6 Dos and Don’ts of Investing in Bitcoin
Bitcoin is a cryptocurrency that was created in 2008. It’s a type of fully decentralized digital currency, meaning that it operates without being controlled by a central administrator. Bitcoin transactions are stored on a public distributed ledger called the blockchain, which is accessible to any computer connected to the Bitcoin peer-to-peer network.
In the last few years, Bitcoin has exploded in popularity and the price of the cryptocurrency has grown significantly as well. In 2015, the U.S. Commodity Futures Trading Commission (CFTC) has ruled that Bitcoin is a lawfully tradable currency under federal regulations. This has attracted many investors, who now see Bitcoin as a legitimate investment vehicle similar to stocks. If you’re interested in investing in Bitcoin, there are a few things that you should know to avoid problems. Here are the most important things to consider when investing in this cryptocurrency:
1. DO Your Research Before You Get Started
Doing adequate research is important before getting into any type of investment. This is especially the case with cryptocurrencies like Bitcoin. If you’ve never used the cryptocurrency before, you should take the time necessary to familiarize yourself with it before you go forward.
There are plenty of free online resources that explain how Bitcoin works, how to buy it, how to use it securely, as well as its unique advantages and disadvantages. Having the right information can keep you from making mistakes that could be very costly in the long run.
2. DON’T Panic and Sell at the First Sign of Trouble
If you’ve been following the price of Bitcoin, you’ll see that it has fluctuated wildly over time. There are many things that could significantly affect the price of Bitcoin in a short amount of time, such as an investor buying or selling a huge amount of coins, government or regulatory actions, as well as various developments in the cryptocurrency world.
If you want to succeed as a Bitcoin investor, you should know that the cryptocurrency’s price will be subject to large swings. Even if the Bitcoin loses a lot of its value in just a day, don’t panic and sell everything that you have.
3. DO Know the Risks
Investing in Bitcoin or any other cryptocurrency can be risky. Bitcoin is considered a speculative investment that carries more risk than most other types of investments, like stocks, mutual funds and precious metals. A negative event could happen that can make the cryptocurrency lose most of its value. Therefore, you should only invest money that you’re prepared to lose.
Some Bitcoin detractors say that the cryptocurrency is just a Ponzi scheme, which is a fraudulent investment that involves an operator generating returns for older investors by paying them with funds that new investors brought in, as opposed to conducting any legitimate business activities. The significant gains that Bitcoin has made in price has caused some critics to say that it’s a Ponzi scheme.
However, a close examination of how Bitcoin works shows that it clearly isn’t. The price of Bitcoin is determined by market movements and the cryptocurrency doesn’t rely on new people buying in to operate. Unlike true Ponzi schemes, Bitcoin is completely decentralized, so there’s no one person or entity controlling it that could run away with everyone’s money.
4. DON’T Believe in Predictions
There are many people who claim that they can predict whether the price of Bitcoin will soar or crash. While there are some reputable publications that perform market analysis and give their opinions as to what can affect the price of Bitcoin, nobody can accurately predict how the cryptocurrency’s price will move, just like nobody can predict the stock market. Therefore, you should take any claims of predicting the future value of Bitcoin with a grain of salt.
5. DO Use the Right Wallet
As Bitcoin is a decentralized digital currency, you need a virtual wallet to hold it. There are plenty of third-party Bitcoin wallets around that work in different ways. The most common ones are online wallets that store your private keys on their servers. While this type of wallet is the most convenient, it does come with its security risks, so using it to store large amounts of coins isn’t recommended.
Other wallets store the key on your PC, on paper or on an external device. Take the time to research the different wallets available and familiarize yourself with how they work. You should also backup your wallet and use any security features available to you, such as two-factor authentication (2FA).
6. DON’T Avoid Taxes
Just because Bitcoin is a virtual currency, it doesn’t mean that you’re exempt from taxes if you invest in it. The most recent government decisions have found that profits from trading Bitcoin are subject to capital gains taxes, just like the profits from trading stocks or other instruments. If you have questions about taxes related to your Bitcoin investments, you should get in touch with an experienced tax professional for advice.
Bitcoin is rapidly becoming a popular investment. Many people from all over the world are buying the cryptocurrency in the hopes of making a profit. If you want to succeed as a Bitcoin investor, you should take the time to do your research and follow some best practices. This will increase the chances that your investments will be profitable and can keep you from making mistakes that cause you to lose money.
Jen McKenzie is an independent business consultant from New York. She writes extensively on business, education and human resource topics. When Jennifer is not at her desk working, you can usually find her hiking or taking a road trip with her two dogs. You can reach Jennifer @jenmcknzie