider.
In many ways, that will fashion the amount that you are comfortable in investing.
The kind of knowledge and insight that you have in the market determines your exposure.
The safety and security of your coins and the investment rationale is important.
Often this is the fundamental of Bitcoin investment.
This will be able to help fashion your investment in the right manner.
Moreover, the fund allocation too will depend on the overall investment rationale.
The degree of risk is a very important consideration.
You must understand that the endeavor has to be for no risk or low risk.
But the fact is that the volatility and uncertainty magnify the risk in Bitcoin.
So how do you invest in Bitcoin risk free?
Some will tell you that it is impossible.
But we believe that it depends on the depth of your insight.
You have to assess the extent of risk you are comfortable with.
That will help you take a balanced call on the overall risk exposure.
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Making an Informed Choice
If you analyze the scams and frauds with regards to Bitcoin, there is a clear trend.
Almost invariably the premise is people aren’t sure about what’s happening.
Most times, scammers capitalize on this cardinal problem.
People have started to invest in Bitcoin only recently.
Moreover, the craze is more about the striking gains.
Investors have been mindlessly putting in money just to clock the gains.
That is often the biggest problem with the overall ecosystem.
You have to understand that the gains don’t come out of nowhere.
There is always a price and a degree of risk attached.
Of course, it is possible to manage the risk.
By this I mean you will have to assess the risk and take steps.
Let’s say if you can spare $1 and risk $1, that is all that you must invest.
Risking $100 when you cannot even hope to repay it if you lose is not worth.
Therefore the primary requisite is that of a well thought out decision.
You should be very sure about when and how much to invest.
In this context, you have to make knowledge your power.
This will ensure that the degree of understanding is deep and meaningful.
For example, a lot of Bitcoin losses are a result of ignorance.
Many times, investors are not careful about what to buy and who to buy from.
This is decidedly the biggest risk in any investment.
You hear of people mortgaging their houses to invest in Bitcoin.
But the question is where exactly are they putting their money in?
How credible is the price hike expectation?
How can they choose to recover the money in case there is a huge loss?
This is exactly where making an informed choice is important.
It reduces risk considerably.
Choosing the Right Index
When people ask how to invest in Bitcoin risk free, the first prerogative is choice of exchange.
Choosing the right exchange to buy or trade the Bitcoin can help reduce risk.
This is because theft is one of the biggest risks in Bitcoin.
Be it traders getting scammed or losing Bitcoin.
So when you invest in Bitcoin, this is the first step.
Avoid investing in a hurry.
Don’t decide to invest because someone else decided to.
If you invest in Bitcoin, it has to be a well-considered decision.
So, you should devote sufficient time in choosing the Index.
Given the popularity of cryptocurrencies, new exchanges are coming up every day.
But are all of these genuine?
Will you be able to get the kind of return that you envisage?
Well, getting an answer to all these questions are very important.
You have to undertake thorough research before choosing the Index.
For risk free investment, it is better to go with established names.
Stick to exchanges that have continued to be in operation for a while.
In this way, you can avoid getting stuck by fly by night operations.
A bit of research on the internet can help too.
Find out the turnover and the trading volumes.
This will give you a fair idea of the kind of trade they undertake.
Most credible exchanges will be able to provide these type of data easily.
You should also look for reviews.
Well, not all reviews will be favorable but try to get a sense of the trend.
Is the maximum number of users positive or negative about the exchange?
Find out the kind of customer support you can expect in times of dispute.
That is a very important concern and also reflects the quality of after sales service.
Choice of Wallet
When you want to know how to invest in Bitcoin risk free, this is the most important concern.
You have to understand theft in Bitcoin transactions are more than $4 billion thus far.
In January 2018, hackers stole $530 million from users of a Japanese Exchange.
This is one of the biggest after the 2014 theft at Mt Gox.
Detailed reports indicate that most f the theft was by accessing customer deposit.
This means that the customer wallet that most Bitcoin traders use needs to be up to the mark.
Most times, these wallets are the primary culprits.
Though the purpose of the wallet is to safeguard the customer’s money, they are compromised.
It can happen due to many reasons.
One of the biggest and most common is hacking wallet private keys.
Therefore, it is important to protect your wallets in a constructive manner.
You need to be careful about who you are sharing the password with.
Also, look for a strong alphanumeric passcode that is not easy to hack.
You have to treat this wallet like a bank safety vault and safeguard accordingly.
But there are some wallets where the exchange has the private keys.
You have to be very careful before you decide to choose any of these.
Often the reasoning that exchanges give is to protect customer interest.
But there are some unscrupulous ones who coolly escape with your money.
Consult users and read detailed reviews before you trust your money with them.
Moreover be careful about how you download wallets.
There are many fake and look alike wallets.
They make you believe they are genuine and escape with your money.
Phishing instances are also quite popular.
It is always better to download wallets directly from the website.
The Reputation of the Wallet Provider & Offline Options
Another important consideration is the reputation of the wallet provider.
As a rule, it is best to avoid exchanges unless you know them for sure.
Buying a Bitcoin is never a huge problem.
It is the storing part that gets really tricky at times.
So you need to take all of these factors into consideration.
Many established exchanges even provide insurance cover for their wallets.
This means that even in case of a theft, investors can hope to get some money.
Moreover, exchanges that have been in operation for long speak for themselves.
But if you ask and offline Bitcoin storage is always better.
There are many providers who provide secure Bitcoin storage systems.
So if you are a serious Bitcoin investor, the first step is investing in a secure system.
The cardinal rule of the game is that you must store Bitcoins where you have direct control.
Think about it, if you had an expensive jewelry, will you leave it with a friend?
The chances are that you will rather keep them on your direct watch.
You will guard it 24×7 and look out for a bank vault for safekeeping.
The same holds true for Bitcoin.
It is much simpler to steal them across the internet than in person.
Tracing them is also very difficult.
Therefore, the easiest route is to save them in offline storage hardware.
Remember you have to take every possible step in maintaining the full security of your investment.
This is undeniably one of the most important steps.
When you consider to invest in Bitcoin risk free, this is the most important risk.
Storage of Bitcoin is becoming a matter of concern world.
The rise in valuation is further exacerbating the problems.
Can You Time the Bitcoin Market?
Now, this is a fundamental question about any investment.
Can you really time the market and reduce risk?
Well, that is a tough ask across asset classes.
Think about any asset class, is there ever the right time to buy?
Mostly there is never.
It all depends on your investment objective and target.
Per se, there is no set rule to buy Bitcoins.
But the basic rule of investment stands true for this too.
It is never a good idea to buy during a peak in the market.
Buying an asset class when prices have depreciated is best
Remember what Warren Buffett said about investment.
Buy when the prices are cheap.
But at the same time, it is never a good idea to buy during a market crash.
It is always better to let prices stabilize and then buy.
But at the same time, don’t let prices rise too much.
‘Identifying a bubble from a genuine upmove is the challenge.
While in hindsight, everyone can tell you what’s a bubble, the reality is different.
Sometimes it can be an actual rally and sometimes you might be stuck in a bubble.
The broad rule is to not lose sight of your investment goals.
How much can you invest and where you need to put a stop loss.
Also, make a mental note of the kind of returns you seek.
But one standard rule is don’t compare cryptocurrency cycles with traditional ones.
The rate of changes, volatility and overall price swings can vary a lot.
Unlike conventional financial markets, the range of intra-day swings can be huge.
A dip may not be the floor.
That is why don’t buy when there is huge volatility.
Adopt a wait and watch approach.
This will inevitably yield the best possible results.
Bitcoin Mining Is Not for Amateurs
If you are curious to know how to invest in bitcoin risk free, avoid Bitcoin mining.
Most times Bitcoin mining is a very specialized area.
It needs detailed understanding and thorough idea of the sector.
There are some firms that may offer to undertake mining for you.
But beware; most times these are huge scams.
They run away with the fees money, and you have to reconcile to the losses.
The smallest of mining operations need more than million dollars’ worth investment.
It is not a profitable business for beginners and veterans as well.
Moreover, this is one of the biggest risk elements in the overall game plan.
Currently, you need huge datacenters and warehouses to make it profitable.
If you are just operating out of the home, it is not worth the effort.
As the reward for it also reduces every four years, it is more of a waste of time.
Even if you want to seek expert help, it may not bear fruit all the time.
The risk of being scammed is quite distinct.
What is more pertinent is that you can earn the better profit by simple trading.
The question then is why you would want to go through this trouble.
Now, are you wondering how tax is a risk to Bitcoin investment?
Well, many people were initially attracted to Bitcoin because of lower tax liability.
But the truth is there isn’t complete clarity on the matter yet.
There are in fact, very few financial authorities who have complete clarity on this issue.
But let us understand something, there is no free lunch anywhere.
If you are earning money and profit through Bitcoin, you will surely have to pay tax.
But the good news is that in most countries Bitcoin is VAT exempt.
This means this does not attract tax for selling.
In many countries like US and Germany, it is considered at par with the property as an asset.
So as a result, this does attract taxes levied on financial products.
But that does not mean that the income generated is tax free.
In fact, that is still an extremely confusing area for financial consultants.
There are several loopholes that investors can take advantage of.
For example, you don’t have to pay any taxes for gains within a year.
In case you are not holding these coins for more than a year, tax liability is limited.
Moreover, there are many ways you can maintain anonymity in your trade.
That means you can avoid paying taxes in many ways.
But this will not be possible for long.
Most genuine exchanges maintain a record of all your transactions.
This means that sooner or later a more uniform tax regime is likely.
At that point of time, you have to work out ways to maintain gains.
The anonymity in trade is another big issue.
As of now, most of the tax advantage is derived primarily out of the anonymity in transactions.
Is Risk Free Bitcoin Investment Possible?
Apart, there is another risk when you invest in Bitcoin.
It is primarily the risk of regulation.
You need to understand that this cryptocurrency has been banned by many countries globally.
In that situation, it can impact your transactions as well.
So before you buy Bitcoins, it is important to verify its authenticity in terms of trading.
Therefore, it is very important to understand how Bitcoins make money.
It is still in a relatively nascent stage and requires lot more clarification.
Also, you need complete clarity on how to store them in a secure fashion.
Just buying them to take advantage of the spike in prices will not help.
You need a comprehensive view of how the currency operates.
Only then, you will grasp how to invest in Bitcoin risk free.
Parvinder Singh is a full time business and money writer with a Master's degree in finance from the University of Delhi.
With over 7 years of experience, Parvinder has helped many startups, financial institutions and marketing agencies in improving their business, marketing, finance, investment, trading etc.
View all posts by Parvinder Singh