Over the past decade, Bitcoin has gone from an enigma to much more of a mainstream investment, and many more doctors are considering investing in cryptocurrencies. While it remains a risky investment that we recommend really learning about and understanding prior to putting any significant amount of money into, many physicians who have invested in Bitcoin can successfully make a reasonable and even compelling argument for how that investment has paid off with dividends (note that they cannot say this with every cryptocurrency). We still strongly believe that all you need as a physician to achieve financial success is a ‘boring’ tried and true approach with careful budgeting, maxing out retirement accounts, and slow and steady investing in a diversified portfolio. That said, for those physicians looking to diversify their investments and who are able to tolerate and stomach some risk, we cover some of the basics of investing in Bitcoin (and other cryptocurrencies) below.
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What is Bitcoin (BTC)?
Starting with the basics, Bitcoin (BTC) is the OG mainstream cryptocurrency, introduced in 2008 by an anonymous cohort going by the name Satoshi Nakamoto. It’s a virtual currency that was specifically designed to be a form of payment that wasn’t controlled by an individual person, country, or other group entity. By being a form of money that exists virtually, it also doesn’t require a bank, mint, or any other third party to be involved in financial transactions. In other words, it’s truly intended to be peer to peer.
While this sounds great in day to day use, how it works behind the scenes is actually pretty complicated. It works on blockchain technology, which is a ‘distributed ledger.’ This essentially means that instead of existing on an individual centralized server, there is a shared database stored on many computers, and all linked (or ‘chained’) together. Those computers all have programs on them that maintain the blockchain, which is all encrypted using cryptographic techniques.
The ‘block’ aspect is that basically all the transactions are files that are chained together with individual encrypted blocks that have information from previous blocks that go all the way back to the original block. While the data within an individual block is encrypted, since each block is used in the next block, one block can’t be changed without changing all the blocks, and this allows auditability.
There’s obviously a lot more complexity, but it’s beyond the scope of this article.
Who uses Bitcoin?
Nowadays, there are many ways to use Bitcoin. While for the purposes of this article, we’re going to reference its use as an investment tool, it can also be used by consumers who want to use it for purchases or to exchange monetary value. Increasingly, there are ways that vendors can accept it as a method of payment through things like hardware terminals and cryptocurrency wallets which interface with blockchain and hold the ‘keys’ to your Bitcoin, which you enter during a transaction.
Isn’t Bitcoin risky, and what are the risks of investing in cryptocurrency?
Simply speaking, yes. Anybody who has followed Bitcoin over the years is aware of its volatility. Bitcoin prices can change dramatically in response to current events like elections or speculation about regulation, and those who have been investing in Bitcoin since its inception have likely experienced some pretty jarring moves in the value of their investment in both directions. There are also lots of issues with fraud and theft.
Digging deeper, these are some of the risks to be aware of:
Volatility: addressed above.
Uncertainty about its status as a security: As of 2024, Bitcoin is still not officially considered a security. This may change in the future, but as of now, it is not recognized.
Insurance: Since Bitcoin is not considered a security, losses or fraud in this space are not insured by the FDIC or similar entities. While some cryptocurrency companies offer some insurance, it may only cover things like cybersecurity breeches or other failures within their own operations.
Regulation: The SEC and other financial regulatory entities such as FINRA and the Consumer Financial Investment Bureau are always looking at cryptocurrency and issuing warnings, and Congressional leaders and government agencies also keep a close eye on cryptocurrency. There’s no telling how they could choose to regulate its use. Additionally, every country or set of countries (such as the EU) may regulate it differently. All of this can have huge implications for the value of the Bitcoin in the future.
Security/safety: Most people who invest in Bitcoin don’t actually have tokens that they’ve acquired by mining, but instead have bought cryptocurrency on one of the popular crypto exchanges. Because these are entirely digitally based, they are prone to things like software operational issues, hackers, malware, and more.
Fraud: Even though the blockchain is auditable, fraud can still occur.
Is investing in Bitcoin (or any other cryptocurrency) for me?
We can’t answer this question for you (and probably nobody else can either). Ultimately you have to decide if you are willing to ride the highs and lows. Many people say to invest no more than 5-10% of your net worth in cryptocurrency. If you are younger, you may have more risk tolerance to ride out volatility (but also risk sacrificing early years of investing into a compounding nest egg that has a more tried and true pathway to wealth).
In general, some guidelines that are proposed by many financial professionals in regards to cryptocurrency include:
Always consider your worst case scenario: If you would be financially devastated by losing this money, investing in crypto is likely not the best asset class for you. Invest assuming you will lose it all, and hope to be pleasantly surprised.
Diversify your portfolio so that you don’t place too many eggs in one basket, and a big loss in one asset class doesn’t impact your overall financial wellbeing too heavily.
Dip your toes in first. See how you feel with a small investment instead of going all in from the getgo.
Think about whether you can tolerate the stress level: knowing that investing in crypto will be volatile, you should understand that you will have to get comfortable with sudden and potentially dramatic swings in the values.
Think about what it adds to your portfolio and whether it’s worth it: In an ideal world, this is a fun, albeit potentially risky, way to take a ‘go big or go home’ type bet for some big returns. If that’s something that interests you, crypto may be a good alternative investment for you, similar to investing in venture capital or an angel investment.
How do people store Bitcoin, and what are Bitcoin wallets?
Bitcoin is stored in either hot or cold ‘wallets.’ Hot wallets allow faster transactions, whereas cold wallets offer more security but will make transactions take longer. Therefore, deciding how you store Bitcoin will likely reflect what your use of Bitcoin on a daily basis is. Regardless of what type of digital wallet you use, making sure that you use strong passwords and enable two factor authentication is a good practice to avoid theft.
Hot wallet for cryptocurrency
Hot wallets store Bitcoin in a way that can be accessed through your computer or through an app. Most of the trading exchanges will offer a free wallet that stores your purchases.
That said, many experienced Bitcoin users will actually choose to use a third party hot wallet provider rather than a trading exchange, as these are also typically free, but may be less subject to blanket security breaches that have happened in the past with large exchanges. Therefore, they’ll buy the Bitcoin and then transfer it to a third party hot wallet.
Cold wallet for cryptocurrency
This is actually a physical device. It’s small and encrypted and you download your Bitcoin onto it. These are usually pretty cheap (<$100), and offer more security than a hot wallet (as long as you don’t lose it).
What are different ways to buy and invest in Bitcoin?
While investing in Bitcoin is different than what you may be used to in a traditional brokerage account, the good news is that there are several different ways to invest in Bitcoin these days, some of which are actually quite easy, even including through your brokerage account. These include:
Cryptocurrency exchanges: You have probably heard of popular exchanges such as Coinbase, Gemini, and Kraken. These cryptocurrency exchanges allow you to buy many different types of coins. It’s important to do your research as they all have different fees, policies, and protections in place, including how and when you can access your investments.
Investment brokers such as Fidelity and Robinhood
Bitcoin Exchange Traded Funds (ETFs): This is new in 2024, but the SEC approved Bitcoin ETFs that reflect the price of Bitcoin and can be easily traded like other ETFs. These are available with many brokerages.
Dedicated Bitcoin ATMs: You may have seen these in your local mall or convenience store, and they look like normal ATMs, but are dedicated to Bitcoin. They can have heavy fees and you need to make sure you know what you’re going to do with that Bitcoin (where you’re going to send it, store it, etc.), so make sure you know what you’re doing before using one of these.
Money transfer apps: Venmo, PayPal, and some others have the ability to purchase and send Bitcoin, as well as actually store it and sell it. Be aware of the security and safeguards with those apps, and any potential risks with having a large value of money in a non FDIC protected consumer application.
There are some other software methods that have been developed as Bitcoin becomes more mainstream, but the above are the most commonly used by those not actively entrenched in the Bitcoin space and daily transactional market.
Bitcoin and taxes
This is a complicated topic, the nuances of which are beyond the scope of this particular article, but the long and short of it is that you should expect that owning Bitcoin will make your tax situation a little more complex. Any time you transact in Bitcoin, there are tax implications if you have had a profit, whether it’s selling it, exchanging it, or using it to pay for something. How much you will be taxed will depend on how you acquired the Bitcoin.
If it’s considered earned income because you earned it by mining Bitcoin or by getting paid in Bitcoin, you’ll pay immediately just like you would with any other earned income.
If you got it in an investment capacity, you’ll likely pay short or long term capital gains, depending on how long you’ve held it. The exact percentage will depend on your overall income and marginal tax brackets.
There is now a question in your tax filling with the IRS that specifically asks about cryptocurrency, and if you’ve done anything with crypto other than just buy it, you’ll have to answer that in the affirmative and provide details. Keeping good records of values when you bought and sold is essential. Those transacting a lot may need special software to keep track of things.
You can declare losses from Bitcoin as you can from other investments to claim the $3000 write-off in any given year.
For those interested in tax loss harvesting, it’s important to note that rules regarding wash sales are different for cryptocurrency and do not currently apply. However, that could change quickly as more regulators eye increasing consumer activity in this space.
Conclusion
As investing in Bitcoin and the hype behind it becomes more mainstream, we are seeing more and more questions about it amongst the physician community. While we are still big believers in taking the tried and true path to wealth that a physician salary opens, for physician investors who are interested in diversifying their investment portfolio with alternative assets and who can stomach (and afford) the risks, cryptocurrency is an asset class to consider. Learning the nuances and understanding the risks is key before jumping in too deeply, as there is still a lot of uncertainty and volatility in this space.
Additional investing resources for physicians
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