Your Blueprint to Bitcoin Investing in 2018

When Bitcoin was born in 2009 after the credit crisis and mortgage meltdown, the goal of the digital currency was simple – attempt to establish a form of money that wasn’t beholden to the whims of central banks or big financial institutions.

Since then, the so-called “cryptocurrency” has blown away early expectations and is very close to going mainstream.

As of right now, Bitcoin alone has a total market value approaching $50 billion. And over the years, other digital options have emerged as well, such as Ethereum which commands its own $20 billion market value!

The widening circulation and popularity is one thing. But for investors, the real point of interest is the profit potential. Recent record highs of about $4,300 for the value of a single Bitcoin shows just how dramatically this digital currency can rally — up from $100 in 2013 and just $500 a year ago!

But despite the growth of Bitcoin, many investors still don’t really understand what the digital currency is or how it works.

So let’s dig into the specifics – particularly how to buy and sell Bitcoin – so you can safely and profitably take advantage of the Bitcoin craze.

But first, a disclaimer: All investments are risky, and Bitcoin is no different. Please make sure you invest responsibly, and that any Bitcoin trades are just a part of a well-balanced portfolio. And as always, please don’t hesitate to contact me with your own thoughts and trades at editor@investorplace.com.

Happy trading!

Jeffery P. Reeves
Executive Editor, InvestorPlace.com

How Bitcoin Works

For those who want all the technical details, there is an in-depth guide at Bitcoin.org describing how the currency works. But in a nutshell, here’s what you need to know about Bitcoin’s structure:

A Bitcoin is Really Just Computer Code: The reason it’s called a cryptocurrency is because Bitcoins are represented in cryptographic code – basically, a coded message or a cipher.

You Store Bitcoin in a Digital “Wallet”: There will be a unique identifier for your wallet that is publicly available for transfers, but also a secret “private key” that operates as a password and security measure.

The Entire Bitcoin World Shares Transaction History: What makes Bitcoin unique is that you don’t prove you own $1,000 in Bitcoin by producing tangible coins or a tangible bit of computer code. Rather, you rely on the “block chain” of previous transactions – a public record of every transaction involving bitcoin. Think of it as a shared public ledger, used to calculate everyone’s accounts together. The block chain is distributed among a network of many bitcoin users to ensure the integrity of the history.

This Means Bitcoin Owners Themselves Regulate Bitcoin: Since Bitcoin users themselves are reconciling transactions and providing the security through verified block chains and cryptography, there’s no need for an institution at the top. That means transactions can happen instantly and without costly fees imposed by middlemen.

Bitcoin May Have Less Friction, But Isn’t 100% “Free”: Of course, all this technology has a cost so it’s impossible for Bitcoin to just exist without some kind of fee structure. However, Bitcoin’s unique way of using its community to verify the block chain and decentralize oversight gives it a big advantage. Over a traditional bank. After all, if anyone with a computer and the know-how to participate, competition keeps costs down and allows many different people to get involved instead of one fat cat at the top. Small fees attached to each transaction are offered up as incentives for anyone who wants to participate in Bitcoin’s transaction decryption and block chain maintenance, and there is no shortage of people who want to help.

There are many more in-depth topics worth exploring — such as how the community “mines” Bitcoins to verify the block chain, differences between Bitcoin and other cryptocurrencies, the most prevalent scams and security flaws and a host of  other topics.

But in a nutshell, Bitcoin is money… it’s just digital money managed by a crowd instead of one institution at the top.

So Why Would Anyone Use Bitcoin over Cash?

The fact that no one entity like a government or megabank is behind Bitcoin is a big appeal.

But is that alone reason to open up a Bitcoin account?

For many, probably not. But there are many other benefits to bitcoin that are worth noting:

Bitcoin Is a Real Currency: Those who think Bitcoin can’t be used to buy anything real are either stuck in the past or just spreading misinformation. Many independent businesses accept Bitcoin, but even some big brands are getting in on the act – including a Pennsylvania Pennsylvania Subway restaurant, and software giant Microsoft Corp. It simply isn’t true that you can’t use cryptocurrencies to buy actual stuff. It’s also imminently easy to get real-time pricing info on Bitcoin via a host of websites, including Coindesk.com.

Bitcoin Transfers Are Fast and Flexible: While many financial institutions charge you or take days to process transactions, Bitcoin allows transfers from one account to another almost for free and at will. You must have some technology, of course, and you must already have your money in Bitcoin form. But there are no middlemen holding you up.

Digital Currencies Are Here to Stay: While Bitcoin isn’t perfect, its potential has won over many of the biggest names of Silicon Valley and Wall Street. Icons from Bill Gates to Richard Branson to Mark Cuban see potential – at least in the concept and technology behind Bitcoin. Even if volatility in Bitcoin prices is the norm and competition is heating up, there clearly is a future for digital currencies in some form.

Bitcoins Are More Secure Than Gift Cards: If you have a pre-paid Visa gift card worth $50 and someone steals it or you lose your wallet, that $50 is likely gone forever. But while there is some level of anonymity in the world of Bitcoin, the block chain transaction ledger ensures that your Bitcoins in your wallet are secure. Since the long chain of transaction histories is shared, encrypted and independently verified by a disparate group of users, there is actually a public record of who has what.

What’s Bad About Bitcoin?

Of course, Bitcoin does have its drawbacks – as do all new investing and technological fads. Here are a few:

Extreme Volatility: The uncertainty Bitcoin faces as a new technology is not unique. However, the fact that Bitcoin is easily linked to the U.S. dollar means the ebb and flow of sentiment is painfully obvious – and in fact, may make volatility even worse. Remember, there are plenty of stocks like Twitter Inc. (TWTR) that are innovative and seem to have staying power … but have still lost investors a bundle. Don’t confuse the potential utility of Bitcoin with a guarantee that its value needs to rise.

A Fractured Future: Adding to the volatility and the prospect of losses is the fact that even if digital currencies become mainstream, there’s no guarantee that Bitcoin will. While a first mover, it’s unclear if Bitcoin itself will survive even as digital currency comes into its own. It’s not just competition from Ethereum and others, either; the Bitcoin community itself is fractured about where to go from here and just saw a splinter group create a competing cryptocurrency known as Bitcoin Cash. After all, BlackBerry Ltd. (BBRY) may have kickstarted the smartphone revolution almost 20 years ago … but it isn’t exactly sitting pretty these days. That could mean trouble if Bitcoin ever gets supplanted.

Bitcoin Isn’t Truly Frictionless: While it’s true that Bitcoin-to-Bitcoin transfers are theoretically easy, it’s an error to think participation in the market is free or without frictions. For starters, users have to exchange real-world dollars or euros for the currency, and most third-party exchanges charge a fee for that. Furthermore, many merchants “accepting” Bitcoin still don’t actually deposit Bitcoin into their accounts – they use a similar third-party exchange to instantly convert Bitcoins back to dollars, which often comes with a cost. And perhaps most seriously, the different value of Bitcoins on different exchanges shows that the market itself remains quite inefficient and bid-ask spreads remain problematic. All that may change over time, but for now the idea that there is no “cost” associated with Bitcoin is not technically true – so there is a chance fees get bigger, not smaller, with time.

High-Tech High Jinks Are a Risk: I don’t pretend to be a blockchain expert, but I do know that the tail of the chain – the most recent transactions — are a common playground for thieves. While Bitcoin itself may be legitimate, there are plenty of bad actors looking to game the system – including one hacker who bilked $65 million from exchange Bitfinex a year ago. And of course, the deficit in public awareness has led to plenty of misbehavior, including fraudulent exchanges that take your money and never issue any Bitcoin in return.

How Do You Buy Bitcoin?

Now that you know most of the risks and benefits provided by owning Bitcoin, the big question is… how do you buy Bitcoin?

There are many different ways out there, but if you’re buying Bitcoin directly the most important step is to use a verified digital exchange like Coinbase – one of the most popular portals out there. This is crucial because some sites claim to sell Bitcoin at a 5% or 10% discount … but they are actually scams.

Coinbase makes it easy and safe however, and you can download an app right to your smartphone or tablet. Then it’s just a question of connecting your bank account info, depositing U.S. dollars to spend on bitcoins and then going at it.

Of course, that’s not the only option. For those who don’t want to mess around with actually buying and selling Bitcoin, the Bitcoin Investment Trust (OTCMKTS:GBTC) from Grayscale allows you to buy the security in a brokerage account or even and IRA.

Read more here on Grayscale’s website if you’re interested in the full details. For my money, there is no better or easier way to play bitcoin with your existing portfolio than this one-stop fund. There are some $475 million in the fund at present, so this is hardly a fad and you can have confidence the fund is legitimate.

Whether or not Bitcoin will keep going up quickly, of course, remains an open question. So remember to only invest a responsible amount and as part of a well-diversified portfolio.