Bitcoin has captured America’s imagination. Whether or not the cryptocurrency will ultimately turn out to be a good investment or just a passing fad remains to be seen. Indeed, in the past several month’s Bitcoin prices have enjoyed a run-up that makes the 1999 tech bubble look staid by comparison. That excitement — the promise of sudden riches or sudden ruin — has a lot of people wondering how a bitcoin investment actually works.
If that’s you, here’s a step-by-step guide on how to trade bitcoin. But first…
Rise of the Cryptocurrencies:
As the tech literacy of the population increases, acceptance of crypto as a legitimate store of value follows, and it has boomed. In social media and in the news, titles along the lines of “Bitcoin prices up 50%”, “Facebook entering the cryptocurrency space”, and “Ethereum price surges” are starting to perforate our news feeds and eyes. One thing is for use; people who were once skeptical of Bitcoin and blockchain technology are slowly understanding it and getting increasingly involved with crypto.
How to Invest in Bitcoin
If you’re aware of the risks and still willing to take the plunge, this is what you need to know about investing in bitcoin: Cryptocurrencies exist in an unregulated, decentralized digital sphere without involvement by (or protection via) a central bank. This is part of bitcoin’s appeal. People or entities can buy and sell cryptocurrency anonymously, and there are fewer middlemen taking a cut of transactions. But it also means you can’t just buy bitcoin via mainstream investing tools like a brokerage account.
First one piece of good news: You can buy fractions up to the eighth decimal place of bitcoin. That means you don’t need to plunk down the nearly $8,000 you often see quoted as the price for a full bitcoin — which is probably for the best, as noted above. As of Tuesday afternoon, that one ten-thousandth — four decimal places or 0.0001 — of a bitcoin is worth about $.80.
Beyond that, for most people, the best (i.e. simplest) way to invest in bitcoin starts with setting up a cryptocurrency wallet. Some of the better-known sites where you can do this are Coinbase, Binance, Bitstamp and Bitfinex, although there are a multitude of other platforms out there, as well. Once you establish an account (which takes time, and includes having to take selfies of yourself holding pieces of paper with the date, along with sending in your driver’s license to verify your identity) , connect it to your payment source — a bank account or a credit or debit card — via two-factor authentication. Of note: It’s important to use a tool like Google Authenticator rather than just relying on text-based authentication, which can be more vulnerable to cyber-theft, when investing in bitcoin or other cryptocurrencies.
Once you have purchased a bitcoin, it stays in your digital wallet until you trade it — either by using it as currency for a purchase, or by selling it (which is technically “trading” it for American dollars or another currency of your choice).
If you have a brokerage account, you can expect the bitcoin user experience to be similar. And, as with a brokerage account, you’re likely to pay transaction fees whenever you buy or sell. That means day-trading bitcoin probably isn’t a great strategy — since those transaction fees could quickly eat up any profits. If you’re using bitcoin instead of PayPal, Venmo, etc., check first to see if the seller will charge you a fee for paying in bitcoin.
And although bitcoin is technically anonymous, that doesn’t mean you’ll necessarily escape the watchful gaze of the IRS. As MONEY has previously explained, for tax purposes, bitcoin is treated like a stock in that a trade can trigger a capital gains tax bill.
Other Ways to Buy Bitcoin
As of recently, investors can also buy bitcoin futures, which has only added to the hype surrounding it. Bitcoin investment sites are struggling to keep up with the surge in demand.
Coinbase, for example, has been such a popular bitcoin investment app that its CEO posted to the company’s blog last year a warning that the sudden influx “does create extreme volatility and stress on our systems,” which can create a lag for users.
There is also the Bitcoin Investment Trust from Grayscale Investments. This is being mentioned for the sake of comprehensiveness, but it’s a bit of a different animal, and one I am personally not a fan of. The fund is invested in bitcoin, but keep in mind, you’re actually buying the fund, not bitcoin. You’re a step removed from owning actual bitcoin, even though you are still exposed to its volatility. The pluses, Grayscale says on its site, are that you get the structure and tax benefits you wouldn’t get trading bitcoin directly; on the other hand, fees will eat up a chunk of anything you earn, negating the reason many people are drawn to cryptocurrencies in the first place. All of which is to say, you should really, really know what you’re doing as an investor if you’re going to dive into this pool.
Now that we have a basic understanding of how to invest in cryptocurrency, lets dig deeper into other ways one can invest
A lot of what was discussed above was looking at buying using fiat, or cash.
There are some major concerns when buying with cash. First, you have to worry about where you are going to buy/store. One will have to become familiar with exchanges and see if you feel comfortable holding them on there. As mentioned above, exchanges are hacked all the time and one may lose their crypto holdings if that were too happen. Believe me, I have seen this and know many people who have had this happen too. Its not a pleasant feeling. The feelings of being violated, out of control, and just robbed, are things that stick with you for a long long time.
One also can go the hard wallet route. If you put in the time and get the understanding, working with a hard wallet can be great. Wallets like Ledger, Trezor, or KeepKey, to name a few, are one of the best ways to hold your crypto. Some wallets only support certain cryptos though, so you may not be able to hold ALL your crypto. New ones are coming out all the time, but with new exchanges, or wallets, one has to be careful and see a “proof of concept” before having full trust. On t op of that, it takes time to move holdings from the exchange to your wallet and then back to the exchange when the time comes to sell. This can take minutes, or even hours. If one is a trader, or plans to be more active, you will certainly not be able to buy when there are “pump” or sell when there are “dumps”. You can be sitting there idly by watching the markets move tearing your hair out or biting your nails until they are bloody. Again not a pleasant feeling.
There is however, another way to invest in cryptos! That is through a retirement account, or using one’s IRA! Lets discuss this:
First, let me list a few of the major benefits of using an IRA to buy/sell cryptocurrency:
- You are buying with tax-deferred dollars (Traditional IRA)
- This means you will be able to acquire more crypto
- As opposed to a brokerage account you do not pay taxes on gains when trading. All assets, crypto, and cash remain in the IRA and remains tax-deferred.
- Your investment grows tax-deferred (Roth IRA grows tax-free)
- You will not have to pay any taxes on your investment gains until you take a distribution from your IRA during retirement years (over 59.5 years old)
- You can control when and how much to take at distribution giving you more control of your personal tax situation (if over 70.5 you have to take RMD, required minimum distribution)
- You can buy and sell at will without tracking for taxes
- As long as you leave the funds in your IRA no taxable event will occur
- Funds that are traded outside of IRA are considered short term capital gains and are taxed as ordinary income (If positions are held less than a year)
- If a position is held for over a year than it is long term capital gains and taxed up to 20%
- You can liquidate, move into cash and invest in other products or move to a different custodian. Again, all tax deferred with no penalties.
Now, there are a number of companies that have been out for a few years that can help you with this, and there seems to be new companies coming out all the time. These companies, to which I was a co founder of a couple of them, charge high fees. We are talking about 10-15% of your investment OFF THE T OP. This is so the commission sales rep you talk to earns that commission and will do whatever he or she can to earn their paycheck. Not a smart investment in my opinion. Once done, it makes it impossible for one to continuously buy and sell as most of your money has already been taken off the to p. I’ll get back to this in a moment. Additionally, bigger companies like Fidelity and Etrade are entering into the markets as well. These companies are only focusing on institutional level for the time being, so that takes these benefits out of the equation for the every man and every woman. On to p of that, some may only be offering GBTC, or crypto version of ETF, which as mentioned earlier, only allow you to own contracts and not the actual cryptos, while taking on all the same “risks”.
Luckily iTrustCapital exists. We have taken the benefits of utilizing an IRA and made it possible for one to invest properly, especially with regards to fees. Here are those benefits:
- Tax Advantages
- Any investment made inside of an IRA is sheltered from taxable events. All gains made in a Traditional, Simple or SEP IRA are tax-deferred until funds are withdrawn. Gains made in a Roth IRA are tax-free as long as no funds are removed until the age of 59 ½.
- Unlike many Cryptocurrency and physical Gold IRA providers, you can buy and sell 24 hours a day without speaking to a commissioned salesperson. We believe if the market is open, we should be too.
- Low Costs
- Costs as much as 90% lower than other IRA providers. Many Crypto IRA companies charge up to 15% transaction fees. Many physical Gold IRA companies charge a 30% spread. Paying this much just doesn’t make sense.
- IRS Compliant
- The ‘Checkbook LLC’ model requires a new LLC, and business bank account must be opened and maintained. Clients are tasked with record keeping and filing which can be complicated. An additional risk is taken according to legal experts who believe that these accounts are not IRS compliant and can be considered distributions which would create a taxable event and possibly other penalties.
So you have now taken a plunge into how to invest in cryptocurrency. We appreciate you learning, as that is one of the core objectives here at iTrustCapital.
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