# niftynei's opinionated guide to buying and holding bitcoin

So you want to buy some bitcoin? Cool, good for you. Here's a brief series of things to think about when you're looking to get into being a bitcoin holder.

- Where to acquire bitcoin from
- How to hold onto bitcoin
- Risks associated with holding bitcoin
- Costs of holding bitcoin
- Tax burden
- Lending out bitcoin

## Buy Bitcoin or Just Get Some Exposure?
First things first, do you want to buy and hold bitcoin or do you want to just have some exposure to bitcoin as an asset?

If you're interested in having the bitcoin for your ownself, you can skip down to the next section, where we talk about where to acquire bitcoin.

If you're only interested in getting exposure to bitcoin, and would really like to do this using a stock broker that you already know and love, the only bitcoin-indexed exchange traded fund that I currently know if is the [Greyscale Bitcoin Trust](https://grayscale.co/bitcoin-trust/). It trades as GBTC; it's an exchange-traded fund and has a 2% yearly management fee.

## Where to Acquire Bitcoin
If you've decided you'd like to own some coins for yourself, the next question is where to get coins from.

Back in the day you used to be able to run some software on your computer; if you ran it long enough and hard enough, you'd get rewarded with some bitcoin. (This is called mining.) Unfortunately the halcyon days of every-man mining have long passed.

There are still a few other options of places to get bitcoin.

- A friend, or someone you know that's willing to trade you for bitcoin
- A centralized, regulated exchange
- A decentralized, peer-to-peer exchange or billboard
- A bitcoin ATM

Assuming that you don't have a friend who's willing to part with their bitcoin, you'll likely be acquiring bitcoin from an exchange or an internet seller.

There's a few things to think about when deciding where to get your coins from, namely counterparty risk, linkability of the coins to you, and exchange fees.

*Counterparty risk* answers the question "How likely is it that the other party that you're getting coins from will attempt to cheat you?"" There's a few ways to handle this. If you're transacting on a peer to peer billboard, you'd probably check their rating and total number of concluded sales to figure out if they're risky. Larger, incorporated businesses that sell you bitcoins have legal venues for you to go after them if they cheat your. If you're dealing with an unregistered or unincorporated party however, there's not always a good way to try to get your money back from them.

When you're dealing with unregistered or anonymous parties, it's always a good idea to start with small amounts.

*Traceability* The second thing to think about is how linkable you want the bitcoin to be to you. If you don't care about your bitcoin investment being associated to you, then a centralized exchange is a good place to buy bitcoin.

If remaining unlinked to the bitcoin you own is the most important thing to you, then you should look for either a bitcoin ATM near you that doesn't ask for identifying information or a decentralized billboard. I haven't used it, but I believe Bisq is good for this, or LocalBitcoins, if it's still running.

*Exchange Fees* Finally, every exchange will charge you for the service of selling you bitcoin. Most stocks trades can be done for free or at a very low cost, thanks to pioneering services such as Robinhood that made this the norm. Unfortunately cryptocurrency exchanges aren't stocks. Converting USD to bitcoin will cost you some money.\*

\* Note that these fees can be added to your cost basis for tax purposes, which means they'll cut down on the tax that you owe when you sell the coins. We'll talk more about this in the tax section.

Finally, if you're looking to acquire a *lot* of bitcoin at once, you'll probably want to go to a bigger exchange that has volume or trade limits that fit the size of transaction you're looking to make.

As with any investment, I'd strongly recommend setting up weekly or monthly purchases and forgetting about it, as bitcoin is pretty volatile. By spreading out your investment over time, you're more likely to net-out a gain than not (since bitcoin tends, overtime, to go up in value).

### Centralized exchanges and KYC

Most exchanges will require that you verify your identity before they allow you to buy bitcoin. This process is known as KYC, short for "Know Your Customer", and often requires you taking a selfie and sending in photos of your driver's license. This is what allows them to link you to any bitcoin withdrawals or deposits you make. They do this because it's legally required that they do it in order to operate.

### List of Places to Buy Coins
This is a US centric list of places to buy coins, and is skewed based on what I've used or heard of. Note that these are all "centralized, custodial exchanges", and will require you to provide basic identity information at some point, typically before you attempt to withdraw the bitcoin.

Generally the process will be 1) "link a bank account to fund your purchase" and then 2) "give us some identifying information so we can 'verify' you, raise your trading limits, allow you to withdraw bitcoin".

- [Square's CashApp](https://cash.app/). Chances you are you already have this app downloaded, if not it's available in your phone's App Store/Google Play Store. CashApp offers bitcoin at a 'basket market rate' -- in other words you'll pay whatever price Square tells you the price is now to acquire it. As of 1 Jan 2020, they charge a 2.23% fee for orders of $100, 1.7% on orders of $1000. This is where I bought my first bitcoin. Square self-custodies any bitcoin that they hold on your behalf. (This means Square operates the cold wallet and holds the bitcoin keys themselves.) You can set up recurring buys in the app.

- [Swan Bitcoin](https://www.swanbitcoin.com/). A nice mobile app that lets you buy bitcoin on a schedule and automatically withdraw it to a wallet with keys you own. Simple app design. I don't know where the on-app bitcoin is custodied.

- [River Financial](https://river.com/). A small start up that's a bitcoin only exchange. They have higher limits and feel a bit more like a bank. They offer the ability to have hardware wallet accounts, and joint accounts are coming soon. River's fees are 1.5% for anything over $200, and [go down from there](https://river.com/support/knowledge-base/articles/fee-schedule). You can set up recurring buys, which offer a 20% discount on the fee. Use my [referral code](https://river.com/signup?r=HK5X6LMC) if you do sign up, it'll give you a week of zero-fee orders for up to $10k of coin. River self-custodies any bitcoin that they hold on your behalf.

## How to Hold Onto Bitcoin

Ok, you've bought some bitcoin. I'll assume, for the sake of this section, that you've bought it through one of the 'centralized, custodial exchanges' listed above. Here's some things you can now do with your bitcoin.

_You can leave it on the platform where you bought it._ If the exchange gets hacked or one of the founders runs off with the bitcoins, then you'll likely lose the funds. I'd recommend setting up 2FA for these accounts (they all offer it).

_You can move it onto a wallet that you alone have the keys for._ These come in a few different flavors, which I'm going to break into two different categories: software wallets and hardware wallets.

_You can find a semi-custodial wallet that helps you secure your coins._ This is a good option for tens of thousands of dollars worth of bitcoin. [Casa](https://keys.casa/) and [Unchained Capital](https://unchained-capital.com/) are two companies that offer services in this space.

### How Do Wallets Work
Let's talk really fast about how a wallet works.

The general idea is that you download some software onto your phone or desktop computer and open it up. It'll prompt you to write down some backup information, typically a list of 12 to 24 words. Then you figure out how to get a deposit address for that wallet that you can send funds to from the exchange you bought it from.

For software wallets this is usually pretty straight forward; for hardware wallets (ColdCard in particular), this might take a bit of setup and possibly might even require finding a 'software wallet' that can generate deposit addresses for you. (There's a good reason for this but it's outside the scope of this article to explain how this works, exactly. Just know that even though the address is generated by a software wallet, the funds are getting deposited onto the keys that only the hardware wallet can sign for/or spend from).

As a quick aside, this ability to deposit to an address of a wallet that's hard to get access to is called sending your bitcoin to "cold storage". It's a bit like putting the bitcoin in the back of a padlocked freezer, except you can teleport the bitcoin there whenever. Getting the bitcoin out of the freezer will require a lot more work, however, which is precisely the point.

Once you've got a deposit address, you'll find the page on the custodial wallet that lets you "withdraw" your bitcoin. You put in your deposit address and hit "send". Eventually, within a few seconds to hours, the transferred bitcoins will show up on your wallet's balance. Note that it'll cost you something to move bitcoin around. In fact every time bitcoin moves between one wallet to another you pay a transaction fee in bitcoin. These fees go up and down based on the total volume of bitcoin transactions that are happening at that same time. If you need the transaction to happen immediately, you may end up paying a higher fee. Sometimes the custodian will pay the fee on your behalf (this was true of Square's CashApp for a while, I'm not sure if it's still true).

The first time you send money to a wallet from an exchange, I'd recommend that you send a very small amount of bitcoin, at least until you're comfortable with the process.

### Wallet Seed Phrases
Any wallet will give you a 12 to 24 word phrase when you set it up. This is often called a seed or seed phrase. This is secret information that is required to spend the funds deposited to that wallet.

DO NOT LOSE THIS PHRASE. DO NOT PUBLICIZE THIS PHRASE ANYWHERE. DO NOT TAKE A PICTURE OF THIS PHRASE WITH YOUR PHONE, AS IT'LL BE AUTOMATICALLY UPLOADED TO YOUR PHONE'S CLOUD SERVICES, SUCH AS GOOGLE OR APPLE'S PHOTO SERVICES. PUT YOUR PHRASE IN A SAFE PLACE. DO NOT LOSE IT.

If you want to buy a special metal device to store this phrase onto, see Jameson Lopp's [reviews](https://jlopp.github.io/metal-bitcoin-storage-reviews/) on "bitcoin steels" and their durability. If someone else gets access to your seed phrase, there is a good chance they will be able to steal all of the money that you put into that wallet.

In addition to a word phrase, wallets will often also ask for a passphrase. They're often optional. Don't forget this either, it'll be necessary to get access to your funds.

### Software Wallets
A software wallet, also known as a hot wallet, means that the keys that can spend your bitcoin exist on a computer with Internet access. This might be a desktop app or a mobile phone app. Typically these are a lot more convenient to use than 'hardware' or 'cold' wallets.

I've used a few software wallets; I really like [Wasabi](https://www.wasabiwallet.io/) for the desktop, [Green](https://blockstream.com/green/) or [BlueWallet](https://bluewallet.io/) for mobile (Green also has a desktop app).

### Hardware Wallets
Hardware wallets are often little devices that keep your secret keys safe.

Like software wallets, hardware wallets have seed phrases that you'll need to write down somewhere safe. In fact, hardware wallets are identical to software wallets this way -- they both contain secret key material and they both use 12-24 word seed phrases as backup.

The biggest difference is that a software wallet holds the secret key material in memory on a computer that's connected to the internet. A hardware wallet holds the secret key material in memory on a computer that isn't connected to the internet.

Typically you can deposit money to a wallet on a hardware device without needing to plug it into a computer, you just need a way to get a deposit address for it. Spending from it requires getting data onto the device, which will require a USB cable, bluetooth connection, or SD card. Each device works a bit differently. This is the "getting the money of out the locked freezer" part, and is often a bit more involved that putting it into storage.

Hardware wallets cost money, typically about $100 each. Be careful where you get a hardware wallet from. If you buy a hardware wallet that someone has loaded malware onto and then attempt to send coins to the "secret key" that it tells you it generated for you, it's possible you'll actually be sending coins to a wallet that someone else has control over.

*Never* buy a hardware wallet from a vendor on Amazon or eBay. Instead get one directly from the manufacturer's website.

Some popular hardware wallets are [Trezor](https://trezor.io/), [ColdCard](https://coldcardwallet.com/), or a [Ledger](https://www.ledger.com/). Personally, I really like ColdCard. The setup is a little less intuitive than the others, and if you type in the wrong PIN too many times, it'll self erase (you made a backup, right?), but I like their security and interface a lot.

#### Caveat Emptor
In late 2020 someone leaked the Ledger customer database, which incuded shipping addresses and emails for pretty much anyone who had ever bought a Ledger device. This means that anyone could look up where potential bitcoin holders live, or send them a phishing email to try to get them to accidentally upload the wrong firmware to their Ledger or otherwise compromise their coins. When placing an order for a hardware wallet, be mindful of the address that you ship the device to and the email address that you use or other personally identifying information that you provide.

### A Small Note on Green Wallet and "multisig"
One of the software wallets I mentioned, Green, is a bit different than most wallets. It's worth briefly explaining how it works because it introduces the concept of "locking your bitcoins to more than one key/wallet".

When you set up a Green account, you'll need to set up a 2FA via email or otherwise. Then, every deposit address that Green gives you will actually lock the deposited bitcoin to something called a "multisig" contract. In order to spend money out of your Green wallet, you'll need a signature from the private keys that exist only on your software wallet, as well as a signature from private keys that the Green wallet service provider (Blockstream) holds on your behalf. Blockstream can't move the funds without your permission; you can't move the funds without Blockstream's signature. Any time that you want to send funds out of a Green wallet, Blockstream will have you also provide the 2FA information before they'll sign off on it also.

These are kind of fancy setups. If you lose access to your email or your 2FA, I believe there's a way for them to reset it, but this will entail a big delay of like 2 weeks or so. If you lose your secret phrase, however, your funds will be lost, so it's not really a replacement for keeping a backup of the secret phrase. Mostly they do this so if your key gets stolen, your funds are safe as long as the thief doesn't have access to your email or 2FA device.

This idea of needing at least two different people to sign off on a transaction is one that you can set up for yourself. Using 'multisig' lets you set up deposit addresses that can be unlocked by any number of keys, like 3-of-5 or 4-of-7. That way, if you lose or destroy one key, you'll have other keys that you can use to unlock the funds.

[Specter wallet](https://specter.solutions/) has been praised pretty highly for how easy it is to make multisig transactions, however I haven't found it the easiest software to use, and wouldn't recommend it if you're just starting out.

## Risks of Holding Bitcoin
Holding bitcoin in a wallet that you have the keys for is risky. You might lose the backup seed. You might lose the computer or wallet that has the key material. Someone may hack your computer or send you a phishing email that causes you to either install malicious firmware onto your hardware wallet or otherwise. Someone may hack your software wallet's upgrade chain and cause you to download a backdoored software wallet just by doing a routine update. Someone may hack the hardware wallet provider and get your information (See Ledger).

Holding bitcoin on an exchange or in a custodial wallet is risky. Bitcoin deposits are not FDIC insured. An exchange where you hold funds may be hacked or become insolvent (See MtGox). Someone may die and take the knowledge of the private key information with them. (See [Quadriga](https://www.vanityfair.com/news/2019/11/the-strange-tale-of-quadriga-gerald-cotten)).

You should not hold more money in bitcoin than you are comfortable with losing in one of the above schemes. It is up to you to safe-guard any bitcoin that you hold and take appropriate measures to confirm that your backups work as expected, etc.

If you hold bitcoin, it's recommended that you not advertise or otherwise broadcast this fact in any public forum. It is not likely, but it is possible owning bitcoin may make you a target.

Jameson Lopp recommends depositing your bitcoin to multisig addresses which require multiple keys to spend, then putting those keys in geographically dispersed locations, such as giving one to a family member or friend you trust or in a lockbox or two or three. The idea is that the people with the backups won't be able to spend your coins since they don't have enough keys, but in the case that you are physically threatened for your coins, makes it much harder for someone to coerce you to send them your bitcoin. Visiting a bank to see a safe deposit box at gunpoint is pretty hard to do.

(Note that you should never put a seed phrase backup into a safety deposit box if that key *alone* can spend coins. Only ever deposit multisig wallet keys, which require at least two seeds to spend. That way if your box goes missing, your bitcoins are still safe.)

If you're going to do a multisig setup with your coins, make sure that you do several tests with small amounts. Do a practice transaction using every key or key device at least once.

## Costs of Holding Bitcoin
How much does it cost to hold bitcoin? Here's a short list of potential related costs.

Acquisition fees. There's the fees you'll pay to acquire the bitcoin, which vary based on which exchange you use, typically around 2% or less.

Storage fees. Buying a hardware wallet will typically run you about $100 per device. Most software wallets are free of charge.

Transaction fees. Every time that you move bitcoin between deposit addresses, you'll pay a bit of money to get the transaction mined. Typically a few cents, but can be a few dollars.

Security fees. Steel cards to keep your key on are typically $50 or so each. Casa's got a multisig service which [starts at $10 a month.](https://keys.casa/). Renting a safe deposit boxes are typically in the $60-200 a year range.

Taxes. See the Tax Burden section, below. You only owe taxes on bitcoin when you spend or sell it.

## Tax Burdens and Bitcoin
Bitcoin is taxed as an asset. This means that you owe taxes on the gains when you dispose of it (in other words when you sell it or exchange it for other goods). You can also have losses on your bitcoin, just as with any other asset.

The gain is calculated on based on the 'cost basis' of the coins when you bought them. Any fees you pay to acquire or hold the bitcoin count towards the 'cost basis' of the coins. This means that you can subtract these costs from the total gain you made from selling the coins.

Typically, assets such as bitcoin are taxed using a First-In, First-Out method. This means that if you buy one bitcoin a year ago and one bitcoin today, and then sell one bitcoin, you'd pay taxes on the difference between the bitcoin price today and the price that you paid a year ago. Here's a short example.

Bitcoin price a year ago: 10,000
Bitcoin price today: 15,000

Let's say you sell the bitcoin today. How much tax would you owe?

Sale price 15,000
Sale fee (2%) 300
Acquisition price 10,000
Acquisition fee (2%) 200

Bitcoin sale total 15,000
Bitcoin cost basis 10,500
(acquisition price + fees)
Total gain on bitcoin 4,500

You'd owe tax on a gain of $4,500. If you've held the asset for longer than a year, you'd pay long term capital gains tax rate; if it was less than a year, you'd pay short-term gains.

If these coins were held by an institution or a business as part of their balance sheet, the accounting for the gain will be a bit different. Consult your tax accountant on how to account for this.

I use a home-grown spreadsheet to track my coin balances, as I don't want other parties to have my transaction information (Google Sheets is safe, right?). I send the tax information to my accountant every spring, who prepares the correct forms for me.

In the past, I've used [CoinTracker](https://www.cointracker.io/) to keep track of my tax burden. They will generate tax forms and sync with most exchanges to collect your acquisition/disposition data. If you have less than 25 transactions, generating the appropriate tax form is free.

[Blockpath](https://blockpath.com/wallets/local/101?action=apptax) is another option. The app runs completely in your browser (so they don't collect data on your transactions) and it only costs $20. Blockpath integrates with QuickBooks and Excel.

#### Avoiding Taxes
It's possible to hold bitcoin yourself in a self-directed retirement account. The tax treatment would be the same as any other asset held in such an account. If you're interested in doing this, I believe that River Financial has worked with individuals to set up IRAs etc. I can't find the blogpost I read on this. You might consider reaching out to their customer support group for their recommendations on how to do this.

I tried googling "Bitcoin IRA" and the results were really scammy looking. I'm not sure I would use any of the services a Google search produces for this.

Another option would be to acquire GBTC using a traditional or Roth IRA at a normal brokerage firm. In fact, the ability to invest in GBTC with "retirement savings" from almost any account likely explains why GBTC trades at a premium.

## Lending out Bitcoins
It's possible to lend out your bitcoins to services in order to generate some return. [Ledn](https://www.ledn.io/en) and [BlockFi](https://blockfi.com/) are the two that I know of; there are other ways to do this that involve running a lightning node or some sort of options contracts on exchanges.

None of these are insured, and the underlying use for your bitcoin isn't always clear. While the returns might be nice, I wouldn't lend out more bitcoin than you're willing to lose. Does the rate of return they're offering compensate for the risk of losing the investment?

Holding bitcoin in the 'savings accounts' offered by Ledn or BlockFi offer a much greater return than holding the same amount of money in a traditional savings account.

If you sign up for a BlockFi account, [use my referral code](https://blockfi.com/?ref=81e37ba8) and we'll both get $10.

### Crypto-backed loans
Another popular thing to do with bitcoin holdings is to use them as collateral for a cash loan. Since these are secured loans (that means the bitcoin you've put up for them will be taken/forfeited if you don't pay the interest on them), they typically don't affect or rely on your credit score.

These are typically useful if you'd like access to the cash value of your coins but want to avoid a sale, which would trigger a tax event. By getting a loan for them, you're instead turning them into a debt instrument which is tax free. In fact, you might be able to write off the interest payments on the loan as a tax deduction. Consult with your tax accountant about this.

The interest payments of the few of these offerings that I looked into were pretty high/normal for a personal loan. The monthly payments are typically "interest only", which means you'd owe back the entire lump sum of the principle on the maturity date.

As with any time you're moving your bitcoins into a deposit address where someone else holds the keys, do your research into the custodian that will be holding them, and verify what recourse you have in case the coins are stolen or lost.

### GBTC, More Info

GBTC works by buying bitcoin and turning that bitcoin ownership into shares. The fund is chartered to create 'an infinite number of shares' so there's not really scarcity at the share level, as they can always raise more investor funds to buy bitcoin and issue shares for it.

GBTC tends to trade at a premium to the actual bitcoin price. This means that if you took $200, and put $100 into buying bitcoin from an exchange and $50 into buying GBTC, you'd have $100 of bitcoin from the exchange and something like $85 of bitcoin in GBTC shares.

As of this writing on 31 Dec 2020, GBTC is trading at $31.90; the bitcoins backing each share are worth only $27.50. (Each share of Greyscale is worth 0.0009312 bitcoin; bitcoin is currently trading at $29k). This is a 15% price premium over the raw bitcoin price. Historically GBTC has traded at 15-20% more than the cost of the bitcoin per share.

Finally, as with all 'custodial' bitcoin options, there's always the risk that Greyscale will have their private keys compromised or otherwise suffer a loss of bitcoin funds, in which case your investment may be at risk. Though, Greyscale notes that the 2% fee they're paid yearly is partially put towards mitigating this risk, e.g. securing the coins they own. Their latest 10Q filing lists Coinbase as the custodian of their bitcoin funds, so holding GBTC is basically a more expensive version of holding bitcoin in a Coinbase account, risk wise. I say more expensive because of the management fee.