Bitcoin is tempting—but do your homeworkby Ruth Jackson / February 19, 2018 / Leave a comment
Cryptocurrency was one of the biggest news stories of 2017, with investors clamouring to get in on the storming price gains. The price of a single Bitcoin rocketed from just under $1,000 at the start of last year to close to $20,000 in December. It has since dropped back to around half that level.
Bitcoin isn’t the only cryptocurrency out there, but it is possibly the easiest one to trade at the moment. However, Bitcoin’s value in real currency terms is incredibly volatile. A price chart for Bitcoin over the past 60 days looks like a mountain range.
If you are tempted to start trading cryptocurrency the good news is you don’t have to buy a complete coin, you can purchase a fraction of a coin—so you don’t need spare thousands to get started.
You also don’t have to buy Bitcoin. If you are computer savvy—and have a very powerful computer—you could mine the cryptocurrency instead. Mining involves solving complex mathematical equations, the cryptographic codes that keep the Bitcoin network running.
For every equation solved, a block of Bitcoin is processed and the miner gets a new allocation of the cryptocurrency. However, not only is this a complex process, you will also be up against other miners competing to solve these equations to claim their Bitcoin.
The more realistic option for most of us is to get exposure to cryptocurrencies by buying them. There are a number available including Bitcoin, Ripple, Iota, and Litecoin. The most well-known is Bitcoin.
The first step on a rather long road to trading in cryptocurrencies is to set up a Bitcoin wallet. You’ll hold your Bitcoins in this and it acts as your cryptocurrency bank account. There are plenty of companies offering these wallets but be very careful which one you pick—not all of them have sufficient security to protect your valuable investments. Two of the most popular—and therefore biggest and most secure—are Blockchain.info and Coinbase.
Once you have set up your wallet you need to make sure it is secure. That’s because you’re about to buy an incredibly valuable cyber-currency that is the preferred payment method for many black-market transactions—so hackers are keen to break into wallets to steal the contents.
To protect your Bitcoins from thieves, go into the settings of your wallet and verify your email address, set a very strong password and switch on two-step authentication. Also, make a note of your Wallet ID.
The next step is to find a broker through which you can buy your Bitcoins. Unfortunately, you can’t buy your cryptocurrency straight from the company that provides your wallet.
As the broker will handle your cash both when you are buying and selling Bitcoin it’s important to use a reputable firm—there are plenty of companies out there eager to part you from your cash.
Bittybot is a comparison website for cryptocurrency brokers. On there you can see a long list of brokers alongside their trust rating, minimum and maximum purchase requirements and how they accept payment.
Before you choose a broker, make sure you check their fees. The sudden popularity of cryptocurrency means fees for transferring coins have soared to the point where you could spend half of a relatively small trade (say £50) before you even get any coins in your wallet.
In order to start buying cryptocurrency you’ll need to pass your broker’s security checks, which should include identity verification. This can slow the process down, but is one sign your broker is reputable.
In order to buy Bitcoins you will need to know your Bitcoin address. This is the long code that represents your account. It isn’t the same as your Wallet ID but can be found in your wallet account. You need to give this to your broker so they know where to send your Bitcoins.
Once you have your coins you can hold onto them for as long as you want, and if you want to sell, you reverse the buying process—contact a broker to sell your coins.
If you’d like to take a position on cryptocurrencies without the hassle of physically holding coins you can bet on whether the value of cryptocurrency will rise or fall via a trading platform—there can be profit in both directions and the volatility makes it a pretty interesting trading instrument. Just make sure you understand the risks involved in trading platforms—you could lose more than you invest. And remember that cryptocurrencies are a high-risk investment that is incredibly volatile. Don’t invest anything you can’t afford to lose.
And in a falling market…
More adventurous investors might want to short cryptocurrencies, like Bitcoin. Trading platforms allow you to do this without actually buying or selling the crypto itself. You put a price per point on the movement of the currency’s value, say, £1 per point. If you take a short position and the price goes from £10,000 to £9,950, you make £50. But beware—if it goes up to £10,500, you lose £500. The potential upside risk is, in theory, infinite.
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