As a cryptocurrency analyst, people often ask me if they should be buying bitcoin. When I say yes, they want to know how.
I can’t speak to your personal financial situation. I can tell you this, though: despite the recent selloff, bitcoin has thrived for more than a decade. It’s a new asset class … the first digital currency not controlled by a central organization or government.
And we’re nearing a point where the real risk won’t be owning bitcoin … it will be not owning it. In my mind, it’s the best hedge against economic turmoil.
Before I encourage anyone to start buying bitcoin, though, I always tell them three things:
1. Buying bitcoin? Start small
Don’t jump in headfirst. If you want to start buying bitcoin, don’t spend more than 1% of your investable assets. For example, if you have $100,000 set aside, buy $1,000 worth of bitcoin.
This protects you from a selloff. It also lowers the stakes as you learn to use bitcoin. Buying cryptocurrency, moving and storing it is not like online banking or investing. If you send bitcoin to the wrong location, you can’t call your bank and cancel the transaction.
With bitcoin, what’s done is done. There is no reversing it. A learning curve is inevitable. And experience is the best teacher.
2. Write everything down
Bitcoin is one of the world’s most advanced technologies. The irony is you still need to keep “offline” records. That means printing out Word documents … or even using pen and paper to back up your information.
To store, send or receive bitcoin, you need a digital wallet. Think of it as the vault where you “keep” your bitcoin. Here’s an example of an online bitcoin wallet from Blockchain.com:
Your wallet has a public key, which will look something like this: 1GwV7fPX97hmavc6iNrUZUogmjpLPrPFoE.
That key is an address you can share with others who want to send you bitcoin. Think of it like an account name.
Your wallet also has a private key. This is an alphanumeric sequence, or a string of words generated by your wallet.
Never share your private key. It’s the “password” you use to access your wallet. Whoever controls it has full control of your bitcoin.
If you lose your private key, you won’t have an “I forgot my password” option. (Note: some less secure wallets may offer this functionality. I advise you to avoid them. If you let a third party store your private key, they might be able to access it.).
No private key? No access to your wallet. And you lose your investment. Period.
That’s why I write everything down. Or, I print out screenshots that include my wallet information. And I always put them somewhere safe.
3. Don’t leave money on an exchange
The easiest way to start buying bitcoin is by opening an account with an exchange.
Much like opening an online bank account, it can take a few days. That gives the exchange time to conduct Know Your Customer (KYC) diligence on you. During that process, they verify your identity. They also ensure you’re not a criminal.
Once you have an account, you can fund it with a bank transfer — or a credit card in some cases. Then, you can exchange that money for bitcoin.
After you’ve purchased your bitcoin, store it in a bitcoin wallet. Leaving it in your account on an exchange creates undue risk. If the exchange gets hacked, you might lose your money. This has happened in a couple high-profile cases.
In 2014, bitcoin exchange Mt. Gox — which handled up to 70% of all bitcoin volume at the time — filed for bankruptcy. Altogether, the exchange lost 750,000 bitcoin that belonged to its customers.
At today’s prices, that bitcoin is worth $1.5 billion. Hackers have a big incentive to target exchanges. Follow these tips to buy bitcoin, and you can avoid being one of their targets.
As of this writing, Eric Wade was long bitcoin.
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