Buying Bitcoin may sound complicated at first, but it can actually be done easily at a Bitcoin Exchange. Once you have purchased Bitcoin using your local currency, the funds can be stored on the exchange or in your own personal wallet. For small purchases of Bitcoin, users may store their coins on the exchange for the sake of convenience. However, it would be advisable to store any large amounts in a personal wallet. Read on to find out more about securing your funds.
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Buy Bitcoin in a few simple steps
The process of purchasing Bitcoin will vary from exchange to exchange, but the main steps are very similar. If you are new to purchasing cryptocurrencies, there is no need to be uncomfortable; most exchange platforms make the process very simple and intuitive.
- Register at a Bitcoin exchange
- Complete KYC/Identity Checks
- Choose a deposit method
- Make a deposit
- Buy Bitcoin with your deposited funds
Register at your chosen exchange by submitting your personal information. Most exchanges will require an identity check when depositing/withdrawing funds.
Most, if not all exchanges will require you to complete a KYC (Know Your Customer) or AML (Anti-Money Laundering) check. Usually, you will have to upload a scanned copy of your photo identification (such as a driving license or a passport) and a proof of address (utility bills, telephone bills, etc.)
Different exchanges will offer different deposit methods. The most common ways to deposit funds at an exchange are bank transfers, SEPA transfers, credit/debit card or PayPal payments. These deposit methods will incur different fees; credit/debit card deposits can be charged a fee as high as 12%. Remember to check the fee for your deposit method and make sure you are comfortable with it before proceeding.
Deposits can take anywhere to a few minutes to several days to be credited in your exchange account. Deposit times will vary from exchange to exchange and the deposit method chosen.
Once your local currency has arrived at your exchange account, you can use these funds to buy Bitcoin. The beginner friendly platforms listed above have made this process very simple. Exchanges which make purchases easy have been marked above with a tick symbol under “Beginner Friendly”.
For an in-depth guide to the steps taken to purchase Bitcoin, see BuyBitcoinWorldwide.com.
How to Buy Bitcoin: An Intro to Investing
Bitcoin is a cryptocurrency – a type of currency which is produced by a network of machines securing the blockchain, a distributed ledger containing the history of every single Bitcoin transaction that has ever taken place. Bitcoin can be traded easily for fiat currencies like Euros or US Dollars, and this system has allowed individuals to transact with anyone in the world without going through middlemen.
Bitcoin transactions are final and immutable. If a transaction is invalid (for example, a user does not have enough funds), then the transaction is not included in the blockchain. Every single valid Bitcoin transaction that has ever taken place forms part of the blockchain, which is stored on thousands of computers around the world. This ensures that there is no central point of failure; there is no central server to attack or seize, because the system is decentralized by design.
Bitcoin was introduced by its pseudo-anonymous creator, Satoshi Nakamoto, back in January 2009. In its early stages, the technology only attracted developers and enthusiasts – the public had no idea of its existence, and there was no established value for 1 Bitcoin. 17 Months later, a Florida programmer bought 2 pizzas from a BitcoinTalk user for 10,000 Bitcoins, effectively setting the first price of $0.0025 USD per Bitcoin. This has gradually increased until Bitcoin’s value exploded in 2017, setting multiple price records in just a few months. This guide to buying Bitcoin will explain why the technology has value, whether the currency is a good investment, and what risks and considerations should be taken into account when buying Bitcoin.
To first understand the value that Bitcoin could provide, and whether you as an investor should consider purchasing Bitcoin, it would be advisable to explore the unique benefits that cryptocurrencies offer and why they attract the attention of such a broad range of investors, from VCs through to retail.
Purchasing Bitcoin anonymously
Many people aren’t comfortable with uploading their personal documents to a website they don’t know much about; if this is the case for you, then there are some options to purchase Bitcoins anonymously. Through peer-to-peer marketplaces like LocalBitcoins.com or Paxful, you can purchase Bitcoins from an individual without going through any identity checks at your own risk.
In order to aid your understanding of the benefits and drawbacks of investing in Bitcoin, it would be helpful to understand the following terms before reading on:
- Fiat Currency
- Market Cap
This refers to any asset or currency secured by cryptography, and they are usually blockchain-based assets like Bitcoin or Ethereum.
Legal tender such as US Dollars, Euros or Pound Sterlings.
The total value of coins in circulation multiplied by the price per coin. This is a rough measure of the total value of the entire network.
A platform used to buy and sell cryptocurrencies
A machine that helps validate transactions and secure the Bitcoin network. They are rewarded with new Bitcoins for their work.
A collection of transactions bundled together.
A distributed ledger built up by blocks. The blockchain is mathematically linked since every block must contain some key information of the previous block to ensure continuity.
Why is Bitcoin valuable and why should I invest in it?
Unlike other currencies, Bitcoin is not backed by gold or the authority of any government. There is a fixed set of rules that govern its production (mining) and it is fully transparent; no central authority can manipulate its inflation, because its supply is controlled, and all Bitcoins will have been mined by the year 2140.
Mathematics and scarcity
The Bitcoin blockchain is a protocol that operates based on Satoshi’s original Bitcoin Whitepaper. Unlike traditional fiat currencies where a central bank can control the money supply through a combination of monetary and fiscal policies, Bitcoin is governed by mathematics. Only 21 million Bitcoins will ever be created, with its rate of production halving approximately every 4 years. This means that the value of Bitcoin is established by its mathematically-guaranteed scarcity, as opposed to physical assets like gold, or the faith in a government.
Right now, Bitcoin is an inflationary currency; miners are rewarded with new Bitcoins for every block they produce. However, as more blocks are produced and more coins are added into circulation, the block reward will decrease – more specifically, it is halved every 4 years. This means that Bitcoin has a predictable inflation rate up until the year 2140, when practically no new coins will be minted into existence.
Although many people believe that Bitcoin is anonymous by nature, this is not the case; Bitcoin is actually pseudonymous. This means that a user’s transactions can be tracked and linked to the same identity. However, as long as you don’t publish your personal information alongside your wallet addresses online, it is very difficult to link said identity back to a real person; in other words, anyone can see that a person made certain transactions, but they won’t know who that person actually is.
This level of privacy is used for legal and illegal activities, much like the internet. However the anonymity given to Bitcoin users is not as strong as the mainstream media may have you believe – those conducting illegal activity continue to opt for truly anonymous cash.
Bitcoin also allows users to be fully in control of their money – no one can seize any Bitcoins without its owner’s consent. Although this may not seem like an important feature to many in the developed world, it has already benefited many users:
During the Cypriot Financial Crisis and the Greek Banking Crisis, Bitcoin acted as a much-needed store of value for both of these countries’ citizens. Many people converted their life savings into Bitcoin just before banks seized customers’ deposits and limited ATM withdrawals to 50€ per day. This allowed them to be in control of their wealth without fearing that their hard-earned money would be stolen by a failing government and banking system. Bitcoin has also acted as a hedge against inflationary fiat currencies, trading at a premium in countries such as Zimbabwe and Venezuela.
Bitcoin isn’t just a currency; although its main purpose is peer-to-peer payments, it can also be used for a variety of other applications. These include, but aren’t just limited to:
- Investing in other cryptocurrencies
- Hedging against the incumbent fiat monetary system
- Diversifying a traditional investment portfolio
- Making cheap international payments
- Time-Stamping documents (embedding a piece of text or a document in the blockchain to prove its existence at a certain date)
- Purchasing online services/goods at a discount (i.e. Purse.io)
What investment strategy?
Investment strategies differ; old Bitcoiners might tell you to “HODL” (a term coined by one excited user’s “HOLD” typo), while experienced traders may prefer to trade with altcoins to increase their investment. This guide is for information purposes only; if in any doubt, consult a financial adviser.
Buy and Hold (or HODL)
Buying and holding is one of the most common investment strategies for Bitcoin. If Bitcoin ever becomes a mainstream currency and is adopted by any country in any way, shape or form, its value will be far greater than it is today. Countries with a hyper-inflating currency might choose to recognize Bitcoin as legal tender; other countries may decided to convert a portion of their assets in Bitcoin.
Given the volatility of the price of Bitcoin, those looking to buy may want to consider “dollar cost averaging”, where the total investment amount is spent over a certain time period to acquire Bitcoin at an averaged price.
Buy and diversify
“Don’t put all your eggs in one basket” is a term that gets thrown around repeatedly in the financial world; the same applies to cryptocurrencies. Bitcoin’s value may explode over the next few years, or it could die and become worthless (see “black swan event”). Although it is unlikely that Bitcoin will disappear anytime soon, many people think that it is always a good idea to diversify your portfolio and use a portion of your investment to acquire other coins such as Litecoin or Ethereum.
Some experienced investors choose to day trade cryptoassets on exchanges like Poloniex or BitFinex. This type of trading compounds risk on an already extremely volatile asset, so it isn’t a good idea if you’re a beginner reading this guide.
Is it too late to buy Bitcoin?
If Bitcoin were to become a mainstream global currency – enabling cheap, instant international payments and trustless transactions between individuals – then it is highly unlikely to be too late to buy Bitcoin. Institutional money has yet to flood into the market, an event which may be on the horizon.
Bitcoin has already shown that it is highly resistant to heavy government regulation in places like China and New York. Time after time, it has been resilient – its price has only continued to rise despite the multiple attempts to close down Bitcoin businesses and exchanges. As the technology matures, the price of Bitcoin is likely to either crash to $0.00 through an unpredictable event, or to rise to an extremely large number that can only be speculated upon. However, if Bitcoin were to succeed, we would still be in the extremely early stages, much like the internet back in the 1990s. Investing in Bitcoin isn’t mainstream yet either; there are currently no Bitcoin Exchange Traded Funds (ETFs), and there is no way to invest in Bitcoin through traditional banking organisations or retirement funds.
To understand how Bitcoin transactions work, one must first understand the relationship between a public key and a private key.
A public key is usually what is known as an ‘Address’ – a long chain of letters and numbers starting with a ‘1’ or a ‘3’. This key, as its name implies, is public – you need someone’s Bitcoin address in order to send them Bitcoins. Anyone can look up all of the transactions sent from/to a specific Bitcoin address; however, they will only see the address itself, without any personal information attached.
A private key is what allows you to spend your Bitcoins – a transaction is essentially an electronic message which specifies the sending address, receiving address, amount and fee which is signed using the private key of the sender. This key must be kept private at all times; anyone with your private key will be able to spend your funds.
The public key/address and the private key is mathematically related; the public key can be calculated from the private key, but it cannot be done in reverse. This means that as long as you don’t share your private key and you keep it safe then no one can spend your funds without your permission.
Transactions and addresses
All transactions on the Bitcoin blockchain are publicly visible through a “block explorer” service, such as Blockchain.info. A transaction is identified by its transaction hash (also known as transaction ID), and it consists of several parts: an input/multiple input address(es), a transaction amount, an output/multiple output address(es), and a fee. Here is an example transaction:
The transaction 8f4ae620bded5bae296f8ce237acae4751994e234cb6a76850cdb637e8c19d08 is a transfer of 0.07 BTC and 0.30423929 BTC from the address 1CcMD7uZTQSyM6NAAqZ8j9L2SnJEYuKPP to the addresses 1B3SYqhRJFp8N4T7RNV1EMq1ZhsYCgvr8Q and 1GTxfmtVLpsbbpXiV5KU962a2KR5xzNB2h respectively. This transaction has a fee of 0.00007006 BTC. Bitcoin transactions are formed of UTXO’s or “Unspent Transaction Outputs”. Confusingly, this means that unless the sender has a single UTXO that matches the amount they want to send, they will need to send a larger transaction, with the difference sent back to themselves. This is why many Bitcoin transactions consist of multiple payments despite only a single amount being transferred to another user (the rest is returned to the sender).
A Bitcoin address is a string of 26-35 alphanumeric characters, which begins with the number 1 or 3. Some of the characters in the address serve as a checksum; this means that your wallet software can detect an address that is typed incorrectly, and it will alert the user. However, manually typing an address isn’t a very good idea; it is much easier to simply copy and paste it, and check the first and last few characters to ensure accuracy.
Block height and confirmations
A Bitcoin block is mined every 10 minutes; this means that on average, transactions with sufficient fees get included in a block and confirmed within 10 minutes. The number of confirmations is a measure of “how deep” the transaction is in the blockchain – usually, 1 confirmation is enough for small transactions, while 6 confirmations is considered extremely safe for very large payments. The reason for this is that it is possible for Bitcoin miners to mine a block at the same time, creating a short term split (“fork”) in the chain. Miners require the previous block’s information to mine the next block, and if the chain has two blocks that can be built upon then future blocks may eventually become redundant when miners eventually agree on the path to follow (which they have a monetary incentive to do quickly). This means that on a chain which splits into Chain A and Chain B, should miners choose Chain B after 2 more blocks, then 2 blocks worth of transactions on Chain A will effectively be undone – resulting in potential double spends. By waiting 7 confirmations, the likelihood of a fork that lasts 7 blocks before reverting is close to zero.
Choosing a Wallet
There are 2 main types of wallets in the Bitcoin space: personal wallets and online wallets. Personal wallets are usually applications/programs that you can download to your computer/smartphone; online wallets are websites or services that hold your Bitcoin for you. There is a small but important difference between the two; personal wallets allow the user to control their private keys, while online wallets do not.
There are several types of personal wallets available; Desktop Wallets, Mobile Wallets and Hardware Wallets.
Desktop Wallets are programs that you can download to your computer; they don’t just allow you to send and receive Bitcoin – most of them also provide other services, such as allowing the user to sign messages using their Bitcoin address. The most commonly used desktop wallet is Electrum – a lightweight client that allows users to control their own private keys and transact securely. Another popular option is Bitcoin Core, which is the reference client and the most popular software for businesses. However, bear in mind that it might take a long time for Bitcoin Core to set up. It needs to download the entire Bitcoin blockchain before you can start using it – this process can take up to a few weeks if you have a poor internet connection.
Mobile Wallets are mobile applications which can be found on the App Store or Google Play; they allow users to create simple transactions, but they often don’t have many advanced features. Examples include bread, bitWallet and Mycelium.
Hardware Wallets are extremely secure physical devices which allow users to sign transactions without being connected to the internet – this decreases the chance of their private keys being stolen. These are only recommended if you hold a substantial amount of Bitcoin as they cost $100+ and require some simple but essential learning. Examples include Trezor, KeepKey and Ledger.
Online wallets are businesses or services that hold your Bitcoin for you – you never actually get access to the private keys. Instead, you have an account with them which displays the amount of Bitcoin you own – however, you must trust the service to send you your coins when you need them. They are very convenient for beginners and traders, but long-term Bitcoin holders usually stay away from these services because of the associated risks.
The most prominent examples are CoinBase and Xapo – both of them also provide other services, such as trading and Bitcoin Debit Cards. However, in return for these convenient features, you won’t have access to your private keys, and you must trust them to hold your funds for you. Unfortunately, even though online wallets may not be malicious, they are often prime targets for hackers due to the vast quantities of Bitcoin they hold – other exchanges like BitFinex and MtGox have been hacked in the past, with users losing all of their hard-earned money. If you store your funds on an exchange or an online wallet, you are essentially handing over responsibility of your Bitcoin to the platform. Exchanges and Online Wallets are not the same as a bank, and the same financial regulations do not apply; insolvency and theft will result in lost funds.
If you still want to store your funds on an online service, it would be advisable to have 2FA (2-Factor Authentication) setup on your account – this will require the user to input a one-time password every time a transaction is made. Google Authenticator is one of the most popular interfaces for 2FA and is used by most online wallets.
Different wallets and exchanges will implement 2FA in different ways, however the additional security that it provides remains the same. A potential thief would not only require your password to steal your Bitcoin, but access to the physical device from which the one-time password (OTP) is generated as well.
A word of caution
2FA through an app like Google Authenticator has so far proven extremely secure. However, some platforms choose to bypass the use of an app and instead send an OTP over SMS. SMS 2FA should be avoided entirely, as the OTP can – in many cases – be observed without needing to unlock a phone. More catastrophically, social engineering has been used to convince telecoms staff to port a phone number to a new SIM; if an attacker is able to do this, then the phone number alone can be used to gain access to any platform “protected” by SMS 2FA.
Transacting Bitcoin safely
Whilst rare, there have been numerous stories of people losing tens of thousands of dollars in avoidable mistakes. Here are a few things to bear in mind when making a transaction of considerable value:
Copy and paste the address
Never type in a wallet address by hand. Addresses are long and case-sensitive, a single mistake will result in the funds being lost forever. Once a transaction is sent, there is no way to reverse it or chargeback your funds using Bitcoin.
Check the transaction fee
A good Bitcoin wallet will show you the calculated transaction fee in dollars and cents. Always double check that the transaction fee is reasonable.
Check, double and triple check the address
Once you’ve copied and pasted the address which you wish to send or receive Bitcoin to, check it multiple times until you’re certain it’s correct. Checking the first and last several characters will ensure the address has been copied properly.
Good wallet software will also confirm the address that you are sending or receiving to. This mitigates the risk of malware intercepting and replacing the address you input.
Although the price of Bitcoin has skyrocketed over the past few years, please bear in mind that it is an extremely volatile asset – its value can rise as much as it has before, but it can also drop. Despite the unlikelihood of Bitcoin reaching $0.00 in the next few years, always remember that investing involves risk; only invest an amount that you are prepared to lose completely.
If you understand the risks involved but you are still convinced that Bitcoin is the future, then join in! Be prepared to see large price fluctuations – Bitcoin has been extremely volatile for practically its entire existence. If you truly believe in the technology then avoid any emotional investment and trust the long-term fundamentals of Bitcoin… Always HODL.