Bitcoins, the most popular in a wave of electronic cryptocurrencies, are taking over the news these days. There’s the Norwegian guy who bought $27 in Bitcoins, only to find four years later, that his investment was worth nearly $1,000,000. Then there’s the first Bitcoin ATM, located inside a Vancouver, British Columbia, coffee shop.
Some investors are all about Bitcoins, while others are wary, to say the least. But investing in Bitcoins can be fun and potentially very profitable.
Just what are Bitcoins, and how do you go about investing in them? Read on to find out.
Table of Contents:
What are Bitcoins?
As we explained in a past article, “Are Bitcoins a Scam?” Bitcoins are online currency created in 2009. Bitcoin is also the name of the open source software that lets you use this currency.
At its heart, the Bitcoin movement is meant to let people safely send money across a distance without risk of fraud or third-party intervention. While Bitcoin transactions can be relatively anonymous, that’s not the goal. Bitcoins are simply about helping people safely and efficiently complete transactions online and off.
The mathematics behind Bitcoins are quite complex, and the system is set up to limit the number of Bitcoins that can be created. The system will create 21,000,000 Bitcoins before it stops.
This limitation means that as demand grows, Bitcoins are worth more and more – usually. Bitcoins are volatile, to say the least. Their value can change in seconds, and it fluctuates dramatically from day to day.
However, the trend has been upward, which is why you hear astonishing stories like $27 turning into $1,000,000 in just a few years.
How Do You Invest in Bitcoins?
There are several ways to invest in Bitcoins, some of which are more complicated than others. Here are the five most common ways to invest in Bitcoins:
1. Mine Them
OK, so this is a less common option for investing in Bitcoins. Mining Bitcoins involves solving complicated mathematical problems and showing proof of work. When you solve a problem correctly, a new Bitcoin node will appear in the software that runs the currency.
Typically, your computer can do the mining for you. To mine, you connect your computer to the Bitcoin network and set it to solve a cryptographic puzzle. When the puzzle is solved, the Blockchain – the public record of Bitcoin transactions – gets a new digital block. And in exchange, miners get a set amount of Bitcoins.
Most of the time, these complicated cryptographs are solved by a group of miners who share profits. Thus far, mining has been open, honest and group-oriented.
You can purchase special servers designed specifically to mine digital currencies. Here’s one of the most popular options on Amazon.
2. Trade Online
Online Bitcoin exchanges are one of the more popular ways to invest. Websites like Coinbase allow you to exchange your currency of choice for the virtual currency.
The problem with online transactions is that it can take two weeks for your bank account to be connected and verified. And that’s after you set up your account, which takes photo ID, proof of residency and an even longer wait time.
In that time, the value of Bitcoins can swing dramatically, so you really have no idea at the beginning of the transaction how much you’ll wind up getting in the long run.
Investing in Bitcoins online may not be a bad option, if you’re just looking to make a small investment to play around or get a feel for how Bitcoins work.
3. Buying Face-to-Face
For those who want to purchase Bitcoins more quickly, face-to-face transactions are the best option, though they can be somewhat dangerous.
This article on Read Write notes that some Bitcoin investors have been robbed, primarily because the face-to-face transaction usually involves quite a bit of cash. When one Bitcoin could be worth $100 or more, you can imagine how much money you’d need to bring to a transaction to make a major Bitcoin investment.
There are safe ways to invest in Bitcoins in person. You should take the same precautions you would with a Craigslist transaction – or any transaction where you’re meeting an individual stranger to hand him or her cash in exchange for something else.
Meeting in a public location and taking someone with you are good ways to protect yourself when investing in Bitcoins in person. You can also check out Bitcoin buyers and sellers on sites like LocalBitcoins, which gives each user a reputation score to help you decide whom to buy from.
This type of face-to-face transaction is also interesting in that you give the seller cash, in exchange for virtual Bitcoins. However, unlike buying through the exchanges, the transaction takes seconds. Bitcoin sellers can transfer money directly from their virtual wallets to yours, and you can see it all happen in real time.
4. A Face-to-Face Bitcoin Exchange
Serious Bitcoin investors may look in to this more complicated version of a face-to-face Bitcoin transaction. Bitcoin exchanges, often called Buttonwood meetups, are similar to the oldest version of the New York Stock Exchange: a group of people getting together to exchange goods (silver and gold) and currencies for cryptocurrencies.
As this article from Wired outlines, most Buttonwood transactions aren’t large. Often, the goal is just to get people informed and interested in Bitcoins and other cryptocurrencies. However, these can be a good place to meet with other Bitcoin enthusiasts and to trade coins, currency and other valuables for Bitcoins (and other cryptocurrencies).
5. Go to an ATM
You can invest in Bitcoins through an ATM, but not just any ATM. The world’s first Bitcoin ATM, created by Robocoin, was placed in the Vancouver, British Columbia, coffee shop called Waves Coffee.
The machine in Vancouver charges a transaction fee of 3-5 percent, but even so, it did $100,000 worth of transactions during its first eight days of operation.
Most of the people who use the ATM have been investors who insert cash for a share of Bitcoins. However, some people have used it to sell Bitcoins for cash.
While the Vancouver ATM is the first, Bitcoiniac, who purchased the machine and four others from Robocoin, plans to deploy the others in Toronto, Montreal, London and Berlin soon. Next year, the company hopes to add Boston, Los Angeles, San Francisco and a few other major U.S. cities to the list with Bitcoin ATMs.