By Jesse Collier. Updated January 2017.
You may have heard of the fairly recent rush for cryptocurrencies such as Bitcoin and Ethereum. Are you interested in gaining a profit that so many others have already claimed?
Bitcoin has been dubbed “the next big thing” (no Apple, we’re not talking about the new iPhone).
As of right now (October, 2017), the price of Bitcoin has risen over 700% in Canadian dollars since last year, where it currently settles at about $7,500 CAD.
UPDATE: With the new Bitcoin Futures hitting the market today, even amidst speculation, Bitcoin is holding steady around $18,000 CAD.
Bitcoin has even been compared to gold in more than one way.
With large companies such as Microsoft, IBM, Intuit, and even Paypal investing in Bitcoin, a lot of investors (major and minor alike) are seeing the change that the cryptocurrency can make to the definition of “currency”.
In this guide, we introduce you to typical phrases and words you will hear when you dive into the cryptocurrency world. We encourage you to read each link we give you in order to be knowledgeable about cryptocurrencies in general, and thus to not make mistakes down the road.
REMEMBER: Don’t invest recklessly. While people are making massive profits from Bitcoin, this doesn’t mean that you should invest all you’ve got into it. We recommend a total of 10% of your entire portfolio.
What is Bitcoin?
Bitcoin is a type of digital currency (cryptocurrency, as it’s more known) that is created and held electronically. It was first created by the anonymous person or group under the name Satoshi Nakamoto. The smallest unit of Bitcoin is called (you guessed it) – the Satoshi.
Transactions with Bitcoin are recorded in a public distributed ledger called a blockchain. Essentially, the blockchain is an electronic collection of every transaction, which allows them to be synced across the world in a relatively short time.
How Is Bitcoin Created And Used?
Bitcoin is created through mining, which is another likeness to gold. While Bitcoin is not physically mined using pickaxes and heavy machinery (save for computers and hardware), it can still be a time and energy-intensive task.
With more and more companies joining the Bitcoin movement, people are increasingly using Bitcoin to pay for products and services. Over 100,000 organizations now accept Bitcoin, and more are added to the list everyday.
Bitcoin is also used as an investment, much like gold, where the value is increasing, and is projected to increase even further. Millions of people have already made money with Bitcoin. You can as well!
Pros And Cons Of Bitcoin
We put together a handy pros and cons list of investing in Bitcoin. We advise you to make a checklist of what points weigh more heavily with you, and then make an educated decision on whether to invest or not.
Some pros can be cons as well, but it’s up to you to weigh the trade-offs that occur.
Pros of investing with Bitcoin
- Bitcoin is decentralized. This means that there’s no set bank or government organization that regulates the distribution of Bitcoin. This also means that if one part of the blockchain fails, then the whole network won’t go down. Being decentralized also allows the cryptocurrency to be borderless – meaning anyone in the world can access the network as long as they have an internet connection.
- Bitcoin is accountable. When we mentioned the public ledger, we meant that it’s transparent and every transaction can be seen by everyone.
- It is resistant to censorship. This means no one can prevent you from buying your own Bitcoins, or block other people from making transactions that they don’t agree with. Read more on Bitcoin censorship here.
- Low transaction fees. Transaction fees are typically low – ranging from a few cents to a few dollars. This usually works out to be much less than the standard 2.9% transaction fee for using other services. The Bitcoin transaction fees depend on a few factors such as network demand and the priority you assign to the transaction. When investing in Bitcoin, this can be a major factor for some people.
- Bitcoin is pseudonymous. This means that in order to perform a transaction, you don’t have to give any personal information away. However it also means that when you send and receive Bitcoin, your wallet address is written into the blockchain, meaning if it’s traced back to you, then all transactions associated with that address are also traced to you.
- Bitcoin is secure. It is encrypted cryptographically within your wallet or exchange (more on those later) and it can’t be forcibly taken if you manage your public and private keys well.
- Almost-instant transactions. Transactions can take a few seconds up to an hour depending on the size of Bitcoin being sent or received, network load, and confirmations needed. Basically, a block is created on the blockchain about once every 10 minutes. Your transaction will wait to be confirmed until the next block is created. Once it is, and for every subsequent block created, your transaction will be confirmed. Some companies require up to 6 confirmations (meaning it could take an hour) before your transaction is processed. This reduces reversible transactions (think of chargebacks on your credit card).
- No middle-men when investing in Bitcoin. When you make a transaction, there’s no middle-men, meaning no companies such as Visa or Mastercard who take a cut. It’s just you, the blockchain, and the other person/business.
- Bitcoin are portable. Bitcoin are easy to carry around and can be kept in a wallet on an exchange, on your computer, or on a physical device (more on those below). They can be easily accessed with only an internet connection and your private keys.
- Bitcoin overcomes its hurdles. From forks on the main blockchain that have tried to sectionalize the Bitcoin user base to countries like China trying to regulate the use of the cryptocurrency, Bitcoin has remained strong.
Cons of investing with Bitcoin
Whew! After the exhausting list of pros for investing in Bitcoin, here’s some cons that might help you make up your mind.
- You have to manage your private and public keys. While your Bitcoin can be kept on an exchange, it’s recommended to keep them in your own wallet on your computer or on a physical hardware wallet. This can mean that without proper management, your private keys can be compromised, resulting in you losing your money. Basically public keys in relation to Bitcoin are the wallet address with which you send and receive Bitcoin. The private keys show that you own the wallet address, or the public key. Think of the private key as your bank PIN. If someone finds out your PIN, they can access your bank account through an ATM, resulting in your money lost.
- Investing in Bitcoin requires some technical ability. You will have to be able to properly manage your private keys and you will have to know how to transfer your Bitcoin between wallets or to pay for different services.
- Bitcoin is volatile. Since it can be exchanged so easily, Bitcoin is susceptible to wild price swings that could have its price vary by hundreds per day. It’s also very influenceable as a direct result of these price swings. Earlier in September, Jamie Dimon, CEO of JP Morgan, called Bitcoin a “stupid” investment and a “fraud”, which made the price dip by almost $1,000. Yet we all know how that turned around to bite him.
- There’s no chargebacks with Bitcoin. As a result of its decentralized structure, it’s impossible to get your money back if you send money to the wrong address or if the seller never delivers on your order. While miners take charge of making sure transactions are recorded in the blockchain, no single user is in charge of disputing transactions.
- Bitcoin could be replaced by a superior cryptocurrency. The thing with technology is that it’s constantly evolving. The inception of Bitcoin spawned thousands of other cryptocurrencies and Initial Coin Offerings. These other cryptocurrencies have various applications, including making tracking transactions harder, creating in-house exchanges so third-party exchanges don’t need to be used, and reducing fraud. While it’s far from likely, any of these cryptocurrencies could take over Bitcoin, leaving holders (or hodlers) in the dust.
- Bitcoin’s reputation can be tarnished by black market activity. Many people still associate Bitcoin with under-the-table or black market activities, which creates uncertainty among beginner investors.
Overall, the surge in Bitcoin demand implies that many people outweigh the pros from the cons, and thus increase the value of Bitcoin. We outlined the most common pros and cons of the cryptocurrency, yet it’s still ultimately up to you whether to invest or not.
How To Start Investing In Bitcoin
Convinced that Bitcoin is for you? Let’s dive into the steps you need to take to start investing in Bitcoin!
Find A Wallet
The first thing you need to do before you start investing in Bitcoin is to find a wallet. While you could leave your Bitcoin in an exchange, it’s recommended to not do that for various reasons.
While it’s entirely up to you which wallet you choose, we chose a few ones that we believe are good for beginners and advanced users alike. However if you don’t like our suggestions, feel free to choose your own.
It’s also important to understand that there’s four different types of wallets:
- Online Wallets (wallets on an exchange or similar website)
- Software Wallets (wallet stored on your computer or mobile device)
- Hardware Wallets (physical device)
- Paper Wallets (private keys stored on paper)
Benefits: Using Electrum for your Bitcoin wallet has numerous benefits, including:
- It’s safe (your private keys never leave your computer and are NOT stored on servers)
- Your money can be recovered using a secret phrase called a “seed” should your computer fail
- There’s no server downtime. Electrum servers only verify your transactions, and the servers are decentralized, meaning if one fails, others are still operational
- Support for third-party plugins such as hardware wallets
Wallet Type: Mycelium is also a software wallet. It’s only available for mobile devices though, so unless you have an iDevice or Android, this might not be the best option for you. Read the full setup guide for Mycelium.
Benefits: Using Mycelium has numerous benefits, which are mostly the same as Electrum, but here are some points we didn’t list above:
- Numerous integrations with many different services and plugins
- Constant platform development (as of right now, they have many features coming to the platform including an asset exchange and debit cards linked to your bank)
- Easy ways to send and receive money including using QR codes embedded with your public key and other social integrations
Ledger Nano S
Wallet Type: The Ledger Nano S is a hardware wallet. It looks exactly like a USB stick, however it could be worth thousands depending on how many Bitcoins you have.
Speaking of having a lot of Bitcoins, hardware wallets are generally recommended for people with $1,000 or more in Bitcoin, as they offer the most security and typically cost around $100.
Benefits: Besides being the most secure form of storing your Bitcoins, hardware wallets like the Ledger provide various other benefits:
- It’s recoverable. Lose your Ledger? Just go to one of their many integrated online wallets, sign in using your secure phrase you setup when you first get your Ledger, and your Bitcoin will be there.
- Confirm transactions on the physical device. Nothing gets sent or received unless you press the button on the Ledger.
- Your private keys are cryptographically stored on the device itself. Through using a secure PIN for transactions, the double-authentication factors built into the Ledger make it very secure and impossible to hack with proper management.
These are just a few of the many different types of wallets available. Feel free to pick the one that suits you best according to what traits in a wallet you value most.
Join An Exchange
After you find a suitable wallet, the next step in your Bitcoin journey is to create an account at an exchange. Exchanges are where you can buy and sell Bitcoin and other cryptocurrencies (named alt-coins because Bitcoin is the “gold standard”).
Most exchanges also have wallets and vaults attached to your account, however as we stated above, it’s not recommended to keep your cryptocurrency on an exchange.
Here we give you a few exchanges that we have personally tested and which are some of the more popular exchanges to use when investing in Bitcoin or alt-coins.
Coinbase is an exchange where users can buy Bitcoin, Ethereum, and Litecoin. In addition to its online platform, the iOS and Android apps are fantastic for quickly buying, selling, sending, and receiving your cryptocurrency.
Attention Canadian Buyers: The Canadian payment processor associated with Coinbase, Vogogo, shut down its business earlier this year. This means Canadian buyers can still buy with CAD, however they cannot sell on Coinbase with CAD. We recommend transferring your cryptocurrencies to QuadrigaCX (read below) in order to exchange to fiat. Read more here.
- Cryptocurrency is stored in offline storage for higher security. A very small amount is stored on Coinbase servers.
- Coinbase has insurance protection, which covers everything including employee tampering and server malfunction. Yet it excludes mismanagement of your personal account (for example, if you lose your password and cannot access your account).
- Coinbase has vault protection, which offers increased protection for your funds. Read more about vault protection.
- Put your investment on auto-pilot. Coinbase has weekly scheduled buys that are debited from your bank account and credited to your cryptocurrency of choice.
QuadrigaCX is another exchange that allows users to start investing in Bitcoin, along with other cryptocurrencies. The platform dedicates mainly to Canadian customers, allowing fluidity between Canadian banks and the exchange.
- QuadriagaCX offers same-day funding and withdrawal via many different payment methods including Interac-Online, e-Transfer, and bank wire. Read more about fees and withdrawal and deposit options.
- The platform has a relatively-low trading fee of 0.2-0.5%. There’s various fees involved with deposits and trading.
- QuadrigaCX has multiple security features in place including globally distributed servers, offline storage, and two-factor authentication.
These are just two of the many exchanges that are available to choose from. Again, the choice is yours, but make sure you do some research before you pick the right one for you.
Now, assuming you have Bitcoin, there’s a few things you can do. One, you can leave it in a wallet and hope the value of it goes up (which it inevitably will – my fingers are crossed!). Two, you can go out and pay for services and products at stores that accept Bitcoin!
If you opt to go and spend your Bitcoin, make sure it’s in a wallet, as it will make it a lot easier when making transactions.
You could also get a Bitcoin debit card that will link to your wallet and allow you to swipe at various retailers. While many argue that having physical cards to use your Bitcoin goes against the whole point of having a virtual currency, it can still be a very convenient way to contribute to the Bitcoin economy.
Finally, make sure you do research on any Bitcoin news, as cryptocurrencies change often, and it’s best to stay on top of things when investing in Bitcoin.
Notice any details or processes we missed? Let us know in the comments!
Like Money Tips For Students?
Don't go without subscribing to keep up to date with us!