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Bitcoin: What It Is & How To Buy It

Updated: Apr. 28, 2023By: Michelle Jones

Learning how to buy Bitcoin isn't as difficult as it might appear. Before following our 2 easy steps to buying the cryptocurrency, learn more about what Bitcoin is and its risks.

Gold and glass bitcoin sign on top of circuit board. Cryptocurrency symbol on digital technology surface with lines and particles. 3d rendering
Photo by Stanislav Gvozd/iStock via Getty Images

What is Bitcoin?

Bitcoin (BTC-USD) is the original cryptocurrency, which means it's based on blockchain technology. Bitcoin is a distributed digital ledger where transactions are made between accounts on a technology called the blockchain. Every account is signified by a string of numbers, a public key, and has a password only available to the owner of that account, or a private key. To have one Bitcoin is to have an account with 1.00000000 BTC.

Other popular cryptocurrencies include:

Bitcoin vs. the U.S. Dollar

Fiat currency refers to government-backed money like the U.S. dollar. It's value is determined by the government, and it can change in value based on investment flows made by others. Unlike fiat currencies, Bitcoin is not government-regulated and its value determined by whatever people are willing to pay for it in the fiat currency they use.

Bitcoin vs. Gold & Other Assets

You can invest in Bitcoin or hold it to use as a form of payment in transactions where Bitcoin is accepted. Being able to use it as a form of payment makes it different from all other assets. Some have compared Bitcoin to digital gold because it acts as a store of value like gold does, but that's where the similarity between the two assets ends.

Bitcoin vs. Stocks & Bonds

Bitcoin differs from stocks because you aren't buying a piece of a company.

Bitcoin differs from bonds because bonds provide a steady stream of income, depending on what their yields and prices are, but Bitcoin can appreciate in value, which would provide a potential return.

Risks of Investing in Bitcoin

As with all assets, there are some risks of investing in Bitcoin.

1. It's Extremely Volatile

Perhaps the biggest risk is the extreme volatility in the price, which makes it easy to lose out on a lot of money if you sell while the price is plunging or soaring. Additionally, as the price gets higher and higher, there is always a chance that it will decline after you buy.

2. It is Decentralized

Another risk of investing in Bitcoin is the fact that it is decentralized, which means no central bank or other agency is overseeing your investment and protecting you from fraud.

Hacking is also a major risk for Bitcoin investors because many crypto exchanges have been hacked into and millions of dollars in Bitcoin stolen. You can avoid this risk by purchasing a cold storage digital wallet that isn't attached to the internet but make sure you don't forget the password or lose it because your Bitcoins will be lost forever.

3. Doesn't Typically Earn Interest

Bitcoin also doesn't usually earn any interest, which means you get nothing for holding it. You can earn interest if you place your Bitcoin in an account on some platforms. If you don't use these platforms, you are dependent on price appreciation to reap any rewards from your investment.

Additionally, since cryptocurrency relies on technology, glitches are always a possibility. Exchanges could also temporarily suspend trading.

Key Takeaway: As with all assets, there are some risks of investing in Bitcoin. Volatility is the biggest risk—the price can change quite rapidly with no warning.

How To Buy In Bitcoin: 2 Easy Steps

Learning how to invest in Bitcoin usually involves getting set up with a digital wallet and then signing up for a cryptocurrency exchange or broker that allows trading of cryptocurrencies like Bitcoin.

If you're buying Bitcoin directly, you must choose how much of the cryptocurrency to buy. You may even choose to purchase part of a Bitcoin if you can't afford an entire token.

If you're interested in cryptocurrencies in general, you might want to consider buying a portfolio of them to diversify your holdings, although most other cryptocurrencies rise and fall with Bitcoin.

If you don't want to invest in Bitcoin directly, you can invest in a fund that buys Bitcoin, like the Grayscale Bitcoin Trust (OTC:GBTC).

Important: Bitcoin is a cryptocurrency, which means it is a string of numbers. Bitcoin cryptocurrency is a distributed ledger of payment transactions, and when you own cryptocurrency, it just means you have access to the private key for a public account on the ledger.

Step 1: Choose Where to Buy Bitcoin

Learning how to invest in Bitcoin starts with setting up an account on a cryptocurrency exchange or broker that offers crypto trading. You also need a digital wallet to hold the Bitcoin after you buy it.

Popular cryptocurrency exchanges:

  1. Coinbase
  2. Gemini
  3. Kraken

Traditional brokers that offer cryptocurrency trading:

  1. Robinhood (HOOD)
  2. Fidelity

1. Coinbase (COIN)

Coinbase exchange is a good choice for beginners because the interface is simple, and there are limited transaction types.

Digital Wallet:

With Coinbase, you don't necessarily need a digital wallet because the company will store your Bitcoin for free. However, you might still want a separate digital wallet because the cryptocurrency will be secure if hackers ever break into Coinbase.

2. Gemini

Gemini offers products for both beginner and advanced cryptocurrency investors. There's a simple interface for new investors, while its ActiveTrader platform is designed for advanced investors.

Digital Wallet:

This crypto exchange holds most assets offline for security, but for online assets, it offers site insurance to protect digital assets against hacks on the exchange.

3. Kraken

Kraken offers a simple interface for beginners, but also provides more advanced features for experienced investors, such as futures contracts and margin trading with as much as 5x leverage.

Digital Wallet:

Kraken gives investors access to both cold storage and hot wallets. It also touts its tight security over its physical infrastructure, which includes round-the-clock protection by armed security guards.

4. Robinhood

Robinhood is an online brokerage, and it offers fee-free Bitcoin transactions in a way that brokers offer stock trades. In other words, you can enter different order types for your Bitcoin trades, just as you do with stocks.

Digital Wallet:

Robinhood provides a self-custody digital wallet, and also allows users to import Ethereum and Polygon (MATIC-USD) wallets to Robinhood Wallet.

5. Fidelity

Fidelity is a traditional brokerage, so it offers charts and analysis tools for cryptos similar to those it offers for stock trading on its platform. Investors who open both crypto and brokerage accounts can buy and sell cryptos and stocks without commissions on the same Fidelity mobile app. Rather than a fee, Fidelity charges a 1% spread. There are limitations, however. Crypto trading is only available in the 36 U.S. states where Fidelity Digital Assets is licensed to operate, and only Bitcoin and Ethereum are supported.

Digital Wallet:

As of the service's launch in early 2023, Fidelity uses a "managed custody" model in which it acts as the custodian for the customer's crypto keys. It does not allow customers to withdraw their cryptos to self-custody wallets, so all of the assets are stored on its site.

Step 2: Choose How Much Bitcoin to Purchase

When trying to decide how much Bitcoin to buy, you should first look at what you can afford. It's best to use a dollar amount instead of a Bitcoin amount because the cryptocurrency's price often changes rapidly.

You don't need to buy an entire Bitcoin if your portfolio won't allow it. You can purchase part of a Bitcoin if you don't want to risk very much of your capital in the cryptocurrency. Many new investors decide to dip their toes in the water first with a very small allocation.

How to Invest in Bitcoin Without Buying Bitcoin

If you don't want to buy Bitcoin directly, there are a few other ways to invest in the cryptocurrency, like through a fund. Here are some methods for investing in Bitcoin through a fund, peer-to-peer transaction or Bitcoin ATM.

1. Grayscale Bitcoin Trust

Buying into the Grayscale Bitcoin Trust is like buying a stock on the over-the-counter market. The fund invited a private pool of wealthy investors to put money in and then used that money to buy massive amounts of Bitcoin. Now anyone can buy into the trust, investing in Bitcoin without directly owning any of it.

The trust charges a 2% annual fee, which is significantly higher than the average ETF fee of 0.5%. Grayscale has applied to convert GBTC into a spot Bitcoin ETF.

2. Bitwise 10 Private Index Fund

This fund invests in the 10 most highly valued cryptocurrencies, of which Bitcoin is one. It's weighted by market capitalization and rebalanced every month. Like Grayscale, it also trades on the over-the-counter markets, so it's like buying a stock.

The company charges investors a 2.5% annual fee, which covers management, custody charges for holding the cryptocurrencies, and customary fees and exchanges from the fund's administrator and auditor. For tax purposes, it issues a K-1, which some investors avoid due to its more complicated tax treatment.

3. Peer-to-Peer Transactions

You can also buy Bitcoin directly from other individuals. Just give them your Bitcoin wallet account number, and they will be able to send coins directly to your wallet in exchange for whatever fiat currency you are using.

There are no fees with this transaction unless the person you are buying from or selling to charges a fee.

4. Bitcoin ATMs

These kiosks allow you to buy Bitcoin directly using a debit card, bank transfer, or cash or sell it out instantly and get cash via a bank transfer, card, or cash.

CoinFlip has the largest network in the U.S. and charges a 15.99% transaction fee, plus a $2.49 network fee, but during times of high demand, it may raise that fee.

Tip: You can invest in Bitcoin by purchasing it directly through an exchange or by investing in Bitcoin and cryptocurrency funds.

How To Sell Bitcoin

Learning how to sell Bitcoin is easy if you've already bought some. Simply choose the "sell" option on the same crypto exchange or online brokerage you used to buy the Bitcoin. You can also sell your Bitcoin at a Bitcoin ATM or in a peer-to-peer transaction.

Bottom Line

Learning how to buy Bitcoin can be very exciting but also extremely risky. As long as investors are careful with where you invest and how you store your cryptocurrency, they can potentially make quite a bit of money if Bitcoin prices keep going up.

This article was written by

Michelle Jones profile picture
Michelle Jones is editor-in-chief for ValueWalk.com and a daily contributor for ValueWalkPremium.com and has been with the sites since 2012. Previously, she was a television news producer for eight years. She produced the morning news programs for the NBC affiliates in Evansville, Indiana and Huntsville, Alabama and spent a short time at the CBS affiliate in Huntsville. She lives in the Chicago area with her son, dog and two cats.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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