Bitcoin is more prominent than ever. Since its inception in 2009, the cryptocurrency has exploded in popularity, becoming something of a buzzword in some economic circles. As it keeps growing in popularity and legitimacy, you may think it’s time to get into it.
Investing in Bitcoin (BTC) can be a profitable venture if you know what you’re doing. Since it’s so different from traditional currencies, there’s a bit of a learning curve when it comes to using it. To help you out, here are 10 things you should know before buying your first Bitcoin.
1. Bitcoins Are Decentralized
One of the most defining characteristics of Bitcoin is that it’s decentralized. Unlike traditional currency, no single authority owns it — which can be an advantage — but also presents complications. Since no one’s in charge of it, you’re responsible for what happens with your Bitcoin.
If you get hacked or fall victim to a scam and lose Bitcoin, you can’t correct the issue with anyone. There’s no service you can complain to and fix these errors. So before you start buying and trading Bitcoin, make sure you’re careful about all transactions.
2. How to Secure Your Wallet
To store your Bitcoin, you use something called a Bitcoin wallet. There are many variations of digital wallets out there, but not all are secure. For example, some work like a bank account, holding your digital currency for you, but these usually have some security issues.
You should back up your entire wallet and do so frequently. It’s also a good idea to encrypt your wallet and any backups of it you have. While all Bitcoin transactions happen online, you may want to store your Bitcoin in an offline wallet (a hardware wallet) on your computer or a flash drive, which is known as “cold storage.” Some of the most popular offline wallets are Trezor and Ledger.
3. Where to Buy Bitcoin
You should know that not all sites offering to trade Bitcoin are trustworthy, so don’t just click the first link for any trading platform you see. While there are multiple ways to buy Bitcoin, the most common and most reliable is on a Bitcoin exchange.
Bitcoin or cryptocurrency exchanges are marketplaces where you can buy and sell Bitcoin for traditional currencies, using a debit card or credit card, a bank transfer or even PayPal if it is accepted (many jurisdictions even have Bitcoin ATMs!).
Some of the most trusted sites include Coinbase, Binance and Gemini. Different exchanges will offer varying rates, but if a price is drastically different, it’s probably a red flag.
You can look at CoinMarketCap’s new Confidence indicator to see how trustworthy the Bitcoin market pairs are on exchanges you are interested in: a low score means that the exchange is likely not being upfront about their real trading volume.
4. Bitcoin’s Price Is Volatile
Bitcoin has a limited supply, and relatively few people use it as compared to a traditional marketplace. As a result, changes in demand affect Bitcoin’s price more than they would a traditional currency. This trait makes Bitcoin volatile, so understand that its price in relation to fiat currency could change fairly drastically in a short time.
One Bitcoin was worth $13.50 at the start of 2013, but more than $1,000 by the end of the year. You should know that these massive price fluctuations are possible before you dive into Bitcoin.
5. What Bitcoin Halvings Mean
You may have seen the news of the recent Bitcoin halving, and you should know it’ll happen again. For every 210,000 bitcoin blocks mined, the reward for each block halves until all 21 million Bitcoin are in circulation. This is an anti-inflation measure, and so it affects Bitcoin’s price.
Historically, a tremendous price surge follows a Bitcoin halving. The massive price increase in 2013 came after a halving in late 2012. You can use this knowledge to determine when the best time to buy or sell Bitcoin might be, although with Bitcoin, nothing is truly predictable!
6. Bitcoin Isn’t Entirely Anonymous
You might hear people citing anonymity as one of Bitcoin’s advantages. While transactions don’t reveal your personal information, their record is visible to the public. Anyone can see the transaction history of a Bitcoin address on the blockchain, so it isn’t entirely anonymous — CMC’s latest Crypto Titan Tim Draper even said he thinks Bitcoin will ultimately be “great for law enforcement” for that reason.
There are ways around this, though. If you use a different address each time you buy or use Bitcoin, you’ll remain anonymous because they won’t have any history. You can even find some Bitcoin wallets that change your address for you.
7. Not Everywhere Accepts Bitcoin
Before you spend your life’s savings on Bitcoin, be aware that you can’t use it as a payment method everywhere. Some websites, including e-commerce giants like Amazon, still don’t accept Bitcoin as a form of payment. More stores are starting to take the currency, but your options are still somewhat limited.
If you’re primarily interested in Bitcoin as a trading investment, this may not apply to you. Just in case you ever want to spend your Bitcoin on something, though, you should know your limitations.
8. Bitcoin Insurance Is Limited
While on the subject of limitation, you should also consider insurance. The Security Investor Protection Act (SIPA) doesn’t cover cryptocurrency like Bitcoin, making it challenging to insure investments. Without this protection, you need to be extra careful in handling your Bitcoin.
You can find some private companies that offer cryptocurrency insurance, but they may not be as reliable. Even trustworthy Bitcoin insurers may not provide the same protection as SIPA.
9. Taxes Still Apply to Bitcoin
Although it is a currency, Bitcoin isn’t considered legal tender. Just because the government doesn’t recognize it as an official currency doesn’t mean it’s outside the law, though. Like any other investment, the IRS taxes cryptocurrency, so make sure you keep a record of your bitcoin holdings and transactions.
In the eyes of the IRS, Bitcoin counts as personal property, so general transaction taxes apply. If you don’t live in the U.S., be sure to check on your government’s tax policies regarding cryptocurrencies (all cryptocurrencies, including Bitcoin, Ethereum, Litecoin, Bitcoin Cash, etc. fall under the same tax policies)
10. Bitcoin Is Still Developing
Perhaps the most important thing to understand before buying Bitcoin is that the currency is still developing. Bitcoin is relatively new, so the system isn’t as well-established as traditional currencies yet. It’s continually improving, but this process comes with some growing pains.
Understand that there are still some kinks in the system that have yet to be worked out. Over time, Bitcoin will become more secure and reliable, but in the meantime, take care while using it.
Manage Bitcoin Wisely
You stand to gain a considerable amount from investing in Bitcoin. Given its unique nature and developing status, though, you should go into it with understanding and caution.
If you know what to expect beforehand, you’ll have an easier, safer time managing your Bitcoin. Understand these aspects of the cryptocurrency before you dive into buying and selling it. With this knowledge, you can invest in Bitcoin wisely.
For more detailed information about how to buy Bitcoin, check out CoinMarketCap’s guide right here!
This article is intended to be used and must be used for informational purposes only. It is important to do your own research and analysis before making any material decisions related to any of the products or services described. This article is not intended as, and shall not be construed as, financial advice.
The views and opinions expressed in this article are the author’s own and do not necessarily reflect those of CoinMarketCap.