How To Buy Bitcoins
Investing in Bitcoin may seem like a complicated process, but it is surprisingly simple once outlined as a step-by-step procedure. Trading or investing in Bitcoin requires you to have an account at an exchange, but further storage practices are highly recommended.
There are a few core requirements every Bitcoin investor will need to get started: A crypto exchange account, a secured internet connection, a payment method, and if you are using a Know Your Customer platform, personal identification documents. Valid payment methods include debit cards, bank accounts, and credit cards. It is also practicable to retrieve bitcoins at specialized ATMs and peer-to-peer exchanges.
Before You Invest In Bitcoin
Two of the most critical issues for Bitcoin investors include privacy and security. The private access key to a public address on Bitcoin's blockchain allows the authorization of transactions. Anyone possessing this access key has the power to manage transactions on the blockchain.
Therefore, private keys should be kept highly confidential as criminals might have corrupt intentions and attempt to steal the keys when they learn of significant holdings. Investors must be cautious of anyone who sees the balance of the public address they use. Individuals can also create multiple public addresses and distribute their holdings accordingly. Therefore, it would be wise to keep large investments at public addresses that aren't connected to the addresses involved in transactions.
Any user can view transaction histories on the blockchain. User identification information is not publicly recorded on the blockchain as transactions are, contributing to the privacy of your financial dealings.
Transactions are confidential but not entirely anonymous as the user's key is displayed next to the transaction. Thus, Bitcoin transactions are more traceable and transparent than cash transactions because they are accessible to the public. Bitcoin preserves a sense of anonymity in its design due to the advanced difficulty of tracing parties involved in transactions, including the sender and recipient of blockchain transactions.
The FBI and international researchers claim to be able to connect transactions on Bitcoin's blockchain to other online accounts like users' digital wallets. For example, an individual must share their personal identification when they create a Coinbase account.
Consequently, when this person buys bitcoin, their purchase is connected to their name. Any further transactions can then be traced back to the original Coinbase purchase, which displays the identification of the account holder. As Bitcoin is legal in the U.S. and most developed countries, this should not be of great concern to investors.
Steps To Purchasing Bitcoin
Step 1: Choose A Crypto Trading Service
The first step to buying bitcoin includes choosing a suitable cryptocurrency trading service or venue. The most common crypto purchasing services include payment services, crypto exchanges, and brokerages. Cryptocurrency exchanges are by far the more convenient and least complicated option as they offer various features to trade cryptocurrencies effortlessly.
An adequate cryptocurrency exchange will enable users to sell, buy and hold their crypto assets. The best option would be choosing an exchange that allows users to withdraw their assets into their personal online wallets to ensure safety and security. However, this option may not be essential in exclusively trading bitcoin and other cryptocurrencies.
Bitcoin is a major promoter of decentralization and strives to equip traders and investors with full control over their assets. Some exchanges allow their users to preserve their anonymity by not requiring any personal information. These exchanges function autonomously and are commonly entirely decentralized, meaning they have no central point of control.
Although these systems could potentially lead to malicious activity, it also offers the world's unbanked population an opportunity to engage in the mainstream economy. Refugees and individuals based in countries with little to no banking infrastructure can participate in financial activities with the help of decentralized exchanges.
Most exchanges currently available are not yet decentralized and still require identification documents. These major exchanges include Coinbase, Gemini, and Kraken. These exchanges are renowned due to their wide variety of features and applications.
The cryptocurrency world has expanded drastically in the last decade, leading to a competitive field of tokens competing for investors. Most exchanges include services that cater to the most prominent coins, such as Bitcoin and Ethereum, but many exchanges are not compatible with other tokens. Each exchange possesses its own set of criteria that determine which tokens' trade it includes and excludes.
Exchanges including Gemini, Kraken, and Coinbase offers Bitcoin among an increasing number of altcoins. The exchanges mentioned above are likely the most convenient exchange services in the current industry. Binance offers services for more advanced traders, including more serious trading capabilities and a wide range of altcoin options.
A key factor to consider when creating an account with a cryptocurrency exchange is implementing safe internet practices, including two-factor authentication and a unique and indecipherable password.
Step 2: Connect Your Crypto Exchange To A Payment Option
After selecting an appropriate crypto exchange, you will be required to gather personal documents depending on the exchange. These documents may include your Social Security card and a picture of your ID or driver's license, along with information about the source of your funds. The required information will additionally depend on your location and its applicable laws. The setup process is very similar to that of a typical brokerage account.
After your identity is properly verified, you will have to connect a payment option to fund your account. Most exchanges allow you to connect your bank account directly or connect your credit or debit card. Although you can purchase cryptocurrency with your credit card, it is not the wisest option, as the volatility of crypto prices leads to the inflation of the overall cost of a coin purchase.
It would be beneficial to ensure that your bank allows deposits to crypto exchanges as many banks question or cease such transactions.
The fees associated with deposits from credit and debit cards and bank accounts will vary depending on your choice of payment method. It is essential to research the fees required with each payment option to make a well-informed decision regarding the exchange and the payment method you will ultimately use.
The exchange itself will also charge a fee for each transaction. If the trading amount is relatively low, you will likely be charged a flat fee. However, you may be charged a percentage of the trading amount if more significant deposits are involved. Credit cards apply a processing fee in addition to the transaction fee.
Step 3: Place Your Order
After choosing an exchange and connecting your payment method, you will be able to purchase bitcoin or other cryptocurrencies. Cryptocurrency exchanges have increasingly become more mainstream recently. As a result, exchanges have expanded significantly regarding liquidity and the range of available features.
Although the cryptocurrency industry faced doubt and questioning regarding its viability, the operational changes at cryptocurrency exchanges contributed to the legitimacy and high reputation of these financial services as a whole.
Cryptocurrency exchanges have evolved to the point where their collection of features and usability is comparable to their stock brokerage competitors. Many Crypto exchanges currently offer a variety of investment methods and order types. Nearly all exchanges offer both limit orders and market orders, with some even offering stop-loss orders. Kraken is the exchange that offers the most order types and provides take-profit limit orders.
Apart from order types, exchanges also provide various ways to set up recurring investments. This feature allows users to consider the dollar-cost average in their investments of choice.
Step 4: Store Your Assets Safely
A secure place to store your digital assets is in a Bitcoin wallet or another cryptocurrency wallet. Storing your assets in your personal wallet instead of keeping it in the exchange is a sure way to preserve control over the private key to your funds. Storing your funds outside of the exchange will protect you from hacks and losses.
The wallets that exchanges commonly offer cannot provide the high-end security that personal wallets can, so we recommend storing large assets elsewhere.
Depending on your choice of exchange, different features will be available for your use. Some exchanges specialize specifically in Bitcoin, whereas others offer the storage of numerous alternative altcoins. Certain wallets provide the function of swapping one token for another.
You have countless options for crypto wallets, but it is essential to understand the types before committing. Hot wallets operate online, whereas cold wallets function as hardware or paper wallets.
Hot wallets
Hot wallets, or online wallets, operate on internet-connected devices such as phones, tablets, and computers. Online wallets encompass vulnerability as your private key will be generated by your choice of devices.
Hot wallets are convenient in that they enable you to access and execute transactions easily and rapidly, but storing your private key on an internet-connected device makes your account susceptible to hacks.
Wallet holders frequently lose funds to theft if they have not taken extensive measures to set up adequate security. Unfortunately, this happens much too often for comfort, and there are various ways for such events to occur. For example, some users boast about the large amount of bitcoin they possess, attracting the attention of thieves.
Wallets can be effectively secured if adequate precautions are implemented. Primary precautions include two-factor authentication, a strong password, and ensuring safe internet browsing.
Hot wallets can be likened to checking accounts, where account holders keep the bulk of their money in investment or savings accounts while placing spending money in checking accounts. Thus, hot wallets are suitable for smaller cryptocurrency amounts that are actively traded on a given exchange.
Hot wallets include desktop, web, mobile, and exchange account wallets.
The frequently repeated phrase in the crypto community states that if it's not your key, it's not your coin. This is especially applicable to exchange wallets as the user of the wallet does not hold the private key to the funds held in this wallet. If an exchange is hacked, you risk losing all your crypto assets.
Cold wallets
The most attractive feature of cold wallets is that they are less susceptible to theft and hacks as they are not connected to the internet. These wallets are alternatively referred to as offline or hardware wallets. The private key is stored on a platform disconnected from the internet that incorporates software allowing users to view their portfolio without risking their private key.
A paper wallet is probably the most secure storage solution for keeping cryptocurrency safe offline. Users can print their private key and a public key out on paper. Then, only those that possess that piece of paper will be able to access addresses that contain crypto assets.
Investors and traders commonly safeguard these papers in safety deposit boxes or even in a safe in their houses. Cold wallets provide high-security of significant long-term investments as users cannot rapidly sell or trade bitcoin holdings when stored this way.
Hardware wallets are more frequently used than paper wallets. A hardware wallet typically entails a USB drive containing a user's private keys. Keys stored in this way are much less susceptible to computer viruses, making it preferable over paper wallets.
Private keys stored on hardware wallets never encounter your network-connected computer or potentially unprotected software. Hardware wallets are typically open-source, allowing the community to confirm its safety by code audits rather than relying on a company to declare its safety.
Cold wallets require more technical knowledge in their setup process, but it is certainly worth the effort considering how much safer they are than other storage solutions.
Conclusively, the best way to set up your wallet is to have an exchange account for the buying and selling of digital assets, a hot wallet for storing small to medium amounts of assets you want to sell or trade, and a cold hardware wallet for the storage of large long-term holdings.
How to Buy Bitcoin With a Credit Card
Purchasing bitcoin with a credit card follows a similar procedure to using credit cards or automated clearing house transfers. You will be required to provide the exchange service with your credit card details and authorize the relevant transaction.
It is generally not recommended to buy your bitcoin using a credit card. The reasons will be discussed below. This stance may ultimately be for the benefit of the customer.
Firstly, not all crypto exchanges allow for the purchase of bitcoin with credit cards due to the associated processing fees and risk of fraud. This stance may ultimately be for the benefit of the customer.
Credit card processing may include charges for such transactions in addition to standard transaction fees.
Secondly, credit card purchases can be costly. Issuers consider bitcoin purchases cash advances and charge large fees and interest rates for such transactions.
Moreover, credit card companies often limit the amount of bitcoin you can purchase monthly.
Investors who prefer utilizing their credit cards in purchasing bitcoin can do so via an alternative method by getting a Bitcoin rewards credit card. These rewards cards offer the same functionalities like any other rewards card except that it offers rewards in bitcoin instead of fiat money. Essentially, they invest the cash backs gained from purchasing into Bitcoin.
Buying Bitcoin With PayPal
PayPal Holding, Inc. is a payment processor that offers investors and traders the opportunity to buy bitcoin. PayPal provides two ways to buy bitcoin. The most convenient method includes purchasing cryptocurrencies through your PayPal account that is connected to your bank account, debit card, or other payment mechanisms.
An alternative option includes using your PayPal balance to purchase crypto from a third party. As few third-party sites allow for this purchase, this is not the preferable option.
PayPal enables account holders to purchase Bitcoin, Litecoin, Ethereum, and Bitcoin Cash through its platform. Users can also purchase products and services with their crypto assets by selecting the "Checkout With Crypto" option when commencing a payment.
Setting up a crypto account on PayPal requires your date of birth, physical address, name, and tax identification option.
Users cannot purchase bitcoin using their credit card on PayPal. PayPal will display the price for the relevant cryptocurrency, which is highly susceptible to change due to the extreme volatility of crypto assets. A good strategy includes setting aside more than the currently required amount of funds in case the prices fluctuate unexpectedly.
PayPal charges a transaction fee for each crypto purchase as any other exchange would. The charged fee depends on the dollar amount of your purchase. A flat fee is charged for small purchases, whereas larger purchases will bring about a percentage-based fee.
A major disadvantage of buying crypto through PayPal is that you cannot transfer crypto funds outside the processor's platform. This means that you are unable to transfer the bitcoin you purchased from your PayPal wallet to your personal crypto-wallet.
Moreover, very few exchanges allow users to purchase bitcoin using PayPal's payment processor.
Alternative Ways To Buy Bitcoin
Peer-to-peer Exchanges
Peer-to-peer exchanges offer a more direct connection between users, unlike most decentralized exchanges which match sellers and buyers and facilitate all areas of the transaction.
An example of such an exchange is LocalBitcoins. Users can publish requests to buy or sell bitcoin, which includes more information regarding payment methods and prices. Users can then browse various offer listings and identify which trading partners best satisfy their trading needs.
P2P exchanges do not provide anonymity to the same extent as other decentralized exchanges, but they allow users to search for the best trading deal. In addition, implemented rating systems further facilitate the identification of appropriate trade partners.
Bitcoin ATMs
With Bitcoin ATMs, investors and traders can deposit cash into a machine and use it to buy bitcoin that will be transferred to their online wallet. Bitcoin ATMs have grown substantially in popularity and even retail giants such as Walmart Inc. is testing the functionality of a pilot program that will provide their customers will the ability to purchase bitcoin.
ATMs are one of the more expensive options as two separate charges are involved in purchasing bitcoin this way, namely a purchase fee and a conversion fee. Both fees are relatively high compared to that of alternative options.
Mainstream Brokerages
Few mainstream brokerages offer the ability to purchase bitcoin and subsequently trade it. This is because there is still significant uncertainty surrounding the regulatory status of many cryptocurrencies.
The lack of commission fees makes mainstream brokerages an attractive option for many beginners, but catches are involved. For example, many helpful features that crypto exchanges like Coinbase offer are absent in mainstream brokerages.
Final Thoughts
Purchasing bitcoin involves a more complicated process compared to buying regular stocks or equities. This is primarily due to the cryptocurrency ecosystem not being as highly developed as many mainstream trading platforms.
Four chief steps are involved in the purchase of bitcoin:
- Choosing an exchange service
- Connecting a payment method
- Placing your order
- Providing safe storage solutions for your investment
Commencing such a volatile investment strategy requires thorough research on your part. It is essential to weigh the advantages and disadvantages before committing to any platform or crypto amount.
