The Three Point Checklist Before Getting into Bitcoin

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How to Invest in Bitcoin

Investing in Bitcoin can seem complicated, but it is much easier when you break it down into steps. You don’t have to understand computer programming to realize that banks, businesses, the bold, and the brash are cashing in on cryptocurrencies. This guide will help you to get started, but always remember that Bitcoin investing carries a high degree of speculative risk.

Key Takeaways

  • The value of Bitcoin is heavily dependent on the faith of investors, its integration into financial markets, public interest in using it, and its performance compared to other cryptocurrencies.
  • Bitcoin investing still involves some technical and security issues that investors should be aware of before they begin.
  • Investors who want to trade bitcoin need a place to store them—a digital wallet.
  • They also need to buy bitcoin, which is usually achieved by connecting a wallet to a bank account, credit card, or debit card.
  • Investors can join an exchange or online marketplace to trade traditional currencies, bitcoin, and other cryptocurrencies.

Bitcoin Background

What Is Bitcoin

It may seem hard to believe that a digital currency could be worth thousands of dollars. Although the lines of code that make up each bitcoin are worthless in and of themselves, markets value each bitcoin at thousands of dollars. Bitcoin has value in part because it has transaction costs that are much lower than credit cards. Bitcoins are also scarce and become more difficult to obtain over time. The rate that bitcoins are produced cuts in half about every four years. This rate is expected to halve again sometime in 2020. The total number of bitcoins in circulation is gradually approaching the limit of 21 million set in 2009 by Bitcoin’s creator, Satoshi Nakamoto.

If the demand for bitcoins exceeds the rate at which it can be produced, the price will increase. As of Jan. 2020, 18.15 million, or 86.42%, of total bitcoins have already been created.   This situation does not guarantee increasing prices. Cryptocurrencies are wildly unpredictable, even ones as popular as Bitcoin. Bitcoin was worth $19,116.98 on Dec. 17, 2020, but the price fell substantially and had yet to recover as of the beginning of 2020.   The value of Bitcoin is heavily dependent on the faith of investors, its integration into financial markets, and public interest in using it. The performance of Bitcoin compared to other cryptocurrencies, such as Ethereum, is also crucial in determining its value.

Bitcoin operates on a decentralized public ledger technology called the blockchain. When consumers make purchases using the U.S. dollar, banks and credit card companies verify the accuracy of those transactions. Bitcoin performs this same function at a lower cost without these institutions using a system called hashing. When one person pays another using bitcoin, computers on the Bitcoin blockchain rush to check that the transaction is accurate. In order to add new transactions to the blockchain, a computer must solve a complex mathematical problem, called a hash. If a computer is the first to solve the hash, it permanently stores the transactions as a block on the blockchain.

When computers successfully add a block to the blockchain, they are rewarded with bitcoin. This process is known as bitcoin mining. Similar to winning the lottery, solving hashes is mostly a matter of chance. However, there are ways to increase your odds of winning in both contests. With bitcoin, arriving at the right answer before another miner has almost everything to do with how fast your computer can produce hashes. In the early years, bitcoin mining could be performed effectively using open-source software on standard desktop computers. Today, only special-purpose machines known as application-specific integrated circuit (ASIC) miners can mine bitcoin cost-effectively. Mining pools and companies now control most bitcoin mining activity.

Before Beginning

There are several things that every aspiring Bitcoin investor needs. A digital wallet, personal identification documents, a secure connection to the Internet, a method of payment, and an account at a cryptocurrency exchange are the usual requirements. Valid methods of payment using this path include bank accounts, debit cards, and credit cards. It is also possible to get bitcoin at specialized ATMs and via P2P exchanges. However, be aware that bitcoin ATMs were increasingly requiring government-issued IDs in early 2020. There are additional details on buying bitcoin that we will not cover here.

Privacy and security are important issues for Bitcoin investors. Even though there are no physical bitcoins, it is usually a bad idea to brag about large holdings. Anyone who gains the private key to a public address on the Bitcoin blockchain can authorize transactions. While it is obvious that the private key should be kept secret, criminals may attempt to steal private keys if they learn of large holdings. Be aware that anyone you make a transaction with can see the balance in the public address that you use. That makes it a good idea to keep significant investments at public addresses that are not directly connected to ones that are used for transactions.

Anyone can view a history of transactions made on the blockchain, even you. But while transactions are publicly recorded on the blockchain, identifying user information is not. On the Bitcoin blockchain, only a user’s public key appears next to a transaction—making transactions confidential but not anonymous.

That is an important distinction. International researchers and the FBI have claimed that they can track transactions made on the Bitcoin blockchain to user’s other online accounts, including their digital wallet. That’s a direct result of anti-money laundering policies.   This should not concern most investors because Bitcoin is legal in the U.S. and most other developed countries.

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Step One: Get a Bitcoin Wallet

The first thing that you’ll need to get started is a wallet to store bitcoin.

When it comes to choosing a bitcoin wallet, you have options. However, the Louis Vuitton and Gucci of the cryptocurrency world right now are “software” and “hardware” wallets. Software wallets are mobile applications that connect with your traditional bank account. These wallets allow for quick and easy access to bitcoin, but the drawback is they put your money in the hands of a third-party company.

Although the leading software wallets are trustworthy, popular third-party companies have collapsed, or been hacked, in the past.     Much like you wouldn’t store thousands of dollars in your mattress, users with larger bitcoin holdings should consider storing their money more securely.

Coinbase is the most popular software wallet available in the United States. In part, that is because it has a website, a mobile application, and stores 98% of customer currencies offline for added security. For beginners, Coinbase is the best and easiest place to start because it is connected directly to a bitcoin exchange, which simplifies the buying and selling process.

There are also many other bitcoin wallets available. Blockchain.com is another top wallet connected to a bitcoin exchange. Mycelium is one of the most secure mobile wallets, but it can be a little harder to use. Blockchain Wallet is a popular mobile wallet, while Electrum is an excellent open-source choice for desktop users.

Hardware wallets are a little more old-school but are generally considered to be more secure because they are kept offline. Trezor and Ledger are two of the leading hardware wallet manufacturers. These wallets store a user’s private key on a physical hardware device similar to a flash drive, which prevents hackers from accessing a user’s private key through an Internet connection.

Step Two: Connect a Bank Account

In order to purchase bitcoin, you need to connect your wallet to a bank account, debit card, or credit card. Although these payment methods all perform the same function—exchanging traditional currency for bitcoin—they each carry their own set of fees.

Transactions made using a bank account can take four to five days to process on Coinbase, but are generally recommended for first-time investors.   By linking a bank account to your wallet, you can buy and sell bitcoin and deposit that money directly into your account. Bank accounts are generally recommended if you are dealing with larger sums of money. At the time of writing, bank accounts let users spend as much as $25,000 per week. 

Debit and credit cards, on the other hand, allow you to buy bitcoin almost instantly. The drawback is that on Coinbase and other popular exchanges, debit cards can only be used to purchase crypto—and even then, only in smaller amounts. Users cannot sell bitcoin or deposit money into their bank account when their wallet is connected to a debit card. 

Step Three: Join a Bitcoin Exchange

Bitcoin exchanges are online marketplaces where you can trade bitcoin for traditional currencies, say BTC for USD. Just like when you go to make a purchase online, you have options. There’s eBay, Amazon, Etsy, and Alibaba—to say nothing of the millions of private retailers who use these websites to sell their products. The same is true of buying bitcoin.

Even when two exchanges trade the same cryptocurrencies, they usually offer slightly different services. Exchanges can vary in reputation, reliability, security, processing fees, exchange rates, and cryptocurrencies available for trading. Before settling down with an exchange, look around. Here are our top recommendations for where to start.

While most exchanges offer wallets for their users, security is not their primary business. Except for Coinbase, we generally do not recommend using an exchange wallet for large or long-term cryptocurrency holdings.

Best for Beginners: Coinbase

Coinbase is the most popular and respected digital currency exchange in the United States. Coinbase lets users securely buy and store cryptocurrency in one location. Coinbase charges a 1.49% fee for U.S. transactions from a bank account or Coinbase USD wallet. Purchases made using a credit or debit card are charged a 3.99% fee.   Plus, Coinbase secures cash balances up to $250,000 in the event of theft or breach in online storage. 

Best for On the Go: Square Cash

The Square Cash app is a leader in peer-to-peer money transfers, right alongside PayPal’s Venmo. The Cash app comes from Square, the company that makes those mobile credit card readers. Square is a huge financial technology company that includes many other services—one of which is trading bitcoin. Unlike most online exchanges, the Cash App stores your bitcoin in your Square Cash Account, rather than a separate digital wallet. If you’re worried about security, however, you can send the bitcoin in your Square Cash Account to another wallet of your choosing. Square limits deposits to $10,000 per week, but there is no limit to what you can sell. 

Best for Bitcoin on a Budget: Robinhood

Robinhood launched in 2020 as a fee-free stock brokerage. In Feb. 2020, the company expanded into the Bitcoin and Ethereum markets, along with market data for another 15 currencies, allowing users to trade cryptocurrency without a fee. As is the case with Square, Robinhood stores bitcoin in the same Robinhood account that is used for stocks. Robinhood is mobile-first and just recently added a web version, so it is best for people comfortable managing money from their phone or tablet.

Best for Big Spenders: Coinbase Pro (Formerly GDAX)

If you feel comfortable trading on Coinbase and want to step up your trading volume, you may be ready to switch from Coinbase to Coinbase Pro. Formerly known as Coinbase Global Digital Asset Exchange (GDAX), the trading platform uses interfaces similar to Bloomberg terminals and active stock, commodity, and option trading platforms. Coinbase Pro offers options to make market orders, limit orders, and stop orders in addition to traditional buying and selling. Coinbase Pro also allows users to trade between cryptocurrencies, say between Ethereum and Bitcoin. Coinbase Pro charges fees ranging from 0.04% to 0.50% based on your trading volume. Most people trade less than $10 million per month and will fall into the 0.20% tier. If you want to try Coinbase but with much higher volume, this platform is the way to go. 

Best for Buying in Cash: Peer-to-Peer

If you have a wallet, but it isn’t connected to a bank account, debit, or credit card, you can buy bitcoin using cash through a peer-to-peer exchange. Unlike typical bitcoin wallets, peer-to-peer exchanges work similarly to Craigslist for cryptocurrency. They allow buyers and sellers in the same areas to find each other and meet up to trade bitcoins for cash. With peer-to-peer exchanges, it’s important to remember that you are trading high-value currency with strangers you have never met before. If you choose to exchange bitcoin in this way, we recommend that you meet buyers and sellers in a public place with high visibility.

Step Four: Place Your Order

You’re now ready to buy bitcoin for the first time. It is crucial to keep in mind that although one bitcoin costs several thousand dollars, bitcoin can be divided up to eight decimal points. The smallest unit of bitcoin is known as a satoshi. Even if the price of bitcoin skyrockets, you’ll still be able to buy a satoshi for a tiny fraction of a cent.

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10 Questions to Ask Before You Buy a Stock

Aug 27, 2020 1:45 PM EDT

NEW YORK (TheStreet) — It may seem like a given that you should do your homework before plunking down your hard-earned cash on a company’s stock — but many people don’t.

“There are some investors who simply don’t carefully weigh their stock-investment decisions,” said Brad Barber, University of California Davis professor and co-author of the study All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors. “Individuals are heavy buyers of stocks that are in the news — that is true of good and bad news,” he said.

As stock market crashes have taught us, a carefree investing style doesn’t work forever. In fact, its success usually comes to an abrupt end. It would behoove investors to relearn that painful lesson before the next crash.

With that in mind, here are 10 questions investors should ask — and answer — before buying a stock.

Of course, knowing all the answers doesn’t guarantee a winning stock. Nothing can do that. But over the long haul, taking the time to consider these questions will make one a better, more well-informed investor.

1. What Does the Company Do?

Warren Buffett famously says he doesn’t invest in what he doesn’t understand. If the greatest investor of the past 60 years is brave enough to acknowledge that he doesn’t understand all companies, we should all probably take heed. This first basic question is a simple one, but that doesn’t mean it’s easy. To answer the question, there are plenty of places to look, including the company’s Web site.

2. Is the Company Profitable?

This is also a simple question, which can be made more complicated by all sorts of variations on a company’s earnings. Investors can read the quarterly and annual earnings reports to check out how much net income the company reported, in dollars and in per-share earnings. Later down in this column we’ll address ways to mine for red flags in earnings.

3. What Is the Company’s Earnings History and Outlook?

A quick scan of older news stories and the company’s past quarterly statements help answer this question. Does the company have a history of steady earnings growth? Are earnings volatile? Remember, all trees don’t grow to heaven: If the company is a maturing tech company, can it sustain the heady growth of its days as a spry, young growth company?

4. How Richly Is the Company’s Stock Valued?

It’s wonderful to find a company whose earnings are growing exponentially, but the other side of the equation is the value the market pays for that growth and the prospect of future growth. There are several basic methods of determining a company’s valuation, including price to earnings and price to sales. These numbers can be easily found online (including under the Key Stats tab on TheStreet’s stock quote pages). Price-to-earnings, or P/E, multiples aren’t the perfect gauge, but investors do need to consider how much they are paying for a stock.

5. Who Are the Company’s Competitors?

Companies don’t operate in a vacuum. For every Coke (KO) – Get Report , there’s a Pepsi (PEP) – Get Report — and a host of other competitors as well. Companies are constantly trying to take business from one another. Investors should know where their companies stack up: Does this company have the biggest market share in its industry? Is it a small but growing niche player in a competitive industry? Is it an industry dominated by one company, or is it a fragmented industry where even the biggest player controls less than 10% of the market — such as in the supermarket business? Also, investors should increasingly pay attention to foreign competition, where lower-cost competition can put pressure on profit margins.

6. Who Runs the Company?

Unlike professional money managers, individual investors don’t have the ability to drop by a company’s headquarters and chat up the management before making an investment decision. However, that doesn’t mean there aren’t plenty of ways to find out about the leadership. Any company worth its salt will have a Web site that lists the senior managers, how long they have been with the company, their background and the company’s history. If the company’s executive suite has a rotating door, that may not reflect positively on the company’s stability. Beyond the company line on the executive suite, investors should research articles about the executives. Often, trade publications from any given industry are useful in digging into a company.

7. How Clean Is the Company’s Balance Sheet?

Serious-minded long-term investors need to be able to read over a company’s balance sheet. Is the company saddled with a huge amount of debt compared with how much it earns? Checking out a company’s earnings alone doesn’t tell you if the company has borrowed to the moon to achieve those earnings. It’s also useful to see how much the company is spending on research and development and how large its inventory levels are. (If they are growing from last year, that may mean business is slowing down.) This brings us to question No. 8.

8. Have You Read the Company’s 10-K and 10-Q Annual Reports?

The 10-K report is the annual report every company is required to file to the Securities and Exchange Commission. It’s much more in-depth than the more sanguine annual reports that companies file during earnings season. The 10-Q is the quarterly report — similar to the 10-K report except that it is required on a quarterly basis.

9. Are There Any Red Flags That Call Into Question the Company’s Integrity?

This is where the 10-Q and 10-K filings come in handy. First off, every company needs to detail the risk factors that may undermine its prospects. Second, the explanations of the company’s accounting practices and operating assumptions on matters ranging from depreciation rates on its assets to assumed rate of growth for its pensions tell you a great deal about whether the company is getting too aggressive.

10. Is the Company’s Competitive Position Sustainable?

Run-and-gun investors looking for short-term gains might not need to answer this question, but serious-minded long-term investors do.

This article was written by a staff member of TheStreet.

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