Beginner’s Guide: How to Invest in Bitcoin

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investing in bitcoin how it works beginner's guide

More and more institutional and retail investors want to know how to invest in bitcoin. Bitcoin, the first cryptocurrency, has unique features that define how it works. Before investing, one should do their research and make sure they know what they are buying, what the long-term potential is, and, in brief, how the technology behind bitcoin works.

Why and how Bitcoin emerged: A brief history

Bitcoin is an open-source code written by a person or community presenting themselves as Satoshi Nakamoto. Satoshi published a whitepaper for bitcoin and its operating principles in 2008. Since then, the currency development has been in the hands of the users and operators that comprise the sector. The real identity of Satoshi remains unknown and has caused much speculation. However, since even Bitcoin’s creator can not manipulate the system, it is safe to use regardless of who created it.

bitcoin whitepaper
The abstract of the Bitcoin whitepaper. Source: https://bitcoin.org/bitcoin.pdf

The bitcoins are added to circulation through a process called mining. The total number of bitcoins that will ever exist is finite. This makes it different from the euro and the dollar, which central banks can create without limits. Limiting the maximum amount makes bitcoin a scarce resource. Due to its scarcity, the increase in value is a natural consequence of the growing popularity and use of bitcoin.

Users’ computers across the world maintain the Bitcoin blockchain. Network operations work with the help of users who donate computing power (hash rate) to the network. As a reward, users — miners — receive bitcoins that the network creates in the process. Miners process all the transactions in the bitcoin network. To process a transaction, the performing miner must solve a demanding mathematical equation. Mining consumes a lot of energy which leads to the debate whether bitcoin is bad for the environment.

What is Bitcoin & how does it work?

Bitcoin is a decentralized digital money system developed by an open community that uses it. Bitcoin’s operations are based on a distributed database known as the blockchain. We can also call it bitcoin’s accounting book or ledger. This public ledger contains information on all the bitcoins in the world and bitcoin transfers executed in the network. The system is open and transparent, meaning all existing bitcoins and bitcoin transactions are public. Privacy is based on the fact that the ownership of the bitcoin addresses is not public.

The price and supply of bitcoin

The BTC price, on the one hand, works similarly to the price of other assets. On the other, bitcoin has a set of its own rules. Let’s cover one of them here — the supply of bitcoins.

The frequency of creating new bitcoins is defined in a formula from the whitepaper. Currently, miners generate around 6.25 bitcoins every 10 minutes. Every four years, the number of new emerging bitcoins automatically halves, slowing down their flow on the markets and further increasing the scarcity. So far, halving events have taken place in 2012, 2016, and 2020. Ultimately all bitcoins — 21 million — should be in circulation in 2141. Henceforth, miners receive rewards as commission fees from transactions.

In early 2021 there are over 18 million bitcoins in circulation. I.e., over 85% of all bitcoins have already been mined. Besides, we presume an estimated half of all existing bitcoins lost, meaning their owners died or lost access to their private keys. While these coins continue to exist in the blockchain, nobody can obtain them. This makes the actual supply of bitcoins even lower.


All bitcoin transactions are in the same public ledger.

Because of the limited supply and the increase in value, we use smaller units of bitcoin. A thousandth of bitcoin is called mBTC. There’s another common acronym for a hundred millionth of a bitcoin, the smallest unit — a satoshi. It’s common practice to buy a fraction of bitcoin at a time, as big as one can afford.

How to invest in bitcoin

Bitcoin has attracted growing numbers of investor funds during the past years. Currently, people most commonly use BTC as an investment tool and value retainer. The long-term value of the most widely used currencies globally, such as the US dollar and the euro, is constantly downward. The continuous increase in the amount of money leads to a decline in value. Due to the constant deterioration of value, it might not be convenient to keep large amounts of cash or low-interest accounts with these currencies.

What are bitcoins’ benefits compared to fiat?

Due to its very limited amount, bitcoin’s value doesn’t tend to deflate like fiat currencies. As an investment, one should rather compare BTC to gold than the dollar or the euro. As a result of increased awareness and use of bitcoin, the value could keep rising for many years to come. Bitcoin has doubled its value during the years 2009-2013 and 2015-2017 and 2019. During the 2021 bull run, Bitcoin (BTC) went over $60,000.

Bitcoin price chart until mid-2021 coinmarketcap
Bitcoin price chart until mid-2021. Source: coinmarketcap

How does bitcoin value react to world events and economy

Throughout most of its history, bitcoin has been uncorrelated or even negatively correlating with traditional assets, meaning it either maintains its value or goes up when other assets drop. In March 2020, the COVID-19 pandemic led to a market panic, during which bitcoin’s price crashed 30% in one day. This marked the first time bitcoin has ever correlated with the broader economy during its entire ten-year existence. However, BTC quickly recovered and strengthened its case as a durable safe haven and store of value.

Bitcoin’s independence from banks or centralized entities also makes it very independent of social changes. People use it in many countries where social turbulence and corruption are prevalent. For example, the Greek banking crisis at the beginning of 2010 greatly increased the use of bitcoin within the country. Bitcoin wasn’t affected by the banking crisis. It was a safe and functional alternative to maintaining and transferring money for the Greeks dissatisfied with their banks. We have seen a similar development in other countries like Venezuela. The hyperinflation has left the national currency practically worthless while bitcoin use has literally saved lives.

Bitcoin network upgrades

The Bitcoin network is not perfect when it comes to processing transactions. However, if the community reaches a consensus on adopting technological upgrades, it may boost the BTC value even further.

In 2017 Bitcoin’s transaction speed improved with the significant Segregated Witness update. One proposed solution to further accomplish faster transactions is the Lightning Network. That was one of the most promising answers to Bitcoin’s scalability problem. It is a second-degree solution, meaning that it is built separately from the Bitcoin network but interacts with it. In essence, its purpose is to enable faster payments with lower fees. If successful, the Lightning Network could see Bitcoin’s transaction speed rise to seconds with almost non-existent fees.

In 2021, the network started voting on adopting Taproot — the most significant upgrade to the Bitcoin network since the block size increase of 2017. If they reach the consensus, the privacy of the network will increase, transactions will become more flexible, fees will become even lower, and transactions on the Lightning network will become even cheaper, more flexible, and private.

How to invest in bitcoin: Can I use it to pay?

People widely use bitcoin in international money transfers and e-commerce platforms. Bitcoin transfers are processed at the same rate regardless of where the sender and recipient are located. Typically transactions take less than an hour. As the network develops further, the transaction speed can drop to minutes or seconds in the near future. Fast and affordable transactions make bitcoin an attractive option for international transfers, typically slow and expensive.

People can use bitcoin to pay in an increasing number of stores and web stores. There are already tens of thousands of merchants internationally who accept bitcoins as a payment method. Paying with Bitcoins in stores typically takes place via the merchant’s QR code. The client reads the code with a bitcoin wallet app on their phone.

The best features of bitcoin with Henry Brade
Coinmotion’s founder and bitcoin expert Henry Brade explains why he likes BTC as a digital asset

How to invest in bitcoin: Where to buy & store BTC

If you want to invest in bitcoins, you need to set up a wallet to store your coins safely. A Bitcoin wallet is similar to a cash wallet or a bank account. Once you’ve created it, you can buy bitcoins to deposit to this wallet. You find your personal wallet address or public key in your wallet, which acts like a bank account number. Anyone with the wallet address can transfer bitcoins into the wallet. Be careful not to share your private key since it is equal to a password and can be used to access your funds.

If you are researching how to invest in bitcoins long-term, secure storage like the Coinmotion platform is a good option. If you have a significant amount of bitcoins, you might also want to try managing the funds yourself, in which case a cold storage wallet (e.g., Ledger Nano S or X) is an option to consider.

It is also possible to buy bitcoins with cash from Bitcoin ATMs. These machines allow you to deposit or withdraw cash when you want to buy or sell BTC. In Finland, Coinmotion Ltd maintains the largest Bitcoin ATM network Bittimaatti.

How to invest in bitcoin on Coinmotion

Coinmotion is one of the leading bitcoin investment platforms in the Nordics. You can buy, sell and store bitcoins and eight other virtual currencies safely. After signing up, you get a free account and Bitcoin wallet that works in your browser or mobile app. You also get separate wallets for other virtual currencies — and you can exchange them for bitcoin (and the other way around) to save on fees.

Read next: How to buy bitcoins safely on Coinmotion

For those who want to invest at least 10,000 euros in bitcoin, Coinmotion offers private banking services. Our team helps you manage your crypto portfolio and provides regular market insights.

How to invest in bitcoin & put it in a vault

When bitcoins are a long-term investment, we recommend paying attention to security issues. The biggest risk is that someone hacks into your account and withdraws the bitcoins. Most bitcoin thefts happen like that.

Coinmotion provides extra security against such threats with the Vault service. You can protect Bitcoin transfers with a timelock that can be set from 12 hours to one month. So if someone hacked your account and tried to withdraw funds, you would receive a text message or email immediately. You could then cancel the withdrawal by contacting our support during the time window.

How to invest in BTC & use physical storage

Even though Bitcoin is a virtual currency, service providers have made physical versions of bitcoin wallets. We used to produce those under the Denarium brand from 2013 to 2020.

physical bitcoin coin storage
One of the premium models of Denarium bitcoins is made of gold – an upscale way to invest in bitcoin, the digital gold

While Denarium ceased manufacturing new products in 2020, the website and database are functional. Our customer support provides help with all matters related to Denarium products. Limited-edition physical coins such as Denarium also have value for collectors.

How to invest in bitcoin: about the risks involved

Storing bitcoins has become safer over time while the most trusted service providers developed their security standards. Especially in the early days of Bitcoin’s existence, some significant bitcoin exchanges were misused or used illegally, and users lost their bitcoins. Investigating the background of the service you use is still highly recommended.

If you invest in bitcoin and use physical storage, take care of the safe storage of the coins themselves. A safe at home or a bank are both excellent options. For virtual services, it is vital to make sure that your password is secure. High-quality service providers enable two-factor authentication, which increases security.

With bitcoin’s increasing value and human mortality in mind, it is good to remember that even a tiny amount could one day amount to a substantial inheritance. Therefore it is recommended that bitcoin investors make testament arrangements to ensure that their funds won’t be lost and can be legally inherited by family members or other trusted parties.

How to invest in bitcoin: Timing is everything

There are different types of risks involved with investing in Bitcoin. The volatility of Bitcoin prices is higher than the volatility of many other currencies or some traditional investment instruments. Even though the volatility has decreased during the last few years, you should consider bitcoin a high-risk investment. Bitcoin’s value has been increasing strongly during the last years, but there have been significant downtrends as well.

You should pay attention to the price fluctuation, especially if you plan to make a short-term investment. As a long-term investment, bitcoin has historically performed well. Therefore a long-term investment strategy is the recommended way of investing in bitcoin. Due to the price fluctuation, it can be wise to divide bitcoin investments over a longer time period. If you wonder how to invest in bitcoin and when, one option is repetitive monthly purchases.

the BTC network
Bitcoin value has been rising throughout its existence.

How has the value of bitcoin developed so far?

Bitcoin’s value has risen steeply since its creation. Volatility has slightly decreased as the Bitcoin market has grown and matured. When big companies and investors put money in bitcoin and bitcoin-related businesses, the economy slowly stabilizes. However, in the near future, the value of bitcoin is likely to continue fluctuating more than in the case of fiat currencies.

The value of bitcoin at least doubled during 2009-2013. In 2014, the value of bitcoin experienced a recession. This was affected by the significant Mt. Gox exchange service embezzlement. After 2014, appreciation has again been growing strongly and accelerated in 2017. The year 2018 marked a bear market similar to 2014, while 2019-2021 have seen the price climb again. Growth can easily continue in the same manner in the following years.

Bitcoin’s price & future

If bitcoin truly breaks through in the following years, it could become a global currency that can be used as a payment method worldwide. While exact numbers are impossible to count, it is estimated that there are currently around 100 million bitcoin users amounting to roughly 1% of the world population. If the growth continues and the amount of bitcoin users multiplies further, the value can skyrocket.

Some financial experts expect this to be the case. A Harvard professor forecasted that bitcoin would reach $100 000 by February 2021 (in reality, the BTC price was $35,524.43 on February 1, 2021). Top analyst Kay Van-Petersen, in turn, predicted $100 000 dollars by 2027.

Even though bitcoin price predictions don’t always come true, such optimistic forecasts are a good sign for a crypto investor.

For sure, some experts think otherwise. Many critical forecasts come from people working in the banking sector. Obviously, the rise of bitcoin can decrease the power of banks, so these people have a reason to be cynical. Nonetheless, it is worth being cautious and weighing the pros and cons of Bitcoin before making an investment decision and diversifying your portfolio with it. Bitcoin certainly includes risks — but it also has enormous potential for brave investors.

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AARNO TUOMENOJA
AARNO TUOMENOJA
20/04/2020 18:00

Voinko ostaa Coinmotion kautta pareja kuten BTC-USD, LTC-UAS jne?

Robin Nyberg
Editor
Robin Nyberg
22/04/2020 10:44

Coinmotionissa ei toistaiseksi ole tarjolla tuollaisia vaihtopareja, mutta välittömät vaihdot euroista viiteen eri kryptovaluuttaan onnistuvat.

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