Often, my friends want to invest in Bitcoin, but are quickly overwhelmed by the details. I’d like to share my current thoughts on what works well for investment in Bitcoin for an average person.
- The basics of investment apply to Bitcoin. When you buy any asset, you need to establish a time horizon for how long you plan to hold it and under what conditions you would buy more or sell. Usually people get tripped up when they experience big changes in their lives — moving, getting married, starting a family, buying a home, receiving expensive medical care — and not planning for dipping into their savings. You should also decide how you will diversify your investments using non-correlated assets, and when and how you will rebalance your portfolio. A financial investor almost certainly will not give you good advice about Bitcoin, but he can give you good advice on investment basics. If you can, self educate. If you’re not clear on how to make decisions in this area, you might not be ready to invest in Bitcoin.
- If you don’t already have a bunch of savings to invest, you probably want to instead dollar-cost average in. For example, you might set aside $100 from each paycheck. If Bitcoin has risen in value a lot recently, resist the temptation to panic buy with a large portion of your savings. Trading is mostly psychological; read up common trading pitfalls and plan in advance.
- Buying Bitcoin is probably easier than you think, especially if you live in the US. You should open several Bitcoin trading or exchange accounts, because they go down somewhat often. Getting each exchange account into good standing where you can buy and sell coin might take days, weeks, or months — mostly because of complications related to the legacy banking system — so hop on this ASAP. Some reputable exchanges accessible to the US include Coinbase, GDAX (owned by Coinbase but with lower fees), and Gemini. ShapeShift can help you convert between crypto-currencies.
A couple of tips concerning Bitcoin’s current high ($20+) transaction fees:
If you can’t buy a crypto-currency directly, you may not want to buy Bitcoin first and then convert it due to Bitcoin’s high fees. Instead, you could buy a currency with lower fees such as Bitcoin Cash or Litecoin, and immediately convert that to your currency of choice with a service like ShapeShift. This will impact high rollers far less than people who make small, regular investments.
You may be able to decrease your Bitcoin fees by buying from an exchange that will directly deposit Bitcoin in your wallet of choice, rather than requiring an additional step to move the funds from the exchange account. Blockchain.info (disclosure: my employer for 3 years) offers this capacity in many states and countries.
You should learn about typical fees for any currency you invest so you can plan around them.
- Understand tax implications of when you buy or sell crypto-currency; in the US, it’s primarily capital gains. This will help you plan when to buy and sell. Bitcoin’s weak privacy lends itself to analysis and tracking by high-resource organizations like the IRS; neglect taxes at your own risk. To learn more about Bitcoin Privacy, read: The OBPP Top 4 for 2016.
- Crypto-currencies are here to stay, but it might not be Bitcoin that wins in the long run. To hedge against this possibility, you can invest a small portion of your crypto-currency assets into other strong contenders. The developers of these currencies must have a technical explanation for why they might succeed where Bitcoin does not. To limit risk (and reward), choose coins with already competitive market caps. Understand that non-Bitcoin currencies (“alt-coins”) are even higher risk than Bitcoin, with risk profiles which resemble penny stocks. Don’t buy an asset because you heard a positive rumor about it, and instead develop investment theses. Investigate: Bitcoin Cash and Ethereum. Avoid: Ripple (not a crypto-currency), Litecoin (not different from Bitcoin in any interesting way), and ICOs (mostly scams). Most people do not have the technical skills to vet the claims of new crypto projects, and so you probably shouldn’t try to. A reasonable crypto-currency portfolio might be:
90%: Some combination of Bitcoin and Bitcoin Cash
10%: Ethereum and other alt-coins
- Be humble in your trading. There are a lot of professional individual and institutional investors in Bitcoin, now. If you’re an occasional amateur trader, they are better at trading than you are. Therefore, don’t try to out-smart them, and keep your trading strategies simple. Avoid leveraged trading and derivatives.
- Learn how to securely store the coins yourself. Multiple times per year, exchanges get hacked and lose millions of dollars of customer funds. This is not likely to stop any time soon. Therefore, leave your coins on exchanges for the minimum amount of time necessary to buy or sell them.
- Some good basic skills to learn for any Bitcoin wallet client include: Send and receiving, sanity checking fees, importing and exporting private keys and mnemonics, backing up funds, and applying security measures such as Two-Factor Authentication.
- Most people will lose funds in one of four ways: Hacked exchanges, phishing websites, malware, and failure to backup. Use of a hardware wallet such as a Trezor or Ledger will go a very long way to protect you from the first three, but there is no magic bullet for preventing the loss of funds. Always backup your recovery mnemonics to multiple safe locations. If you own a lot of crypto-currency, you may want to look into more advanced security measures such as the Glacier Protocol. A few reasonable rules of thumb are:
$0-$1000: OK for web wallets, mobile wallets, etc. Look out for malware and phishing. Use 2FA.
$10k-$1m: Buy a hardware wallet already, you cheapskate. Technically savvy might set up a more sophisticated cold storage system. At this point, you probably need to break funds up into multiple wallets for casual money vs. long-term savings.
$1m+: Investigate more sophisticated storage systems such as the Glacier Protocol. Consider the possibility of physical coercion, and plan your estate.
Putting this all into practice:
- Alice opens accounts at Coinbase and Gemini. She secures her accounts with 2FA. As she goes through the Know-Your-Customer processes, she uploads identity documents and links her bank accounts. She commits to purchasing $100 of crypto per month.
- Alice sets up a Blockchain.info web wallet, verifying her email account and setting up Two-Factor Authentication with the Google Authenticator app on her mobile device. She only accesses her wallet on a device she is reasonably sure is free of malware, and bookmarks Blockchain.info’s wallet login to avoid phishing sites. She uses a well-secured GMail account for her email address. She carefully writes down her 12-word recovery mnemonic for her Blockchain wallet on a piece of paper, stored in a safe in her house.
- Each month, Alice logs into Coinbase and buys $70 of Bitcoin and $30 of Bitcoin Cash.
- Alice moves the $70 of Bitcoin and $30 of Bitcoin Cash into her Blockchain.info wallet. She immediately converts $10 of the $30 into Ethereum using the ShapeShift integration.
- Once Alice has $1,000 USD of crypto-currency, she buys a Ledger Nano S hardware wallet and moves all of her funds there. From then on, she uses the Ledger to receive all funds. She writes down the 24-word recovery mnemonic for her hardware wallet and stores it in her safe in her home next to her Blockchain recovery mnemonic.
All of the currencies, wallet clients, and exchanges referenced in this article are provided merely as examples that have worked well for some people, and not others. Do a little research and choose what will work best for you.
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The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.