JUN 13, 2014
How To Invest In Bitcoin Without Losing Everything
How should Bitcoins be used by long-term investors and how can investors keep their Bitcoin safe?
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Bitcoin has broken down many of the barriers regular people face financially. One of the more significant ways it has done this, is by opening up a speculative asset market that is easily accessible and has the potential to be extremely profitable. I am, of course, talking about Bitcoin itself as a speculative asset.
Let's face it, most of us missed out on the early gravy train that was Bitcoin. If we had invested in the currency back at its invention, or even just back in early 2013, we'd all be stinking rich right now. But that doesn't mean it is over. This is still the early days of the technology, if you hold bitcoin right now, you are still an early adoptor.
Bitcoin day-trading is not for the feint of heart. It is risky, stressful and bites most users in the ass more than it helps them. But what about investing in Bitcoin for the long haul? What if you just want to sit on your Bitcoins for a long time and sell them in twenty years when (hopefully) the currency is worth multiple times what it is worth now.
So how should Bitcoins be used by long-term investors and how can investors keep their Bitcoin safe?
First things first, you have to acquire some Bitcoins. We have a guide for that, but once you have some Bitcoin, you have to decide where to store it. Coinbase and sites like it provide a great service, but they aren't meant for long term storage.
That doesn't mean you can't buy the Bitcoin through Coinbase or other web-based wallets, simply that afterward, you should store them in a separate wallet that you control on your actual hard drive. That isn't enough to keep your coins completely safe, Windows is full of vulnerabilities, after all.
Once you acquire enough coins that losing them would be painful, you should move them to an offline wallet - a method commonly referred to as “cold storage.” Offline wallets can be stored on a computer that doesn't have access to the internet or better yet, printed out onto pieces of paper called paper wallets. So long as your private keys aren't stored on any computer that is connected to the internet, the Bitcoins should be completely safe.
Blockchain.info and Coinbase both make it extremely easy to make a paper wallet, but if you would prefer to not depend on them, bitaddress.org makes it easy to set up a paper wallet that you can add money to.
Once your bitcoins are in a secure paper wallet, you can hide them away somewhere (just don't forget where) and your coins will be completely safe. Even better, by using the paper wallet's public key, you can continue to accept payments and add more Bitcoins into your account.
Another thing to consider, like all good investors, is diversification. While most altcoins are next to worthless, there are a few worthwhile ones that you could use to hedge your bets on Bitcoin. Dogecoin, Litecoin, Darkcoin, NXTcoin, and Peercoin all hold significant value and can be used to make your cryptocurrency portfolio a little more secure. Be careful however, as volatile as Bitcoin's price is, altcoins tend to be even more volatile. They also have a better chance of losing most of their value permanently.
It is recommended to keep tabs on the community and the company involved. News can affect prices of both Bitcoin and its alternatives and it is important to keep track of security issues dealing with Bitcoin, exchanges and various storage mechanisms. Of course, we will keep you up to date here at Cointelegraph.
There is one last option for those looking to invest in Bitcoin, it's letting someone else do it for you. Just like traditional stocks, companies have sprung up that invest in Bitcoins for people. The Bitcoin Investment Trust allows investors to buy stock in the company. The Bitcoin Investment Trust invests exclusively in Bitcoin, by buying a piece of the trust, you are essentially buying Bitcoins. Since it is the only thing the company is investing in, the company's stock price is directly tied to Bitcoin. This allows potential investors to put money into Bitcoins without having to worry about the above advice regarding buying and storing them.
The downside of this is that you never actually own any bitcoins, just a part of a company that is made up entirely of bitcoins. If something happens to the Bitcoin Investment Trust, something happens to your Bitcoins as well. They are independently audited and claim to use the most state of the art cyber security methods in order to secure their bitcoins. Still, when it comes to money, people like to trust as few people as possible. Investing in a company rather than Bitcoin itself requires that you trust the company.
Despite the feeling that the Bitcoin boom has passed, the fact is, the currency is still getting started. Nothing is guaranteed in this world, but if Bitcoin reaches its full potential, then its value is just starting to rise. It may go up or down over the months, weeks and even days ahead, but over the long haul, BTC has one of the best risk/reward ratios of any investment going today. The key is knowing how to keep the coins safe and in your hands in the coming years and decades.