Bitcoin (BTC)? What It Is, What It’s Worth and Should You Be Investing?

bitcoin cryptocurrency and US dollars
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Investing is a tough subject for many of us, despite that it’s now become quite accessible. From brokerage to retirement, you can open any kind of account online. Our next investment opportunity is always a click away, and we’re paying less to invest our money than ever.

Several investment houses, including Charles Schwab, E-Trade, Fidelity and Vanguard, now allow commission-free trading on most stocks and exchange-traded funds–which still have an expense ratio. Even better, fractional shares — meaning buying a portion of a full share — are becoming more widely accepted.

Vehicles like ETFs and index funds are popular, but a newer product on the market — a cryptocurrency called Bitcoin — has been harder for investors to grasp. If you’re having trouble with it too, read on to learn how to make money with Bitcoin.

What Is Bitcoin?

Many people know that Bitcoin is a virtual, decentralized currency encoded through cryptography, but they may not know what that means. So, before learning how to make money with Bitcoin, you need to learn about its key features.

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Virtual Currency

Bitcoin is a currency that only exists online in the same way that email accounts only exist on the internet.

The Internal Revenue Service describes this kind of currency as virtual, which means it digitally represents a value that isn’t a “real” currency, like the dollar or a foreign currency. Like its “real” counterpart, virtual currency has a value that can be exchanged.

Encoded via Cryptography

The IRS usually doesn’t consider virtual currency as legal tender. However, cryptocurrencies like Bitcoin are accepted, because they rely on cryptography, a security-minded information coding technique, to validate it. This also keeps a transaction record on a digitally distributed ledger, like a blockchain.

Not Connected to a Physical Company

With traditional investments, such as stock or fund trades, you are buying into a company or a fund made of company stocks. As an investor, you own a piece of the actual company. With Bitcoin, on the other hand, you just own a machine-generated coin that is recognized as an online currency. It doesn’t represent a piece of a larger organization.

Decentralized, Peer-to-Peer Transaction

Unlike traditional, regulated securities, cryptocurrency can be purchased online by anyone, without the oversight of a bank or financial institution.

Converting To Cash

Bitcoin can be exchanged for actual cash. Its cash value depends on its assessed value as a digital currency.

How To Make Money With Bitcoin

Here are three ways to get your feet wet with Bitcoin:

1. Buy Bitcoin

The most common way to invest in Bitcoin is to buy it. You have a couple of options to do this:

  • Full or fractional shares. Firms like Goldman Sachs and Morgan Stanley are beginning to offer their clients access to Bitcoin and other forms of cryptocurrency. Fractional shares are now available in some cases.
  • Bitcoin exchange-traded funds. ETFs tend to be more affordable and tax-efficient than other investments, such as mutual funds — and, unlike mutual funds, they trade like stocks. Currently, there are nine applications for Bitcoin ETFs lined up for approval by the U.S. Securities and Exchange Commission, and the first could debut later this year. Grayscale Bitcoin Trust, the biggest and most liquid Bitcoin investment globally at $34 billion in Bitcoin assets, plans to convert to an ETF as well.

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2. Work for Bitcoins

The internet has made it very easy to have a side hustle, and some gig economy tasks now pay in Bitcoins.

Ways To Earn Bitcoins

  • Mine for Bitcoins. It takes complex computer calculations to securely produce and record each new Bitcoin. Since so many Bitcoins have been mined already, though, it takes a lot of processing power and electricity to mine new ones. To manage this cost, Bitcoin miners may join mining pools to combine resources.
  • Write paid posts. Websites like Bitcointalk, where sponsors may commission content about Bitcoin, will often pay you in Bitcoin.
  • Some job sites. Sites like Bitcoinget, Cointasker, Coinworker and Microworkers offer microtasks that will pay you in Bitcoin.
  • Watch ads or send traffic. Certain websites will pay you with a Bitcoin faucet site to watch their ads or direct traffic to them.
  • Tips. On sites like Bitfortip.com, people can ask for help with things and then give Bitcoin tips to the people who help them out.

3. Lend Your Bitcoins

This option isn’t for everyone, so do your homework, but you can loan your Bitcoin and charge interest. Websites like BTCpop and Bitbond let you loan at up to 15% interest. However, you will assume the risk of not getting paid back and just losing your Bitcoins.

Risks of Investing Bitcoin

Although Bitcoin is slowly gaining acceptance in the investing community, being an investment means it comes with risks, including but not limited to:

  • Market volatility. Bitcoin is known for its ups and downs. If you want to invest in Bitcoin, be ready for frequent and potentially dramatic performance fluctuations.
  • Taxes. The IRS considers Bitcoin to be property, which means that standard tax rules apply. Expect to pay capital gains taxes on any earnings when you sell, and to pay a higher rate if you’ve owned the Bitcoin for less than a year.
  • Security. Your Bitcoins come with a private key that allows you to manage them — for example, to spend or transfer. If anyone gets access to your key, they could potentially move your Bitcoins into their own digital wallet.

Advice

To avoid security issues with your Bitcoin wallet, you could keep your key in a cold wallet, or a wallet not connected to the internet — such as a notepad or safe deposit box.

As Bitcoin continues to develop as an investment vehicle and become more accessible, you’ll likely hear more about it. Do your research and map out your investment goals to figure out if Bitcoin fits with your goals, planned time in the market and level of risk tolerance.

Our in-house research team and on-site financial experts work together to create content that’s accurate, impartial, and up to date. We fact-check every single statistic, quote and fact using trusted primary resources to make sure the information we provide is correct. You can learn more about GOBankingRates’ processes and standards in our editorial policy.

About the Author

Kelli Francis is a writer and content strategist. She started her career with a degree in journalism from the University of Oregon and went on to work in some of the industry’s busiest newsrooms, from The Seattle Times to MSN.com, WebMD and Yahoo. In nearly a decade at Yahoo, she worked as an assistant managing editor at Yahoo Finance, specializing in personal finance content; a producer for Yahoo News; and a managing editor on Yahoo’s home page team. A perennial seeker, Kelli is currently expanding her knowledge of all things finance as a student at The American College of Financial Services. She is also the very proud mom of a wonderful and unstoppable 7-year-old with Autism Spectrum Disorder.  

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