Chances are good you’ve at least heard of Bitcoin and the concept of digital currencies. Lately, they’ve been in the spotlight more than usual.
With good reason. Bitcoin prices have skyrocketed from just under $1,000 for one Bitcoin on January 1, 2017 to more than $6,000 at the beginning of November 2017.
That’s 600% in less than a year.
Enough people have made a decent amount through Bitcoin that investment groups are sitting up and taking notice.
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The world’s largest futures and options trading group, CME, announced in November 2017 that it plans to debut Bitcoin futures with a view to opening an ETF. (An ETF is an “exchange traded fund” – a type of investment that you can buy and sell on the share market, like a company.)
For now, though, individual investors are on their own when it comes to making money from Bitcoin. So how can you get started?
Some things to keep in mind before you invest
Bitcoin is massively volatile.
In 2014 the FBI raided a dark web marketplace called Silk Road – it allowed users to buy drugs and other illegal items with Bitcoins. After the raid, Bitcoin’s price collapsed. In 2013, the online exchange Mt Gox briefly halted deposits: Bitcoin prices fell more than 20%.
On the other hand, positive moves cause huge changes too. That futures and options trading group we just mentioned, CME – their recent announcement about plans for Bitcoin futures sent the price above $USD6,600.
Another thing: currencies are only as good as the places that accept them. If stores all of a sudden decide that they don’t want to accept Bitcoin, then the value will fall.
Bottom line: don’t put money into Bitcoins that you aren’t prepared to lose.
How to buy Bitcoin
The simplest way to invest in Bitcoin is to buy individual coins, and the most popular way you can do that is through an exchange. The most popular exchanges – sites like Coinbase, Coinjar, Bitfinex, Bitstamp and Gemini – follow a pretty similar process.
First, you sign up for an account (some require verification with ID). Next, you need to connect a bank account (or a debit/credit card) so you can start buying Bitcoins. Then, it’s simply a matter of transferring money from your bank account into your exchange account, then using that money to buy as many Bitcoins as you want.
Pick your exchange carefully. Many are reputable, but there are always scammers out there. And exchanges without good security measures can leave accounts containing Bitcoins vulnerable to attack.
Once you buy them, store them somewhere else
You can keep your Bitcoins in an exchange. But a lot of Bitcoin buyers – and the exchanges themselves – advise against it. After all, they’re susceptible to hacking like any other website.
So what’s the alternative? Something called a Bitcoin wallet. These are pretty much what they sound like – services that allow you to hold your Bitcoins in one place. There are a few different types:
Online wallets: Online services that allow you to keep your Bitcoins in them, secured with account credentials. They’re easy to use, but remember – they’re still online. Online wallet hosts have been hacked before. There are smartphone-based wallets like Xapo available too.
Offline wallets: Offline services that you can download and use as a way to store your Bitcoins. Some even let you hold your Bitcoins on a USB drive. (There are some made just for protecting Bitcoins). Some users call this "cold storage".
These are great for people who want to make sure their Bitcoins are on their machine, and their machine alone. As a result, many people believe they are superior to online services, but they have risks too. Like if you throw your hard drive away and lose millions of dollars.
Paper wallets: Some exchanges or wallets let you create a "paper key". These are paper copies of the cryptographic information that essentially make up your Bitcoins, along with QR codes. The advantage? Your Bitcoins aren’t vulnerable to hacks.
However, putting anything on paper means it can be destroyed, so you’ll need to keep it somewhere that no one can ever find it, like a safe. Any of these solutions will work – it really comes down to how much risk you’re willing to take.
How to sell Bitcoin
Simply reverse the process. Send your Bitcoins from a wallet to an exchange, then transfer your Bitcoins into the currency of your choice.
A lot of exchanges put limits on how much you’re allowed to transfer, like $2,000 or $3,000 a day. So if you’ve struck it rich and made $3 million you’re going to have to either cash out that Bitcoin across multiple exchanges to withdraw it quickly, or do it over a longer period of time.
Put money away for tax
Any time you make money from an investment you need to pay taxes on it. In most countries, including Australia, that tax is the capital gains tax.
Here’s how CGT works: the profit you make from your sale is added to your income. So if you buy $10,000 worth of Bitcoins, then sell at $50,000, then you’ve made a profit of $40,000. That $40,000 is added to your total income and taxed.
Be sure to figure out what tax bracket you’ll be in as a result of your profits, then put the appropriate amount of money aside.
You also need to keep records, including:
- The date of the transactions
- The amount in Australian dollars
- What the transaction was for, and
- Who the other party was
It’s strongly recommended that you see an accountant who can specialise in cryptocurrencies if you end up selling for a large profit.
Ready to get started?
Investing in Bitcoins isn’t as easy as just buying some shares – you need to put some effort into where and how you buy, along with the reliability of any exchange or wallet you use. But if you’re willing to take the risk, holding on to some digital currencies could be a way to diversify your assets.
Just remember – only buy Bitcoins with money you’re willing to lose.