In the world of cryptocurrency, bitcoin is the undisputed king based on value, market cap and the number of users. Of course, most people may not yet know much about virtual currencies, but they sure have heard something about bitcoin. It is the most popular crypto, and deservedly so.
Some other digital coins will boast more efficient mining, faster transactions and better innovation, but everyone eventually invests in bitcoins. The digital currency is the first in its class, a pioneer, and every other cryptocurrency is compared with bitcoin.
In this guide, we discuss how to buy bitcoin. What do you need, and how do you go about it?
Where Bitcoin Came from
Bitcoin came to the scene in October 2008, when its anonymous creator, Satoshi Nakamoto, presented a whitepaper on the invention of blockchain to the world. Cryptocurrency is, in fact, a pioneer in the application of blockchain technology. All other cryptos that have come after have been based on the same technology as bitcoin.
The blockchain that forms bitcoin contains numerous blocks of transactions happening on the network. Typically, the bitcoin network includes the nodes or the various computers around the world that maintain the authenticity and security of the blockchain.
Users receive an extremely complex PIN code or private key to send cryptos and a public address to receive funds. Through the combination of peer-to-peer network, cryptography and proof of work consensus algo, bitcoin can process reasonably quickly while also avoiding cases of a double spend.
All the records of the transactions, such as how many bitcoins each address holds, how much was sent, the date of the transaction, cost and where it was sent to, is stored in a distributed ledger.
The bitcoin network is fortified by a consensus algorithm or the proof of work mining, which also verifies mining in the network. But what is mining in this context?
Mining is a consensus system that confirms pending transactions and includes them in a ledger. Miners enforce a chronological order in the network to safeguard its neutrality and establish consensus in the system. For their effort, miners get bitcoin as a mining reward.
The first real-world bitcoin transaction was in May 2010, when one person paid 10,000 Bitcoins for two pizzas worth $25. Since then, the value of the digital currency has fluctuated dramatically, and its current 2021 supply is at 18 million, out of a total of 21 million that will ever be available. This set limit of 21 million makes bitcoin a scarce resource, which beefs up its value even more. Bitcoin has been used to compare other digital currencies and has almost the same status as gold in the world of fiat currency.
How You Purchase Bitcoin
You can easily buy bitcoin from various exchanges, using multiple payment methods such as credit card and bank transfers. But before you can purchase any cryptos, there are a few requirements you must fulfil.
- If you choose a Know Your Customer (KYC) platform, you will need to present personal identification documents.
- You will also need a cryptocurrency exchange account
- A secure internet connection
- Valid methods of payment that include debit cards, credit cards, bank accounts, P2P exchanges and specialized ATMs. You may need a government-issued ID when using a bitcoin ATM.
Follow the Steps Below to Purchase Bitcoin:
1. Pick an Exchange
Joining a cryptocurrency exchange allows you to trade in cryptocurrencies. Choose an exchange that permits withdrawal to personal online wallets for safekeeping.
There are various exchanges you can join and purchase bitcoins. Some of these will allow anonymity, based on bitcoin’s spirit of individual sovereignty and decentralization. They are autonomous and without a central point of control. These exchanges will not require personal identification info before you can purchase crypto.
While autonomous exchanges can be used for illegal activities, there’s also a lot of good that comes from them. People with no access to infrastructure and the unbanked populations with zero personal identification documents, such as refugees, can benefit from the anonymous exchanges.
But the most popular exchanges, Binance, Kraken, Coinbase and Gemini, are centralized and require personal identification. All these offer bitcoin and altcoins.
2. Link the Exchange to a Payment Option
Gather your identification documents that may include your social security number, driver’s license, source of funds and info about your employer because you may need them to link a payment option.
The required personal information varies depending on the exchange you’ve chosen and the local laws. After the exchange is satisfied with your identification documents, you can now link a payment option.
Most platforms can link with your bank directly, or you can use a debit or credit card. However, some banks may not be too welcoming to the idea of direct deposits to the exchange or cryptocurrency sites. First, enquire from the bank before linking your account.
Familiarize yourself with the various charges associated with the different methods to make the right choice. For example, Coinbase charges a credit and debit card fee of 3.99% and 1.49% for bank accounts. There are also charges per transaction.
Some platforms charge a flat fee when transaction amounts are low. Other charges include credit card processing fees.
3. Place the Order
With a suitable cryptocurrency exchange and a linked payment option in place, you can finally place an order. Unlike some years ago, exchanges are now mainstream. Perhaps the changing perceptions on cryptocurrency has something to do with it.
The industry was once looked at as a scam or scheme by a few to enrich themselves. Things have changed, and it is now more legitimate in the eyes of most people. Crypto exchanges are almost at the same level as stock brokerage firms.
Every exchange has its unique features and products to invest in. There are different order types and recurring investment types that give you a viable choice. Before you place the order, browse and understand the various available options.
4. Secure Storage
Safe storage of cryptocurrency assets is critical, and that is where a crypto wallet comes in. Holding your cryptos in a personal wallet away from the exchange ensures that you are the only one with control over the key.
On the other hand, taking your bitcoin from the exchange keeps it from cybercriminals when the exchange gets hacked.
Usually, different cryptocurrency wallets vary based on features. While some can swap one token for another, a different one may hold other cryptos. Typically, you have a wide variety of options to choose from. Understand the concept of hot wallets and cold wallets so that you can choose the right one for your needs.
Hot wallets are internet-based and connected to devices such as your laptop, tablet or phone. They are convenient and fast. Unfortunately, online wallets can expose you to hacking risks and the loss of cryptocurrency assets.
Online wallets are susceptible to hacking because they generate private keys. In the absence of sufficient security measures, your bitcoins may be exposed to thieves.
Telling every person who would care to listen that you have large amounts of bitcoins is never wise, especially when using hot wallets with questionable security controls. Among your audience is people that are more than ready to relieve you of your cryptocurrencies wealth.
But that does not imply hot wallets are unsafe and should never be used. You can make online wallets secure in various ways. For example, use safe internet browsing and 2-factor authentication as a bare minimum. Also, use hot wallets for small amounts of cryptos or amounts you may be actively trading in the exchange.
Never use the wallets provided by the exchange for custodial purposes. You are not the owner of the private key, and this exposes you to risks. If the exchange were to be compromised, your funds would be lost. Understand that if you don’t own the private key, they are not your coins.
Cold wallets do not have an internet link. They are similar to your physical wallets, and therefore safer from internet risks. You can also refer to the cold wallets as hardware wallets or offline wallets.
In cold wallets, the user’s private key is stored somewhere with no access to the internet. You can still view your portfolio, but your private keys are much safer. The software used to view the portfolio is parallel and does not put your crypto wealth at risk.
Typically, hardware wallets are quite popular and are usually a USB drive device that stores your private key offline. They are unaffected by viruses and keep your private key away from an internet connection. Hardware wallets are typically open-source, and this allows the community to test their resilience against attacks. The only shortcoming is that they may have some learning curve to set up.
A paper wallet is perhaps the most secure way to store your bitcoins. You generate a paper wallet from particular websites, print it out, and keep it in a safe deposit box or other secure places. The wallet has both a private and public key.
Access to cryptocurrencies is only possible if you have the private key on the piece of paper. Paper wallets are ideal for long term investment because it takes some time to sell the cryptos stored in this way.
Additional Methods of Buying Bitcoin
Buy From P2P Exchanges
Decentralized exchanges, popular with blockchain, thrive in the anonymity of the transactions. However, there are other methods, such as peer-to-peer (P2P) with a more direct connection.
Users with accounts can request to trade in cryptocurrency and can either buy or sell. Browse the list of buyers and sellers before you can determine the best to transact with.
An excellent example of a P2P exchange is Local Bitcoins, which allows you to shop for the best deal. The platform has a rating system that buyers or sellers use to evaluate the potential transaction partners.
Using Your Credit Card to Purchase Bitcoins
To purchase cryptocurrencies, you need to provide credit card details and authorize the transaction. But it is not always a good idea to buy bitcoins through a credit card.
Based on the high risk of fraud and associated processing fees, most exchanges and third-party agencies do not take credit cards as a payment option. It is in the best interest of the client.
Credit cards can add other charges when used in bitcoin transactions, which is an additional cost. Credit issuers see such purchases as cash advances, and so charge hefty fees for the service.
Alternatively, acquire a Bitcoin Rewards credit card and get rewards in terms of bitcoins. Unfortunately, the annual fees for this facility may be pretty steep, and other additional costs to convert the cryptos to fiat may also be high.
Using Paypal to Purchase Bitcoins
You can conveniently buy bitcoins using PayPal, a payment processor. Use your PayPal balance to purchase bitcoins directly or from a third-party provider.
But it is not all third-party providers that allow the use of a PayPal button, which may not always be convenient. You buy bitcoin through PayPal, either by an existing account balance, bank linked to the account or a debit linked to the account. However, you cannot use a credit card to purchase bitcoins through PayPal.
Usually, PayPal benefits in various ways for providing this service, such as through processing fees for every transaction. PayPal also makes money through the difference between the USD exchange rate and bitcoin’s market price.
But using PayPal has its shortcomings. You cannot transfer the cryptocurrencies in the PayPal wallet to your wallet. Furthermore, very few exchanges and third-party traders allow the use of cryptocurrencies.
Bitcoin ATMs, which has become popular in recent years, act the same way as exchanges when you want to purchase bitcoins. The process is simple and straightforward. You only need to insert money into the machine and then use it to buy bitcoins that you transfer to a secure wallet.
While bitcoin has turned many people into instant millionaires, it is still true speculation. No doubt, it is the future of transactions and the medium of exchange. But be careful. The cryptocurrency has been around for over a decade now, with no government or financial institution backing. Its high volatility can wipe your savings in a matter of seconds.
But that does not imply you should keep off. Exercise caution, and only purchase the value of the bitcoins you can afford to lose. Taking some risk is not bad, but tread carefully.