What is Bitcoin? How to invest and secure it: Beginner's guide for friends, family with 0 experience - Updated 1/25/18
This article will be updated as things change, in order to keep everyone up to date - Cryptocurrency moves fast. You should know immediately that you don't need to buy a full bitcoin. I think this is a big reason people tune-out initially. You can buy $1 of bitcoin which would be .000089 Bitcoin. 1 Bitcoin can be split into 1 million pieces.
I started investing in cryptocurrency (Bitcoin is the first and biggest cryptocurrency) in late June of 2016. I first heard about Bitcoin from a tech-savvy friend a year or two ago, and then heard about it again on a podcast. Whenever I hear about something from two people I trust, I run my googles. I’ve become obsessed ever since spending multiple hours a day researching this new world. I feel comfortable enough to start writing a basic guide to help friends and family, and maybe some Steemit people get started (But if you’re on Steemit already this may not be for you). I am an artist/designer with no experience in investing or finance, just interested in tech - so full disclosure this is just coming from a dude that’s been googling non-stop, this is not financial advice. This should serve just as a jumping off point, I would highly suggest doing your own research.
The idea of virtual money feels sketchy to me...
Lets briefly talk about the history of money. Thousands of years ago we had the barter system, where we traded things for other things… cows for chickens, silk for tools etc. Thousands-to-hundreds of years ago we started using precious metals in the form of coins and bars. Hundreds of years ago we started using paper money, a Chinese invention. In America it used to be backed by gold “the gold standard” - that went out the window in the 70s. This paper money system, or 'Fiat' money system, is controlled by the Federal Reserve (central bank of The United States) and carried out through the banks. In recent decades credit cards have become popular, we also now have Paypal and Venmo for transferring money, this is all still fiat money in different forms. The fiat system is liable to crash, as we've seen with depressions and recessions. It's very complicated to the average person and can be manipulated by banks, governments, and the super rich. Bitcoin is just the next form of money, and many people believe it and other cryptocurrencies will be a huge development for mankind, as it doesn't need a bank or government to control it's value, keep it safe, and its worth the same everywhere (technically). I think this is a good promo video for Bitcoin.
What is bitcoin, how does it work, and why is it different?
Bitcoin is a decentralized anonymous (however not fully anonymous anymore) currency system. Bitcoin is not a company. It is a technology that is now baked into the internet, and is improved and kept alive by a large community of people from around the world. Bitcoin was invented in 2008, a couple weeks after the US financial collapse. There are only 21 million bitcoins that can exist, no more can be created (inflation-proof). Which is why the value of each coin keeps rising, as more people start buying and using bitcoin. Every single bitcoin transaction is stored in thousands of computers cryptographically making fraud impossible without changing the records in every computer which is currently impossible. This decentralized storage/"ledger" system of transactions is called blockchain. The blockchain technology system of making thousands of copies and spreading them out could revolutionize many things and is quite exciting. These videos will explain blockchain and bitcoin better than me:
Here's another good video explaining 'Blockchain' in 2 minutes
So again, basically Bitcoin and other cryptocurrency is the future of money, a new form that doesn't need banks, and doesn't care what country you live in, has very low fees (small %s of bitcoin is paid to "miners" who run their computers to process transactions), and you can't print up more bitcoin because the total amount is fixed in the code. Other cryptocurrencies have different uses, added technologies and benefits that Bitcoin doesn't have. It will be especially great for poorer people with no bank account, or countries with a corrupt bank system, and everyone basically :). Sending money through banks sometimes take days-weeks to clear, especially between country borders and have high fees. We’re in a complicated banking system that nobody understands anymore. We all just have a common agreement and trust that paper money is worth something. If we all trust bitcoin is worth something (There's $552 Billion worth of confidence as of today) and is useful, just like we all trust paper money is worth something, bitcoin will soar, and you will benefit from being an early adopter.
You should watch this documentary called "Banking on Bitcoin" on Netflix which is a good history lesson, and this BBC Documentary on youtube which does a better job of explaining the technical aspects of it.
Is there anything that can destroy Bitcoin, or make the price go down drastically? There are maybe three things I see as a possible threat. The first two are not very likely, the last is the most likely, but not a real threat.
1. Bitcoin not being able to handle the large amount of growth. There has been a ton of people buying bitcoin lately, which has made transactions very expensive, and the speed of the network very slow. This has made Bitcoin really more of a store of value like Gold, than a currency to be exchanged. This has caused groups of people in the Bitcoin community to "fork" bitcoin, and basically create their own new Bitcoins, out of frustration for no majority consensus on what to do. So essentially there is no governance system which is a problem. Bitcoin can be "forked" because the code is open-source. So now we have Bitcoin Cash, Bitcoin Gold, and Bitcoin Diamond. These coins are smaller groups of people trying to improve Bitcoin in some way. If you hold the original bitcoin you get these coins for free which is great, but also water's down the Bitcoin brand. In my opinion, I think the Bitcoin "Core" community will make the original Bitcoin better, it's just a slow process because they are trying to do the best job. Bitcoin has the strongest group of developers that work on it for free, who are rich already, and just want it to succeed. I have faith it will improve. These other Bitcoin's are a quick fix, and most will probably not live too much longer. This has not stopped people from buying bitcoin really. Most people just are buying Bitcoin to just store away anyways, not to buy coffee with.
2. Bitcoin becomes illegal in the US and Korea. The biggest cryptocurrency markets are Korean and the US. China was a large market but recently they banned it and we saw the price go down 30%, however it bounced back up incredibly as if it never happened. This would cause people to sell their Bitcoin driving the price down, but would not get rid of it. Bitcoin is baked into the internet at this point and cannot be eliminated, just as you can't stop people from sharing music. The US nor Korea would do this probably because they don't want to stifle innovation. We can definitely expect some kind of new regulations from both the US and Korea, but probably just on taxes and ICO's (which I won't explain here). China will be back though, this will also increase the price whenever they figure out how they want to regulate it.
3. A smaller problem but still significant, is that Banks will decide they don't want to interact with sites like Coinbase, which turn fiat dollars into Bitcoin. In this scenario, people will probably just switch banks that do let them buy Bitcoin, or people will use sites like LocalBitcoins to purchase Bitcoin with cash, P2P.
How do I buy bitcoin or other cryptocurrencies?
The most popular and trusted site/way to convert your 'fiat' (dollars) to cryptocurrency (bitcoin) is Coinbase.com. Coinbase has a license to operate in New York which is an important note for my NYers, most other sites do not have a license (the government is now catching up with crypto and there are some new regulations). Sign up for an account, the process is easy. Here's a step by step video if you need help. It will ask for your SSN, and other personal information. This is part of the "Know Your Customer" anti money laundering law. This should not deter you from buying.
Please use my invite code for Coinbase if this article has been helpful to you. You and I both get $10 if you use my link, which will probably cover your fees!
- Important note: Make a strong password!! Use a program like Dashlanethat can store all your passwords. You will accumulate many passwords getting involved with crypto. Write all your passwords down in multiple secure places too, preferably not digital. You should have crazy passwords for your crypto things, ideally something like this: ;YnP*TVf?b}&Zq. Convenience is not more important than keeping your money safe. This new crypto world is under constant attack from hackers and you need to protect yourself. Don't make yourself a low-hanging fruit, with an easy password like "Yourdogsname123", or a password you use on other sites. You are the bank now! and it comes with some responsibility. You will need to connect your debit card or bank account to start buying. Your buying limit will be less using a card. You will have to enter your SSN which will feel sketchy but this is normal, and is also required when you buy stocks. Now Enable 2-factor authentication- Click on Settings then Security and you should see it. Follow the steps, it requires you downloading the Google Authenticator app. This is very important for securing your account. It makes the hacker's job much more difficult. You should also have 2-factor authentication enabled on your email! - so a hacker can't do "forgot your password".
After creating your account and signing in you will see "Dashboard...Buy/Sell...Accounts...Send...Tools...Settings" Tabs.
Click on Buy/Sell - Here you will purchase your Cryptocurrency using your linked Payment Method (bank account or credit/debit card). You will see three options for Bitcoin, Ethereum, and Litecoin. I suggest just buying Bitcoin for now. Ethereum and Litecoin are also great coins, currently the 2nd and 5th largest cryptocurrencies, but I won't go into the differences here.
Putting in your first buy order - and getting the best price
Really any price is a good price in the long run, and by long run I mean 6 months, a year.. 5 years.. 10 years who knows how fast/much it will go up. However you want the best price right!? Cryptocurrencies are highly volatile and unpredictable. As I'm writing this, bitcoin is $3,398/per coin (now $11,200. it was 19K recently, so it's a great chance to buy cheap now - 1/25/18). It could easily drop down or skyrocket. Good chart readers on youtube or whatever can make accurate predictions sometimes but even the best have a high % of inaccuracy. I can’t stress enough how much “Dollar cost averaging” is important for buying. This basically means not spending all of your money at once. Here is some strategy:
- Split up your allotted amount of money you have to spend in pieces. I would suggest minimally splitting it into 4 pieces which is aggressive but okay if you plan to keep investing. 10 pieces is conservative, and/or if you don’t plan on investing more in the near term.
- Buy with one of the pieces on a schedule. This can mean buying every Friday (which is statistically the best day to buy). Or buy once a week when the price is a little lower. The price has gone up so fast lately, I might advise you to spend your pieces faster, maybe every couple days now- this is especially relevant now as Bitcoin is very cheap. Buy low, Sell high! Sounds simple, but most people do the opposite. If you believe in Bitcoin you shouldn't be nervous. If you are nervous it means you either don't believe in Bitcoin, or haven't learned enough about it yet.
The point is to just get an average buy in price. Bitcoin is very volatile and it’s hard to get the lowest price.
- A more advanced method would be to wait for a crash or “correction” in the price and scale your buys bigger as it goes lower. This is riskier for a few reasons: Bitcoin is going viral basically and there’s no telling how high it will go before coming down. Price corrections have been less and less severe over time. This also requires knowing the market better and anticipating a correction. So this method is not for beginners and you may wait for a price that never comes...
Don't drive yourself crazy checking the price every two seconds after you buy. Bitcoin/cryptocurrency is brand new and it's a roller coaster. You should just feel confident that it has promise, and will rise in value over time. You increase your confidence by learning more about cryptocurrency. Investing in cryptocurrency in 2018 is like investing in the .com bubble in the 90s. With that said, don't invest any money you're not ready to lose.
Note on other cryptocurrencies on Coinbase:
I love Ethereum, and I recommend buying some after you've researched it, to start creating a portfolio of cryptocurrency. I will not explain how it is different from Bitcoin here. I do not recommend buying Bitcoin Cash or Litecoin. Litecoin is the better of the two though.
How do I safely store it?
You can technically just keep it in your Coinbase 'wallets' (Accounts tab) however exchanges like Coinbase (while FDIC insured) are not as secure as holding it offline on your computer or on a hardware wallet. Hardware wallets like Ledger Nano S or Trezor are the most safe. I personally own a Ledger Nano S, but both companies are equally great. I highly recommend buying one, if you have more than a couple months pay in cryptocurrency.
I recommend the Exodus wallet for your computer which is second best to a hardware wallet. Go to the 'Download' page, via button on the upper right hand corner of the page. Download for your Windows, Mac or Linux computer. Here is a tutorial video direct from Exodus, Watch that video but you'll be depositing funds into the account the same way as this tutorial video ow this video explain. Deposit your Bitcoin into Exodus:
- Go to Coinbase and click the Send tab.
- Now on Exodus, click the Wallet tab - then click Bitcoin
- Hit the receive button
- Copy the bitcoin address (the long string of numbers and letters)
- Double check the address is correct.
- Paste in the 'Recipient' box (where it says 'Email, or bitcoin address')
- Click 'Use Max' and make sure it says your 'BTC wallet' then hit send.
- It will send fairly quickly, but not instantly! Don't freak out! Allow at least a few minutes for it to go through.
Keeping your money off of exchanges like Coinbase, and on your computer (via Exodus), and creating strong passwords are the best steps you can take to keeping everything safe. You can be even more secure with a 'paper wallet' or 'hardware wallet' which I won't explain here. Using exodus is way more secure as someone would need to have physical access to your computer to steal your funds (hacking into someone's computer via the internet is very difficult and not likely). As opposed to a website (exchange site like Coinbase) where if someone guesses your password they can steal your money.
Taxes
If you sell your bitcoin you will pay Capital Gains tax, as if you sold a house, or a car. There are different amounts based on how long you've held the Bitcoin without selling. If you start trading Bitcoin for other cryptocurrencies, with the new tax bill you are supposed to pay taxes on every trade. My favorite site for taxes, and tracking your trades is Cointracking.info, Bitcoin.tax is also popular. These sites will help you during tax time to figure out what you need to do.
Final Thoughts
This is the path I used to get started, which is the result of lots of googling, however I encourage you to do your own research. My initial investment did lose money (I bought in at bad prices), however now I am significantly up on my investment. I have however moved on to trading other cryptocurrencies which is kinda where the faster money is at. So don't expect immediate increases in value, it is kind of a long term thing that will go up and down, but far better than stocks or other investments. Now is also a great time to invest, you are still early even though the price seems astronomical. Maybe once I get better at trading smaller cryptocurrencies I will write another post. If you're interested past Bitcoin, check out coinmarketcap.com and see all the coins and projects happening. These are coins listed by "market cap" or general size in price. Investing in just Bitcoin is still a great move. Like I said it is extremely early still. It could be worth exponentially more as more people buy and use it. It has been through a lot of ups and downs already and has stood the test of time. Keep up do date with Bitcoin/cryptocurrency news. It's interesting and could really shake up the world.
PS
What is this Steem site?
It's a great new social networking site with it's own cryptocurrency. I think it's most similar to Medium and Reddit. You can make money posting, liking (or 'curating') content. The dollar amount below this post reflects real USD but in crypto form. It can be converted to real dollars (maybe I'll make another post about this too, although there are many already).