There are many ways to profit from Bitcoin price movements and the best investment option will depend on your specific financial objectives. The below steps should help to get started:
- Decide on how much you are prepared to risk.
- Decide on a maximum time frame for cashing out the investment, and targets for cashing out that will be acted upon if they are reached before the maximum time frame. For instance, CFD brokers will allow you to trade intra-day (taking profits a few times a day). There are also options to trade on larger time frames. A buy and hold strategy – something between 9 months to 2 years.
- Decide on how you will invest: whether by direct ownership, or indirectly by purchasing shares in a Bitcoin fund or through a CFD broker.
Direct Purchase of Cryptocurrencies
One of the cheapest methods once transaction fees are factored in, is simply to buy Bitcoin directly and store it. This leaves you, the investor, with the legal ownership of the asset as well as the responsibility of storing and protecting it. The worry is in protecting the code, as the proof of ownership of Bitcoin is like a bearer share: anyone with access to the code can “spend” it. Thankfully, there are now phyiscal storage devices available that you can store Bitcoins “offline”. Kind of like a USB stick. This will help protect against the risk of hacking for example.
As for making the actual purchase of Bitcoin, there are two main methods:
- Using an online cryptocurrency exchange. There are typically a flat fee / commission associated with the purchase.
- There are also some ATMs in some cities which accept cash, debit and credit cards in exchange for Bitcoin. However, there is a much larger fee for this transaction.
While the cheapest possible method of direct purchase is usually through online exchanges, it can take a while to open an account and fund it, by providing ID and other required proofs, and making the bank or credit card transfer. It is also true that many exchanges do not yet accept deposits from residents in many countries. This means that if your country has an ATM where Bitcoin can be purchased, this may be your only option, even though the fees are higher.
The usual method is as follows:
- Download a wallet application onto your smartphone which can store your desired currency.
- Obtain the amount of cash you wish to invest. At the ATM, select your purchase and feed in the required cash. The ATM then allows you to scan your smartphone, and deposits your cryptocurrency into your smartphone’s wallet. You now have the proof of ownership stored in your phone.
- The wallet may not show you the cryptocurrency’s current value in the fiat national currency you want to value your investment in, so you will need to make a note of the price at which you made the purchase and judge its fluctuations from there.
For this reason alone, online exchanges are easier to operate and monitor, and they can be funded by bank transfer, credit cards and other methods instead of cash.
Another option which might be useful if you want to be highly diversified and invest in a range of different cryptocurrencies, is to buy shares in a cryptocurrency fund. The fund will buy and sell substantial amounts of cryptocurrencies, according either to fixed rules which are known to you, or to its own discretionary and active management. You buy a share of the fund, hoping that at some point in the future, the fund’s investments will have increased in value, and you will be able to sell your shares at a profit.
The advantage of investing in Bitcoin funds is that is offers an easy and sophisticated service. However, there is often a serious drawback in these funds: they usually trade at a high premium above the net asset value, or in plain English, are seriously overvalued beyond the assets they own. This means that unless you are getting active investment management or a very accurate tracker of the entire market, you are likely to have to pay much more than you should for the shares, making it an uneconomical option. Things may improve in the future as the market matures.
An alternative method for building something similar to a Fund approach is to use the broker eToro, which at the time of writing offers a “CryptoCurrencies Copy-Fund”. Buying or selling units in the Fund allows the trader to automatically copy eToro’s top traders’ operations in Bitcoin and Ethereum, weighted according to the currencies’ respective market capitalization.
BitcoinOptions & Futures
Options and futures are derivatives contracts which allow the investor or trader the chance to profit exponentially when they are right, while limiting their potential loss when they are wrong to a defined and relatively small amount. At the time of writing, there are a few online exchanges which offer such instruments based upon Bitcoin; however, deposits must be made in Bitcoin itself.
It should be noted that online cryptocurrency exchanges are currently only offering options and futures in Bitcoin. As these options and futures can be bought and sold on a secondary market within the exchanges and do not have to be held until maturity, they can also be a suitable vehicle for anyone wishing to trade Bitcoin instead of investing.
Many CFD / Forex Brokers are now offering Bitcoin to trade in a leveraged environment. The fees and costs associated with trading through a CFD broker are also very small. Usually you will pay a spread, but that’s about the extent of it. Even depositing and withdrawing should be cost effective.
Similar to purchasing actual Bitcoin, with CFD brokers you can hold a Bitcoin position for months or even years. There is the added advantage of being able to “scalp” the Bitcoin market and make investment choices on a daily basis.