There are a few things you should know before you buy your first cryptocurrency.
To put it mildly, investor interest in Bitcoin has exploded. As I write this, Bitcoin trades for about $60,000, roughly 10 times where it was a year ago. Millions of people all over the world are opening accounts at cryptocurrency exchanges and buying and selling Bitcoin. If you're thinking of jumping into the Bitcoin world, there are some things to know first.
1. You don't have to buy an entire Bitcoin
Here's a "Bitcoin 101" concept that's easy for new investors to miss: You don't have to buy an entire Bitcoin. You can buy a fractional amount of one. In fact, Bitcoin is very divisible -- all the way down to eight decimal places. In other words, you can buy Bitcoin in increments of one hundred-millionth of a full coin (each of these tiny units is known as a "Satoshi," after Bitcoin's mysterious creator). Many exchanges have minimum trade amounts, but it's usually in the $5 to $10 range, not the $60,000-ish price tag of a full Bitcoin.
2. You'll probably pay a fee to buy
Buying Bitcoin isn't free, even when you see "no transaction fee." Most places that sell Bitcoin profit from something called a "spread" -- the difference in the price they sell it for and the price they pay for Bitcoin. This is usually in the range of 1% to 2%. Some platforms, including a few of our favorite cryptocurrency exchanges, charge a transaction fee on top of this. These fees shouldn't scare you away from buying, but be aware of them.
3. It's very important to protect your passwords
Cryptocurrency exchanges are very secure when it comes to avoiding breaches and large-scale theft. Most Bitcoin held by our favorite cryptocurrency exchanges is kept in cold storage (meaning it's not connected to the internet), and there's typically an insurance policy to guard against theft.
However, there's nothing to protect you if just your account gets hacked. For example, if someone steals your password or uses your phone to authenticate a transaction, there's no way to get stolen funds back, like you can with a credit card or bank account. Once Bitcoin is transferred out of your account, it's gone. So, it's extremely important to use strong passwords and safeguard the security of your account.
4. There are several ways to store Bitcoin
On a similar note, it's important to realize that keeping your Bitcoin in the same place you bought it is only one option. For example, if you buy Bitcoin on Coinbase, you can leave it in your Coinbase account, a perfectly valid option for most people.
On the other hand, if you're worried about the security of your Bitcoin, you can use a cryptocurrency wallet instead. There are varying degrees of protection you can get from a wallet. You can use a hardware wallet (essentially a specialized hard drive that isn't connected to the internet) to store your Bitcoin completely offline. If you're a casual Bitcoin buyer, such a precaution might not be necessary, but if you're planning to put thousands of dollars into Bitcoin, it could be smart.
5. Trading Bitcoin and investing in Bitcoin are different things
It's important to know the difference between trading and investing, especially with Bitcoin and other cryptocurrencies. "Investing" means buying Bitcoin and holding onto it for the long run. "Trading" means you're buying it because you think it'll go up in value quickly and you can make a quick profit. The former can be a good supplement to a well-diversified investment portfolio, while the latter should be approached with extreme caution -- it's generally a losing battle to try to time the pricing of any investment, and since buying and selling Bitcoin isn't free, the fees can really add up if you frequently buy and sell.
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Matthew Frankel, CFP has no position in any of the stocks or cryptocurrencies mentioned. The Motley Fool owns shares of and recommends Bitcoin.
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