As with any asset, your point of entry can have a bit impact on your investment. In our experience, there are two key approaches that you should consider when starting out buying bitcoin.
Buy and hold
If you are taking the long-term view, and don’t have time to follow price moves on a daily basis, this is by far the best approach. Referred to as HODL in community slang, this approach has been taken by many of the main movers in cryptocurrency.
Famously, the Winklevoss twins, of Facebook fame, have recently been anointed newly minted billionaires by following this strategy. Payment giant, Square, have also announced a similar approach after buying $50 million in bitcoin recently.
If you believe in the long-term value of bitcoin and don’t have the time to follow, understand and react to every daily price movement then this is the way to go.
Pros – Takes little time and effort, tried and tested strategy.
Cons – If you buy in at the “wrong” price, waiting for the market to come back after a dip can be unnerving.
Build your bitcoin position in stages
If you believe bitcoin’s value will increase over time but are nervous about the price volatility, easing in might be the best approach.
1 bitcoin is composed of 100 million units, referred to as “satoshis”. Most buyers do not buy entire bitcoins at a time and so the most common purchase is of a number of satoshis. As the market continues to grow, you’ll hear this description more and more.
Many investors buy a few hundred dollars worth of bitcoin per month, regardless of whether the price is going up or down, and forget about it, a bit like a pension plan.
Pros – The risk of your investment being impacted negatively by price volatility is reduced. The amount you invest can more easily reflect your confidence in the price. If you think it’s low you can increase the amount you buy and vice versa.
Cons – It’s a slow way to catch a rising price trend, those who have profited most from Bitcoin are those who got in earliest, and it’s still early days if we’re talking long-term.
A note about technical analysis and charting cryptocurrencies
The use of charting in cryptocurrency is heavily used by day traders but definitely not an approach we would recommend to the occasional investor.
Charting, or Technical Analysis (TA), is an approach that attempts to look at the price history and build some kind of narrative about the current and future price direction. Because it is used by professional traders across all asset classes it is referred to often in the media.
For the uninitiated, it certainly can be helpful as a graphic of past activity. Properly used, with sufficient training, TA can be an aid to planning recurring investments in cryptocurrencies but when to use each tool and how to interpret them is an art. There is no data we are aware of to suggest that those who use them in cryptocurrencies are suddenly more profitable than they might have been using simpler trading strategies.
Pros – TA can remove the noise that surrounds the direction of the cryptocurrency price and help identify historical lows and highs.
Cons – Misinterpreting the signals is common and mistakes can be costly.
You might have been told that you can avoid the purchase of bitcoin altogether by buying cryptocurrency derivatives. These are essentially bets on a future price and can take the form of options. This is a whole different area of investing we would certainly not recommend as they are risky financial products that can result in heavy losses. For this reason, the sale of these to retail investors is banned in many countries.
Pros – Allows you to take large positions with small amounts.
Cons – Complicated pricing and you can lose your entire investment – and more – very quickly.
Buying bitcoin the better way
Using a combination of the above approaches may reduce your risk. If you decide to take the road of making regular trades, you could consider using a simple spreadsheet to do virtual trading for a few months to test your trading assumptions without actually committing any cash.
When deciding on an exchange to make your bitcoin purchases, (and we would of course recommend Xcoins.com) make sure they have good reviews and excellent customer support. Some of the biggest names out there in the cryptocurrency exchange business have notoriously poor customer support and surprisingly high fees for card purchases.
Always be sure to use an exchange that allows you to control your private keys, otherwise, you don’t truly own your own crypto, can’t freely spend your coins, and your cryptocurrency is at risk if the exchange you use goes out of business or doesn’t properly protect your keys. This remains the case for companies such as Paypal and Revolut.
Whichever approach you decide, never lose sight of the fact that the most important decision you make will be your investment objective. If profits or losses along the way come as a complete surprise, you are doing something wrong.
Decide for yourself how much you think the cryptocurrency you choose to buy is worth in the long-term and prepare to withstand a volatile market along the way. As with all of our advice, always remember that this is a general guide and not personal financial advise. Before making any major financial decisions we recommend you seek the advice of a licensed financial advisor.
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