Before You Buy Bitcoin
There are several things that every aspiring Bitcoin investor needs. A cryptocurrency exchange account, personal identification documents if you are using a 'Know Your Customer (KYC)' platform, a secure connection to the Internet, and a method of payment. It is also recommended that you have your own personal wallet outside of the exchange account. Valid methods of payment using this path include bank accounts, debit cards, and credit cards. It is also possible to get Bitcoin at specialized ATMs and via P2P exchanges. However, be aware that Bitcoin ATMs have increasingly required government-issued IDs as of early 2020.
Privacy and security are important issues for Bitcoin investors. Even though there are no physical Bitcoins, it is usually a bad idea to brag about large holdings. Anyone who gains the private key to a Public Address on the Bitcoin Blockchain can authorize transactions. Private keys should be kept secret; criminals may attempt to steal them if they learn of large holdings. Be aware that anyone can see the balance of a public address that you use. That makes it a good idea to keep significant investments at public addresses that are not directly connected to ones that are used for transactions.
Step One: Choose an Exchange
Signing up for a cryptocurrency exchange will allow you to buy, sell, and hold cryptocurrency. It is generally best practice to use an exchange that allows its users to also withdrawal their crypto to their own personal online wallet for safer keeping. For those looking to trade Bitcoin or other cryptocurrencies, this feature may not matter.
Right now, however, the most popular exchanges are not decentralized and do require KYC. These exchanges include Binance, Kraken, Coinbase, Kucoin, Gate, to name a few. Each of these exchanges has grown significantly in the number of features they offer. Binance, Kucoin, and Gate offer Bitcoin and a growing number of altcoins. These three are probably the easiest on-ramps to crypto in the entire industry.
An important thing to note when creating a cryptocurrency exchange account is to use safe internet practices. This includes using two-factor authentication and a password that is unique and long, including a variety of lowercase letters, capitalized letters, special characters, and numbers.
Step Two: Connect Your Exchange to a Payment Option
After you have chosen an exchange, you will need to gather your personal documents. Depending on the exchange, these may include pictures of a driver's license or Social Security number, as well as information about your employer and source of funds. The information you may need can depend on the region you live in and the laws within it. The process is largely the same as setting up a typical brokerage account.
After the exchange has ensured your identity and legitimacy, you will then be able to connect a payment option. At most exchanges, you can connect your bank account directly or you can connect a debit or credit card. Though you can use a credit card to purchase cryptocurrency, it is generally something that should be avoided due to the volatility that cryptocurrencies can experience.
Though Bitcoin is legal in the United States, some banks do not take too kindly to the idea and may question or even stop deposits to crypto-related sites or exchanges. It is a good idea to check to make sure that your bank allows deposits at your chosen exchange.
There are varying fees for deposits via a bank account, debit, or credit card. Coinbase is a solid exchange for beginners and has a 1.49% fee for bank accounts, with a 3.99% fee for debit and credit cards. It is important to research the fees associated with each payment option to help choose an exchange or to choose which payment option works best for you.
Exchanges also charge fees per transaction. This fee can either be a flat fee (if the trading amount is low) or a percentage of the trading amount. Credit cards incur a processing fee in addition to the transaction fees.
Step Three: Place an Order
When you have chosen an exchange and connected a payment option, you can now buy Bitcoin and other cryptocurrencies. In recent years, cryptocurrency exchanges have slowly become more mainstream. They have grown significantly in terms of liquidity and their breadth of features. The operational changes at cryptocurrency exchanges parallel the change in the perception of cryptocurrencies. An industry that was once thought of as a scam or one with questionable practices is slowly morphing into a legitimate one that has drawn interest from all the big players in the financial services industry.
Now, cryptocurrency exchanges have gotten to a point where they have nearly the same level of features as their stock brokerage counterparts. When you have found an exchange and connected a payment method, you are ready to go.
Crypto exchanges today offer a number of order types and ways to invest. Almost all crypto exchanges offer both market and limit orders and some also offer stop-loss orders. Of the exchanges mentioned above, Kraken offers the most order types. Kraken allows for market, limit, stop-loss, stop-limit, take-profit, and take-profit limit orders.
Aside from a variety of order types, exchanges also offer ways to set up recurring investments, allowing clients to dollar-cost average into their investments of choice. Coinbase, for example, lets users set recurring purchases for every day, week, or month.
Step Four: Safe Storage
Bitcoin and cryptocurrency wallets are a place to store digital assets more securely. Having your crypto outside of the exchange and in your personal wallet ensures that only you have control over the private key to your funds. It also gives you the ability to store funds away from an exchange and avoid the risk of your exchange getting hacked and losing your funds.
Some wallets have more features than others. Some are Bitcoin only and some offer the ability to store numerous types of altcoins. Some wallets also offer the ability to swap one token for another.
When it comes to choosing a Bitcoin Wallet, you have a number of options. The first thing you will need to understand about crypto wallets is the concept of Hot Wallet (online wallets) and Cold Wallet (paper or hardware wallets).
Hot wallets
Online wallets are also known as hot wallets. Hot wallets are wallets that run on Internet-connected devices like computers, phones, or tablets. This can create vulnerability because these wallets generate the Private Keys to your coins on these Internet-connected devices. Though a hot wallet can be very convenient in the way you are able to access and make transactions with your assets quickly, storing your private key on an Internet-connected device makes it more susceptible to a hack.
Cold wallets
The simplest description of a cold wallet is that it is not connected to the Internet and therefore stands at a far lesser risk of being compromised. These wallets can also be referred to as offline wallets or hardware wallets. These wallets store a user’s private key on something that is not connected to the Internet and can come with software that works in parallel so that the user can view their portfolio without putting their private key at risk.
Alternate Ways of Buying Bitcoin
Though exchanges like Coinbase or Binance remain some of the most popular ways of purchasing Bitcoin, they are not the only method. Below are some additional processes Bitcoin owners utilize.
Bitcoin ATMs
Bitcoin ATMs act like in-person Bitcoin exchanges. Individuals can insert cash into a machine and use it to purchase Bitcoin that is then transferred to a secure digital wallet. Bitcoin ATMs have become increasingly popular in recent years; Coin ATM Radar can help to track down the closest machines.
P2P exchanges
Unlike decentralized exchanges, which match up buyers and sellers anonymously and facilitate all aspects of the transaction, there are some peer-to-peer (P2P) exchange services that provide a more direct connection between users. Kucoin and Binance is an example of such an exchange. After creating an account, users can post requests to buy or sell Bitcoin, including information about payment methods and price. Users then browse through listings of buy and sell offers, choosing those trade partners with whom they wish to transact.
Binance facilitates some of the aspects of the trade. Though P2P exchanges do not offer the same anonymity as decentralized exchanges, they allow users the opportunity to shop around for the best deal. Many of these exchanges also provide rating systems so that users have a way to evaluate potential trade partners before transacting.
How to Sell Bitcoin
You can sell Bitcoin at the same venues where you purchased the cryptocurrency, such as cryptocurrency exchanges and peer-to-peer platforms. Typically, the process of selling Bitcoin on these platforms is similar to the process used to purchase the cryptocurrency.
For example, you may only be required to click a button and specify an order type (i.e., whether the cryptocurrency should be sold instantly at available prices or whether it should be sold to limit losses) to conduct the sale. Depending on the market composition and demand at the venue, the offering price for Bitcoin may vary. For example, exchanges in South Korea traded Bitcoin at a kimchi premium during the run-up in its prices back in 2018.
Cryptocurrency exchanges charge a percentage of the crypto sale amount as fees. For example, Coinbase charges 1.49% of the overall transaction amount as fees.
Exchanges generally have daily and monthly withdrawal limits. Therefore, cash from a large sale may not be immediately available to the trader. There are no limits on the amount of cryptocurrency you can sell, however.
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