Our concepts of money and financial systems are undergoing major disruption.
With the emergency of cryptocurrencies in the last decade, we now have an alternative to participating in traditional financial markets, such as stocks, real estate, or commodities. The decentralized nature of cryptocurrency enables banking to reach underserved populations around the world and help meet the needs of the unbanked.
Bitcoin, the new “digital gold,” is the first to enter the cryptocurrency scene and has become increasingly popular since its inception. As of January 6, 2023, it’s worth ~$16,931 per coin, with many investors expecting the price to surpass $100,000 over the next few years.
Have you heard of Bitcoin but aren’t sure how to get some? Read on, and let’s find out you can join the crypto revolution.
- Cryptocurrencies are digital assets created on the blockchain, with Bitcoin being the first and most reputable coin available today.
- Since its inception in 2009, Bitcoin’s value has grown more than 10M%.
- Before purchasing Bitcoin, some factors to think about include the platforms or venues used, payment method, storage, fees, and security.
- While Bitcoin itself is unlikely to get hacked, your wallet or exchange account can be compromised, which is why it is crucial to put in adequate security protocols.
- Two common ways to buy Bitcoin are through a centralized cryptocurrency exchange or a peer-to-peer platform.
Intro to Bitcoin
With any investment, always make sure you understand what you are investing in and do your research beforehand. Here are some basic things you should know about cryptocurrencies:
- Cryptocurrencies are digital assets created using blockchain technology. They run on decentralized networks, meaning you do not need a central authority, such as a bank, to exchange crypto. While you can trade cryptocurrencies on public exchanges, such as Coinbase, they do not have the same regulations as traditional investment securities like stocks or real estate, which poses heightened risks and benefits.
- Bitcoin was the first cryptocurrency to debut in 2009 under pseudonymous founder Satoshi Nakamoto. While there are thousands of other cryptocurrencies in circulation today, Bitcoin is among the most reputable and valuable coins available. Since its inception, the value of Bitcoin has grown more than 10M%! In comparison, Goldman Sachs data indicates the average annual return of the S&P 500 in the past ten years is roughly 13.6%.
Risks vs. Rewards
If you are interested in purchasing Bitcoin or other cryptocurrencies, there are several ways to frame your thoughts on the risks and rewards. When you invest in Bitcoin, you are making a bet on the cryptocurrency space and the technology behind the coin. Since crypto is relatively new to the financial markets, there is no guarantee that everything will work out. But, if everything goes well in the crypto world, you can make life-changing gains.
Bitcoin, and the crypto space in general, is highly volatile, making it difficult to find good buying or selling opportunities. Since buying Bitcoin, Ethereum, and a couple of other tokens, I have watched my gains go up 3x or more in a short timeframe. I’ve also watched my portfolio lose 50%+ just as quickly. While this was something I had mentally prepared for before investing, it certainly hasn’t been fun watching my investments lose value.
So, think carefully about your financial goals and strategy before investing. As a rule of thumb, you should only invest with money you are willing to lose. Cryptocurrencies are NOT subject to Federal Deposit Insurance Corporation (FDIC) or Securities Investor Protection Corporation (SIPC) protections. That means if you lose your coins or your account gets hacked, there is a high chance you will not get them back.
Before You Buy Bitcoin…
Privacy and security are at the top of their minds for many Bitcoin investors. Anyone with the correct private key (similar to a password) to a public address on the Bitcoin blockchain can authorize transactions. That is why many investors, myself included, avoid publicly disclosing how much Bitcoin they own and distribute their Bitcoin across multiple wallets.
Compared to credit cards or cash, Bitcoin transactions are much more transparent and traceable because all transactions get publicly recorded on the blockchain. Anyone can view the transactions and associated public keys, but not the identifying user information, which builds an element of confidentiality and makes it difficult to trace which parties made the transactions.
Factors to Consider
Investing in Bitcoin can seem extremely complicated. When I first started, I had many conversations with my friends to guide me step-by-step on the entire process before making my first purchase. We’ll break down everything you need to know to invest securely.
1. Payment Methods
You have several payment methods to choose from, ranging from credit cards to bank transfers, payment apps (Paypal, Apple Pay, Square, etc.), cash, or barter. You can also get Bitcoin at specialized ATMs or through peer-to-peer (P2P) exchanges. Depending on where and how you buy your Bitcoin, each payment method comes with different tradeoffs regarding fees, privacy, and convenience.
You can buy Bitcoin using digital wallet providers, centralized spot exchanges, over-the-counter (OTC) exchanges, peer-to-peer marketplaces, or through payment apps like PayPal, Venmo, and Square Cash. Alternatively, you can buy Bitcoin face-to-face with cash transactions.
3. Where To Put Your Bitcoin
Once you buy your Bitcoin, you can either put it into a Bitcoin wallet you control or one that someone else, such as an exchange, controls.
Hot wallets are online wallets that you can access through Internet-connected devices, such as your laptop or phone. While a hot wallet is convenient, your coins are more vulnerable to hacks because these wallets generate the private keys to your cryptocurrency on the Internet.
If you use a hot wallet, make sure to add a strong password and two-factor authentication to prevent theft. For example, if you brag about how much Bitcoin you have on a Reddit forum or Discord server with little to no security on your hot wallet, you risk getting doxed and losing all your money.
Hot wallets are best for small amounts of crypto or crypto you are actively trading and include mobile, web, desktop, and exchange account custody wallets. If you are using an exchange, they provide a custodial account to you, and you do not hold the private key to the crypto in the exchange wallet. So, if your account gets compromised, the exchange does not have to give your money back.
A cold wallet is not connected to the Internet and thus has a lower chance of getting hacked. These wallets store your private key offline and sometimes come with software that allows you to view your portfolio without exposing your private key.
One of the most secure ways to store your cryptocurrency is through a paper wallet you generate off certain websites. These sites produce public and private keys that you can print out and store in a safe either at home or at your bank. These wallets are best if you want to store your Bitcoin securely and buy and hold long-term. But, the main drawback is that if you lose your paper wallet, you may permanently lose access to your Bitcoin.
A hardware wallet is usually a USB drive device that stores your private keys offline. They are less prone to viruses, and your private keys are unlikely to get exposed to vulnerable software. Hardware wallets are typically open-source, so the community can run code audits to determine how safe they are versus a company declaring that they are safe. So, while cold wallets require more technical expertise to set up, they are much more secure.
Depending on the payment method and platform or venue you are using for buying Bitcoin, you will get charged different fees. For example, if you are using cash to buy Bitcoin from a friend, you will only need to pay the network fee for sending the Bitcoin from your friend’s Bitcoin wallet to yours. If you are paying with a debit or credit card, you may need to factor in additional payment fees. Some exchanges also charge additional fees for facilitating your trades to cover operating costs.
5. Verifying Your Identity
If you want to buy Bitcoin using US dollars or other fiat currencies through an exchange service, they will require identifying information to use their app. That is because you are interacting with a regulated, financial business that needs to comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations.
6. Not Your Keys, Not Your Bitcoin!
When you buy and hold Bitcoin in a non-custodial wallet, you will not need to wait for anyone else to approve your transaction, such as a centralized exchange. You have complete control and can send your Bitcoin out wherever and whenever you want. As long as you manage your private key securely, your account will not get hacked or be exposed to counter-party risks.
On the other hand, many custodial Bitcoin wallets restrict what you can do with your Bitcoin. For example, if you want to use Robinhood’s crypto wallet, you will need to verify your identity and add two-factor authentication to your account, which can take a week to get processed. You can also only send up to $3,000 worth of crypto or make ten transfers max in 24 hours and will not get the private key to your Bitcoin wallet.
Ways to Buy Bitcoin
The two main ways to buy Bitcoin are through a centralized cryptocurrency exchange or a peer-to-peer platform.
Buying Bitcoin From a Centralized Cryptocurrency Exchange
With this method, you will purchase Bitcoin through an exchange like Coinbase or Kraken, which will hold your crypto on your behalf. If you want total control of your crypto, you will need to withdraw it from the exchange and transfer it to a non-custodial wallet. When you withdraw your coins, you will need to follow the exchange’s withdrawal policy and pay transaction fees.
A common flow for purchasing Bitcoin from an exchange includes:
- Select an exchange and sign up.
- Connect a payment method.
- Place an order.
- Store your Bitcoin.
Step 1: Select an Exchange and Sign Up
If you want to buy cryptocurrency, one option is to find a crypto exchange where buyers and sellers meet to exchange fiat currencies for coins. There are different types of cryptocurrency exchanges. Some allow users to stay anonymous and do not require identifying information, which can provide services to the unbanked population, such as refugees or those living in countries with weak financial systems. Those exchanges operate autonomously and are usually decentralized.
Right now, most reputable crypto exchanges are not decentralized and require users to submit identifying information, such as your driver’s license, Social Security card, employer information, etc. Some of the largest include Coinbase, Kraken, and Binance. If you are a beginner, you should look for one with ease of use, low fees, and strong security.
When choosing an exchange, ensure that the exchange has a Bitcoin wallet built into its platform. That way, you can withdraw your coins and move them to other platforms or wallets. Otherwise, you will need to sell your holdings and repurchase them to move your crypto onto a different exchange.
Note that if you want to use an exchange or other online platform, it’s best to put your money across multiple places instead of having it all in one wallet to minimize risk. Previously, I held my crypto across Coinbase, Coinbase Pro, Gemini, Celsius, BlockFi, and Robinhood. With Celsius and BlockFi now both bankrupt and Gemini Earn withdrawals halted, had I put all my crypto in one place, I would have lost everything.
Step 2: Connect a Payment Method
After choosing an exchange, you will need to add money to your account. Depending on which platform you use, you can fund your account through bank transfers, PayPal, wire transfers, a crypto wallet, or a credit or debit card.
Some platforms will charge high transaction fees depending on which payment method you connect. For example, you can do an electronic transfer from your bank account for free on Coinbase, but you will need to pay $10 if you do a wire transfer and 2.5% of the transaction amount if you use PayPal. If you want to buy crypto directly with PayPal or a credit or debit card, Coinbase charges a 3.99% fee of the transaction amount.
Exchanges also charge transaction fees, which are usually a flat fee or a percentage of the trading amount. Because these fees reduce your available capital for investing, we recommend connecting your bank account and depositing money through electronic transfers.
Step 3: Place an Order
Once you add money to your account, you can place an order to buy Bitcoin. Depending on which platform you are using, you can purchase it by tapping a button or entering Bitcoin’s ticker symbol (BTC). Then, set an amount for how much you want to buy.
Some exchanges will allow you to place either a market order or a limit order. A market order lets you buy Bitcoin instantly at the current market price, while a limit order lets you set a target price to buy Bitcoin. Given how volatile Bitcoin is, it’s a good idea to set limit orders at different price points so that you do not end up over-paying.
Once the transaction goes through, you will own a fraction of a Bitcoin. Buying a single Bitcoin requires a significant upfront investment, so unless you have ~$17,000 lying around (current price of Bitcoin as of 1/6/2023), you will only get a percentage of a coin.
Step 4: Storing Your Bitcoin
If you do not feel comfortable leaving your crypto on an exchange, you can move it off the exchange into cold storage. While most major exchanges have some form of insurance policy to reimburse their users, keep in mind that security is not their primary business line.
Storing your Bitcoin in a personal wallet will give you the most security. But, you may need to pay a withdrawal fee to move your coins out. Additionally, if you use a third-party wallet custodian, you may permanently lose access to your assets if you lose the private key, which has happened to several Bitcoin millionaires.
Buying Bitcoin Using a Peer-to-Peer Trading Platform
With decentralized exchanges, buyers and sellers facilitate their transactions anonymously. On the other hand, peer-to-peer exchange services, such as LocalBitcoins, facilitate trading by directly connecting users. Most P2P platforms offer a venue for buyers and sellers to post their requests and an escrow and dispute resolution option.
After creating an account, users can post requests to buy or sell Bitcoin and include information about rates and payment methods. Users can also browse through all the listings of available offers and choose who they want to transact with.
While P2P exchanges offer less anonymity, they give users a venue to shop for the best deal and evaluate potential trade partners through rating or reputation systems. In many jurisdictions, they are not classified as exchanges or money transmitters. So, you might not need to reveal your identity. If privacy is a concern, P2P platforms are a great option. However, they are less convenient and costly due to the lack of liquidity.
The process for purchasing Bitcoin using a P2P platform is similar to an exchange:
- Identify a P2P platform to use.
- Browse through listings by payment method, amount, seller reputation, meetup location, etc.
- Initiate a trade, which will lock up the Bitcoin in escrow.
- Send the agreed-upon amount via the agreed-upon method (which could be a cash meetup).
- The seller confirms the payment via the website or app, which releases the Bitcoin from escrow to your wallet. Depending on what platform you are using, the Bitcoin may get released directly to the wallet of your choosing. Or, it may get sent to a P2P platform account wallet (usually a custodial web wallet), which you will need to withdraw to a personal wallet and pay a transaction fee.
How to Sell Bitcoin
You can sell Bitcoin at the same platforms or venues where you purchased it. Usually, the process will be relatively similar to the buying process. For example, on Coinbase Pro (now Advanced Trade), all you need to do is change the order form from buy to sell and then choose whether you want to set a market, limit, or stop-loss order.
You can choose to sell all your Bitcoin or only a specified amount. Most cryptocurrency exchanges will charge a percentage of the sale amount in fees. Once the sale goes through, you can transfer the money out, though your exchange may have a holding period to clear your transaction before you can move the cash to your bank account.
Most exchanges set daily and monthly withdrawal limits, so you may not have immediate access if you made a large sale. However, there are no limits to how much crypto you can sell. Note that if you made any profits on your Bitcoin, you will need to pay capital gains taxes, similar to selling your stocks.
The Bottom Line
With the price of Bitcoin skyrocketing, it can be tempting to jump into the hype. But, with any investment, make sure to do your research and understand what you are investing in. Given how volatile Bitcoin is, experts recommend keeping your crypto holdings small and do not let them get in the way of other financial goals, such as paying off high-interest debt or funding a retirement account.
If you are a beginner in the crypto space, Bitcoin is a solid place to start. While the process for purchasing Bitcoin is slightly more complicated than buying stocks, do not let that deter you from investing. The cryptocurrency ecosystem is still new to the financial scene and will face growing pains. But, once it becomes more mainstream and widely accessible, the potential is limitless.