5 Things To Consider When Buying Bitcoin
Cryptocurrency has taken the world by storm, with a combined market cap in the hundreds of billions of dollars. Its ease of use, the potential for short-term gains, and overall security via transactions make it a popular choice for many when engaging in digital – and in some cases, in-person – financial exchanges.
Bitcoin alone has a market cap of over $300 billion at the time of writing and is easily the most-recognized cryptocurrency on the market. With familiarity and widespread acceptance come reliability and security – but there are still a number of considerations any investor or purchaser of Bitcoin should consider.
As such, we’ll examine 5 crucial things to consider when deciding to buy Bitcoin.
Know Your Risks
It is vital to understand the full scope of cryptocurrency investment – both the pros and cons – before you buy Bitcoin. As many probably already know due to major news stories over the years, cryptocurrency (and Bitcoin specifically) can be somewhat volatile. Increased regulation, adoption and, market cap have minimized these swings, but it is still a worthwhile consideration.
Ultimately and from an investment standpoint, it is crucial to know your risk tolerance before entering the market. Knowing how much you are willing to potentially gain or lose will help you better guide investment decisions; a good rule of thumb in investing is “don’t invest what you can’t afford to lose”.
Sound planning and research will prevent any major losses. Nevertheless, consider your own personal tolerance for risk before committing to any specific investment strategy to buy Bitcoin.
Familiarize Yourself with the Exchanges
Bitcoin exchanges are generally reliable, regulated and safe entities through which consumers and investors can purchase coins safely. Nevertheless, it is crucial to evaluate a variety of Bitcoin exchanges before deciding on any one platform. Why?
First, a variety of exchanges can have substantially different amounts of fees associated with each transaction when you sell and buy Bitcoin. Next, some exchanges offer faster withdrawals and deposits (which can be invaluable during the investment process). Additionally, some investments may require additional layers of security and/or verification; for some, this can be a nuisance, while it is a relief for others. Established, reputable competitive exchanges such as Paxful make it incredibly easy to buy Bitcoin. With more than 300 payment methods (including gift cards, wire transfers, PayPal and Western Union), investors from all walks of life can buy Bitcoin easily.
Have a Storage Plan
Some people purchase Bitcoin to use in various online and real-world transactions. In these cases, long-term storage is not generally a concern and it may be possible to simply transfer funds directly from the exchange where they were purchased to the individual from whom you’re buying products and services.
However, longer-term investment is usually best secured by opting for a more advanced storage solution. In simple terms, there are five main types of Bitcoin storage: desktop wallets, mobile wallets, web wallets and hardware wallets.
While web wallets can be highly convenient, they can potentially be compromised if an exchange is hacked. Desktop wallets are quite useful and involve installing software on the computer that stores the Bitcoin currency locally. Mobile wallets are similar, but function on tablets and other mobile devices. The most secure type of wallet is the hardware wallet, which often comes in the form of a USB drive and can be disconnected from all internet-connected devices when not in use.
Paper wallets are another highly-secure option, eliminating any possibility for digital theft. Simona Vaitkune has a great article explaining the key differences between the five types of Bitcoin wallets.
Decide on an Investment Approach
How exactly do you plan to use Bitcoin in the short, medium and long-term? If you are purchasing Bitcoin solely for short-term transaction-based use (i.e. to buy products and services), then this is not a concern. However, most buy Bitcoin as an investment commodity and wish to hold it for a specific period of time in order to earn gains.
If your goal is to quickly turn a profit, then your investment strategy will need to account for this. This often requires more attention paid to the price of Bitcoin from day to day and/or quick decisions to optimize short-term gains.
For long-term investment, the micromanagement is far less – but it is recommended to determine either a specific price point at which you will sell regardless and/or a specific time-frame during which you will continue holding the currency. These hard limits can help prevent investors from making risky, short-sighted decisions in the event of an upward or downward trend with Bitcoin.
Research Tax and Legal Concerns
For US residents, there may be numerous tax considerations when investing in Bitcoin. However, the largest single tax consideration is capital gains.
Capital gains tax is broken down into two categories: short-term and long-term. Any earnings on Bitcoin that are extracted within one year will fall under standard income tax brackets. Long-term gains (over one year) fall into three specific brackets: 0%, 15% and 20%. For virtually anyone, earnings of less than $40,000 per year through long-term capital gains will not be subject to capital gains tax.
While there are many unique considerations to make before you buy Bitcoin (or any cryptocurrency), these 5 are among the most universal. Be sure to have a game plan, make the appropriate considerations and ensure your Bitcoin investment strategy is on a sound footing.