Do you remember the first time you ever heard about bitcoin?
Considering the technology is only a decade old , chances are pretty good you do— and you may have quickly dismissed it as a wacky fringe movement, as many did. Part of the reason it may not have seemed appealing is how difficult it is to explain cryptocurrency in layman’s terms.
Ten years later, skeptics might be eating their words. Although it’s definitely seen some fluctuation, the value of bitcoin has risen dramatically. When it first hit the market, you could buy more than 1,300 bitcoins with a single dollar, but today, one bitcoin is worth almost $11,500 .
Although it would have been wonderful to throw $50 toward bitcoin back in 2009, those numbers may have some investors saying, “Better late than never.”
If you want to get in on the bitcoin action yourself, you may still be a little bit worried about the learning curve. Although the cryptocurrency is way more valuable than it was 10 years ago, bitcoin is no less confusing.
Here is an in-depth guide to help you learn how to start adding bitcoin to your financial strategy, including a quick primer on what it is and how it works.
First Things First: What Is Bitcoin, Anyway?
Before learning how to exchange your cash for bitcoin, it’s probably a good idea to have a sense of what it is, exactly.
While you may not need to know how all the technical details work to get started, it may be wise to get some basic knowledge and vocabulary down so you’re not just flying blindly. This is your money, after all, and like many financial endeavors,bitcoin does involve risk (a lot).
Bitcoin is a “decentralized digital currency ”—that is, it’s money that exists solely on the internet, and it isn’t managed by a specific bank or clearing house.
Because bitcoin transactions don’t have to be filtered through a for-profit institution, associated transaction fees tend to be much lower, and you won’t likely run into certain bank-related headaches like having your account frozen or having to maintain an arbitrary balance minimum.
It’s also universal: Bitcoin can be purchased with dollars, euros, or any other type of currency, and can then be exchanged online no matter where your recipient or sender is located. That can make it a lot easier to buy or sell goods and services on foreign markets, since traditional banks often charge foreign transaction fees or make consumers pay for currency conversions.
Bitcoin is sent and received using a digital bitcoin wallet, which you download onto your computer or mobile device. There are a wide variety of wallets available on the app market. (More on wallets later.)
So, what makes bitcoin a particularly attractive option, compared to the multiplicity of other ways to pay online? For many users, the answer is security. While the technical details are well, technical, suffice to say bitcoin, and other forms of cryptocurrency, use very stringent security measures to verify transactions.
While you may have heard the term “blockchain” bandied about, it can be difficult to get a real sense of how it works. Basically, the blockchain is a kind of transparent public ledger: a list of confirmed bitcoin transactions which verifies the integrity of each transaction.
The transactions are confirmed by bitcoin miners, who use special computer hardware to do the fancy mathematical cryptography calculations required to confirm each item on the blockchain. Bitcoin miners are rewarded for this service with transaction fees and newly generated bitcoins.
Furthermore, your bitcoin wallet generates a private key, or “seed,” for each transaction. This key is a secret piece of data that’s used as a kind of signature to confirm your identity and also to keep the transaction from being altered retroactively.
All of these security measures are part of what makes bitcoin a type of cryptocurrency—and it’s not the only type of cryptocurrency available, though it is generally considered to be the first. Other relatively common cryptocurrencies include Litecoin, Ethereum, Zcash, and Dash.
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Pros and Cons of Investing in Bitcoin
Now that you know the basics, you may be wondering how to get into the bitcoin game.
Buying bitcoin doesn’t have anything to do with the traditional stock market. Instead, it’s about simply purchasing bitcoin tokens. Although bitcoin is, at its heart, just a currency which can be used like the dollar bills in your wallet, purchasing bitcoin could possibly be considered an investment, because the perceived value of cryptocurrencies like bitcoin changes over time. And in the case of bitcoin specifically, that value has risen sharply since its inception back in 2009 . (It’s important to note that past performance doesn’t indicate future performance.)
Thus, one of the biggest potential benefits of buying bitcoin is the possibility of earning a high return. As the dollar value of bitcoin increases, the individual coins you own will have greater spending power.
Furthermore, once you have bitcoin, you can use them as currency, giving you the security benefits as mentioned in the previous section—as well as universality and convenience.
Since it’s all online and setting up a bitcoin wallet takes minutes, it’s not hard to get started using bitcoin to buy and sell goods and services, and as the technology becomes more popular, a greater variety of vendors are accepting it.
Of course, like any asset that’s vulnerable to market fluctuations, there’s always a risk that the bitcoin will depreciate, and indeed it has at certain points along its overall skyrocketing trajectory.
Although a downward spiral hasn’t been the long-term historical trend, it’s definitely possible to lose money if you purchase bitcoin and the currency experiences a precipitous drop in perceived value.
While bitcoin itself is relatively stable relative to other cryptocurrencies, it’s important to know that digital currencies can run into disaster. Of the approximately 2200 cryptocurrencies that have debuted on the market, more than 800 have eventually failed entirely.
And although it may not be a drawback to buy bitcoin, if you’re planning to spend the currency online, you should be aware that bitcoin is not anonymous—a common misconception.
Rather, bitcoin transactions might more accurately be described as pseudonymous . Each is tied to a specific bitcoin address, which can be linked to your identity by your chosen wallet app, a merchant, or simply sharing your bitcoin address with someone you know in person.
Investing in Bitcoin: From Start to Finish
Starting to feel confident that you understand the basics of bitcoin and want to buy some for yourself? The process is actually surprisingly simple. You can even automate the process with SoFi auto invest.
The first step is to make an account with a digital currency exchange—these are platforms that allow you to buy, sell, and exchange bitcoin on the market, and which generate the unique bitcoin addresses you need to make transactions.
Different bitcoin brokers offer different specific services; for instance, some are merely exchanges, which allow you to invest with bitcoin similarly to how you would with a stock market brokerage account. In other words, they don’t allow you to pay for goods or services using bitcoin as currency, but only to use them as trading vehicles to hopefully earn money on appreciation.
If you want to trade bitcoin and also use it to pay for things, you may be better served by a bitcoin wallet. There are many free wallets available on the market, some of which are designed for specific platforms, like Windows desktop, iOS, or Android mobile. You can check out the options at Bitcoin.org , and filter by hardware and operating system.
Some bitcoin brokerages, like Coinbase , operate as both an exchange and a wallet. It’s important to thoroughly research your options before you commit to a given bitcoin client, as the platform you choose will affect your ease of access and the fees you’ll be charged for transactions. Furthermore, some platforms offer more security than others. For example, some bitcoin experts believe desktop clients to be less vulnerable than mobile apps, since they don’t rely on a third party for data.
Note that many bitcoin exchanges operate as a third party; the exchange protects your keys for you, which means you never have direct ownership of your bitcoin. That means that in the case of a hacker attack or data breach, you’ll have less recourse for correcting the problem, though it also means you bear less responsibility and can also more easily recover your account through regular password-retrieval technology if you forget your login credentials.
Bitcoin wallets, on the other hand, generally offer you complete ownership over your bitcoin—meaning you have total responsibility for your private bitcoin addresses and keys, and if you lose that information, recovery may be difficult, or even impossible.
Once you choose a bitcoin client, you’ll be prompted to create a username and password, and to verify personal data like your residential address or social security number.
The specifics of the on-boarding process will vary depending on which wallet you choose, but will be similar to signing up for other digital financial products, like investing apps or bank accounts.
You can then link your bitcoin wallet to an external bank account, or another source of funds like PayPal. This is the account you’ll use to buy bitcoin, or to withdraw bitcoin funds in the form of your home currency. You’ll likely need to provide your routing and account numbers, though some bitcoin clients can connect to your bank account directly with your digital login credentials.
Once you’ve linked an account, you can go ahead and transfer funds into your new bitcoin client and use them to buy bitcoin—though keep in mind that the bitcoin wallet may take a portion of your purchase as a transaction fee. Then, you can use your bitcoin to buy or trade with, utilizing the bitcoin addresses generated by the wallet. For specifics on generating new bitcoin addresses with your given platform, check out the FAQs on its site.
Pretty easy, right? Congratulations: You’re officially trading crypto, more specifically bitcoin! Whether you use those coins to make secure purchases online or simply reconvert your earnings to cash if your bitcoin appreciates over time, you’re participating in a whole new kind of trading.
Is Investing in Bitcoin Right for You?
There’s no doubt about it, bitcoin might be a valuable holding to add to your portfolio. But it’s also a very different kind of asset than a traditional stock or bond, or even a tangible investment like real estate or a painting. And due to both its novelty and reputation for incomprehensibility, it can be vulnerable to massive (and scary) value swings.
If you feel like buying bitcoin isn’t the right financial move for you, that doesn’t mean you have to eschew investing entirely—there are plenty of other ways to put your money to work for you and help you plan for big financial goals like homeownership and retirement, including using SoFi Invest®.
If learning the stock market’s ins and outs and managing your portfolio directly sounds like a fun challenge, active investing might be a good fit for you. SoFi active investing makes it simple to learn as you go.
Automated investing, on the other hand, takes all the hassle out of the process, using a combination of real human research and high-tech computer algorithms to create a diversified portfolio that fits your personal investment goals.
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Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.