How Does Bitcoin Investment Work?

Posted by himeed49 on in Bitcoin & The Blockchain
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There are a number of methods to choose from if you’re deciding to get on board with Bitcoin investment. Before you can start using bitcoins you need to set up a digital wallet. This is a computerized "wallet" where you can store bitcoins and works in a similar way to a bank account.

The main difference between a digital wallet and online banking is that only you have access to the wallet - with a bank account the bank can access your account and may be allowed to share that information with tax and other authorities.

Mobile Wallets

There are a number applications that can be downloaded and installed on your mobile device that will give you access to your bitcoins. This has the advantage of having access wherever you go and mobile devices are less likely to be affected by malicious software.

  • Samourai - Secure Bitcoin wallet for Android.
  • Coinomi - Opensource, supports many altcoins, fast and has perfect UI.
  • Jaxx - Reliable, Jaxx supports many of the leading cryptocurrency platforms.

Software Wallets

You can download software onto your computer that allows you to store and access bitcoins. This means that you will only be able to transact on the computer that has the software installed and you won't be able to track the transactions you make.

  • Bitcoin Core - Bitcoin Core is MIT licensed open source Bitcoin wallet. It runs own full node so 145GG of free disk space is required. OSX/Linux/Windows/Ubuntu.
  • Electrum - Thin Bitcoin client. Opensource, MIT, has 100+ contributors.
  • Exodus - Exodus is the first desktop multi-asset wallet with ShapeShift built in.
  • MyCelium - Geeky wallet, easy to set miners fee, rich transaction details.

Web Wallets

Websites that offer online Bitcoin storage and transaction services are popular for a number of reasons. Web services are user-friendly and operate in pretty much the same way as regular online banking. A big advantage of using an online wallet is that you can log in from any computer and conduct your transactions.

  • CoinBase - Buy Bitcoin for $, NFC payments, requested payments.
  • WalletList - Showcase your public cryptocurrency addresses.

Hardware Wallets

Digital currency hardware wallets are one of the safest ways to store bitcoins. There are a number of hardware wallets that one can buy and your information is stored and managed using the hardware device, making to virtually impossible to hack.

  • Ledger Hardware - Reliable hardware wallet. Supports BTC/ETH/ETC/DASH/DOGE and many more coins and ERC20 tokens.
  • Trezor Hardware - The first & most secure hardware wallet. Supports BTC/ETH/ETC/DASH/ and many more coins and ERC20 tokens.

Paper Wallets

This is also very safe because it is never exposed to the internet. One can set up a paper wallet using the bitadress.org website.

The most popular solution is to use a user-controlled wallet. Requiring a modicum of tech skills, a Bitcoin wallet is essentially a cryptocurrency bank account, allowing users to receive bitcoins, store currency, or send it to others.

More secure than the third party, a user-controlled wallet gives users full control over their Bitcoin but can present issues if the device on which the wallet is stored is compromised or lost.

Hosted wallets help less tech-savvy investors to capitalize on Bitcoin without the associated headache by managing private Bitcoin keys on behalf of the user, but come with their own risks.

Over the history of bitcoin, several hacks of both Bitcoin exchanged and hosted wallets have led to the loss of millions of dollars in crypto currency.

Once you've successfully set up the digital wallet of your choice, you'll be able to start buying or earning bitcoins.

Here are the ways in which you can set about obtaining bitcoins.

Bitcoin Exchanges

The most popular way of buying bitcoins is a virtual currency trader. There a number of online trading sites that allow one to buy bitcoins in the same way one would buy stocks, bonds or any other currency. This is a competitive market and one can shop around for the best exchange rate.

Depending on central bank regulations for the currency you're using there can be paperwork involved before you can start trading. However, once you're started it's a pretty easy process and if you're using a recognized trader it's very safe.

Bitcoin ATMs

Some cities have Bitcoin ATMs where you can exchange cash for bitcoins. This works like any other ATM machine.

Local Bitcoin sellers

There are private Bitcoin deals happening all over the world. This is a simple cash transaction - you give someone cash in exchange for bitcoins. As there are no regulations controlling these transactions one should be cautious of whom you trust.

It's recommended to only do small small transactions until you get to know the person you're dealing with.

Earn bitcoins

There are companies that will pay people for services in bitcoins. One can also sell goods through OpenBazaar. This is an online store that works in the same way as eBay, the only difference is that currency used is bitcoins.

Mining bitcoins

When bitcoin started out this was the only way to get bitcoins. Initially individuals were able to offer computer disk space by downloading a mining program.

Bitcoin would offer users bitcoins for their computing power to process mathematical formulas that control and verify bitcoin transactions. However as the system has grown this is now controlled by large companies. How bitcoin mining works.

Of course there's no point in having bitcoins if you don't have any where to spend them. There are a growing number of vendors who accept bitcoins as payment. There's also a bitcoin store where goods are sold only to bitcoin customers.

One is also able to buy Bitcoin gift cards or even convert bitcoins into gold or silver. To find bitcoin vendors you should search online - there are a number of databases supplying this information.

Bitcoin Legislation

Bitcoin investment, and the associated tax legislation, varies from country to country. Some countries, such as Denmark, France and Norway don’t regard Bitcoin as legal currency, with no legal basis for tax on gains or income derived from Bitcoin.

Other countries view Bitcoin as a de facto currency, such as Germany, Poland and Sweden, taxing investors on Bitcoin gains.

Finally, certain countries such as Icelandic are outright hostile to Bitcoin, limiting the ability of domestic entities to purchase Bitcoin from foreign entities. Before investing in cryptocurrency, it’s advisable to brush up on the legality of Bitcoin in the country you reside in.

The perceived anonymity of Bitcoin transactions has also led the European Union to adopt tighter due-diligence controls around cryptocurrency, revising anti-money laundering systems in a crackdown stated to function as a crackdown on terrorism.

The proposal, submitted in July 2016, was presented at the same time as a proposed system for eliminating tax evasion via cryptocurrency, potentially signaling the end of laissez-faire cryptocurrency trade in the EU.

The Verdict: Should You Invest?

Any investment in Bitcoin should essentially be viewed as an investment in future value. While Bitcoin is in a one-year bull market that shows no indicators of stopping soon, the highly speculative nature of Bitcoin investment means Bitcoin investment should represent only one facet of a diversified investment portfolio.

Tips for Bitcoin Investment

  • If possible, spread your cryptocurrency investment between both hosted and user controlled wallets to enhance security and redundancy.
  • Store your bitcoins in an offline system to reduce the risk of hacking.
  • Only allocate a small portion of your total net worth in volatile currencies such as Bitcoin.
  • Check local tax laws regarding the purchase and exchange of cryptocurrency

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Guest Monday, 26 October 2020