Investing in Bitcoin can seem complicated, but it is much easier if you break it down into steps. Buying bitcoin is getting easier by the day and the legitimacy of exchanges and wallets is also growing.
- NOTE: Bitcoin’s value stems from its adoption as a store of value and payment system, as well as its finite supply and declining inflation.
- While it is nearly impossible to hack Bitcoin itself, it is possible for your wallet or exchange account to be compromised. For this reason, proper storage and security measures are essential.
- Investing or trading Bitcoin only requires an account on an exchange, although other safe storage practices are recommended.
Before You Begin…
There are several things that every aspiring bitcoin investor needs. A cryptocurrency exchange account, personal identification documents if you are using a KYC (Know Your Customer) platform, a secure connection to the internet, and a payment method. It is also recommended that you have your own personal wallet outside of the exchange account. Valid payment methods that use this path include bank accounts, debit cards, and credit cards. It is also possible to obtain Bitcoin from specialized ATMs and through P2P exchanges. Note, however, that Bitcoin ATMs increasingly required government-issued IDs starting in early 2020.
Privacy and security are important issues for Bitcoin investors. Although there are no physical Bitcoins, it is usually a bad idea to brag about large holdings. Anyone who obtains the private key to a public address on the Bitcoin blockchain can authorize transactions. While it is obvious that the private key should be kept secret, criminals may try to steal private keys if they learn of large holdings. Note that anyone can see the balance of a public address you use. This makes it a good idea to hold significant investments in public addresses that are not directly associated with those used for transactions.
Anyone can view a history of transactions in the blockchain, even you. However, while transactions are publicly recorded on the blockchain, user information is unidentifiable. In the Bitcoin blockchain, only a user’s public key is displayed next to a transaction, keeping transactions confidential but not anonymous. In a sense, Bitcoin transactions are more transparent and traceable than cash, but Bitcoin can be used anonymously.
This is an important distinction. International researchers and the FBI have claimed that they can track transactions using the Bitcoin blockchain to users’ other online accounts, including their digital wallets. For example, when someone creates an account on Coinbase, they must provide their
identification. When that person buys bitcoin, it is tied to their name. If they send it to another wallet, it can still be traced back to the Coinbase purchase that was tied to the account holder’s identity. This should not affect most investors, as Bitcoin is legal in the U.S. and most other developed countries.
Step One: Choose an Exchange
When you sign up for a cryptocurrency exchange, you can buy, sell, and hold cryptocurrency. It’s generally best practice to use an exchange that allows users to withdraw their crypto into their own personal wallet as well to keep it more secure. There are many exchanges and brokerage platforms that do not allow this. For those who want to trade bitcoin or other cryptocurrencies consistently, this feature may not matter.
There are many types of cryptocurrency exchanges that exist. Since the ethos of Bitcoin is decentralization and individual sovereignty, some exchanges allow users to remain anonymous and do not require users to enter personal information. Exchanges that allow this operate autonomously and are typically decentralized, meaning there is no central point of control. In other words, there is no CEO and no person or group that a regulator can go after if they have concerns about illegal activity.
While these types of systems have the potential to be used for nefarious activities, they also provide services to the unbanked world. Such individuals may include refugees or individuals living in countries where there is little to no government or banking infrastructure to provide government identification required for a bank or investment account. Some believe that the good in these services outweighs the potential for illegal use, as unbanked people now have a means of storing wealth and can use it to climb out of poverty.
Right now, the most commonly used exchanges are not decentralized and require KYC. In the United States, these exchanges include Coinbase, Kraken, Gemini, and Binance U. S., to name a few. Each of these exchanges has grown significantly in the number of features they offer. Coinbase, Kraken, and Gemini offer bitcoin and a growing number of altcoins. These three are probably the easiest to crypto on-Ramp in the entire industry. Binance is aimed at a more advanced trader and offers more serious trading features and numerous altcoins to choose from.
One important thing to keep in mind when creating a cryptocurrency exchange account is to use safe internet practices. This includes using two-factor authentication and using a unique and long password, including a variety of lowercase letters, uppercase letters, special characters and numbers.
Step Two: Connect your exchange to a payment option.
Once you’ve selected an exchange, you now need to collect your personal documents. Depending on the exchange, this may include pictures of a driver’s license, a Social Security number, and information about your employer and source of funds. The information you may need may depend on the region you live in and the laws therein. The process is largely the same as setting up a typical brokerage account.
After the exchange has ensured your identity and legitimacy, you can now connect a payment option. With the exchanges listed above, you can connect your bank account directly or connect a debit or credit card. While you can use a credit card to purchase cryptocurrency, this should generally be avoided due to the volatility that cryptocurrencies can experience.
While Bitcoin is legal in the U.S., some banks are not too friendly to the idea and may question or even stop deposits to crypto websites or exchanges. While most banks allow these deposits, it’s a good idea to check if your bank allows deposits on your chosen exchange.
There are different fees for deposits via a bank account, debit or credit card. Coinbase, for example, a solid exchange for beginners, has a 1.49% fee for bank accounts and a 3.99% fee for debit and credit cards. It is important to research the fees associated with each payment option to choose an exchange or decide which payment option is best for you.
Step Three: Place an Order
Once you have selected an exchange and connected a payment option, you are now ready to buy Bitcoin and other cryptocurrencies. In recent years, cryptocurrency and its exchanges have slowly become mainstream. Exchanges have grown significantly in terms of liquidity and their breadth. What was once considered a scam or questionable has evolved into something that can be trusted and legitimate.
Now, cryptocurrency exchanges have come to a point where they have almost the same level of functionality as their stock brokers. Once you find an exchange and connect a payment method, you are ready to go.
Crypto exchanges today offer a range of order types and investment options. Almost all crypto exchanges offer both market and limit orders, and some also offer stop-loss orders. Of the above exchanges, Kraken offers the most order types. Kraken can provide for market -, limit -, stop-loss, stop-limit and take-profit-limit orders.
In addition to a variety of order types, exchanges also offer options to set up recurring investments that allow customers to include cost averaging in their investments of choice. With Coinbase, for example, users can set recurring purchases for each day, week, or month. Getting an account on an exchange is really all you need to do to be able to buy Bitcoin or other cryptocurrencies, but there are some other steps to consider for more security.
Step Four: Secure Storage
Bitcoin and cryptocurrency wallets are a place where digital assets can be stored more securely. Having your crypto off-exchange and in your personal wallet gives only you control over the private key to your money. It also gives you the ability to store money away from an exchange and avoid the risk of your exchange being hacked and losing your money.
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 exchange one token for another.
When it comes to choosing a bitcoin wallet, you have a number of options. The first thing you need to understand about crypto wallets is the concept of hot wallets (online wallets) and cold wallets (paper or hardware wallets).
Hot wallets
Online wallets are also referred to as “hot” wallets. Hot wallets are wallets that run on Internet-connected devices such as computers, phones, or tablets. This can lead to a security vulnerability because these wallets generate the private keys for your coins on these Internet-connected devices. While a hot wallet can be very handy when you need to quickly access and transact with your assets, storing your private key on an Internet-connected device is more vulnerable to a hack.This may sound far-fetched, but people who are not using enough security when using these hot wallets can have their funds stolen. This is not an infrequent occurrence and it can happen in a number of ways. As an example, boasting on a public forum like Reddit about how much Bitcoin you hold while you are using little to no security and storing it in a hot wallet would not be wise. That said, these wallets can be made to be secure so long as precautions are taken. Strong passwords, two-factor authentication, and safe internet browsing should be considered minimum requirements.
These wallets are best used for small amounts of cryptocurrency or cryptocurrency that you actively trade on an exchange. You could compare a hot wallet to a checking account. Conventional financial wisdom would say to only keep money in a checking account, while the bulk of your money is in savings accounts or other investment accounts. The same could be said for hot wallets. Hot wallets include mobile, desktop, web and exchange account custody wallets.
As mentioned earlier, exchange wallets are custody accounts provided by the exchange. The user of this type of wallet is not the owner of the private key for the cryptocurrency held in this wallet. If an event were to occur where the exchange is hacked or your account is compromised, your money would be lost. The phrase” not your key, not your coin ” is a heavily repeated concept in cryptocurrency forums and communities.
Cold wallets
The simplest description of a cold wallet is a wallet that is not connected to the Internet and is therefore at a much lower 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, allowing the user to view their portfolio without compromising their private key.
Perhaps the most secure way to store cryptocurrency offline is in a paper wallet. A paper wallet is a wallet that you can generate from certain websites. It then generates both public and private keys that you print out on a sheet of paper. The ability to access cryptocurrency in these addresses is only possible if you have this sheet of paper with the private key. Many people laminate these paper wallets and store them in lockers at their bank or even in a safe at home. These wallets are meant for high security and long-term investment, as you can’t sell or trade bitcoin stored this way quickly.
A more commonly used type of cold wallet is a hardware wallet. A hardware wallet is usually a USB drive device that securely stores a user’s private keys offline. This has serious advantages over hot wallets as it is not affected by viruses that might be on the computer. With hardware wallets, private keys never come into contact with your network-connected computer or potentially vulnerable software. These devices are also usually open source, allowing the community to determine their security through code audits, rather than a company declaring that it is safe to use.
Cold wallets are the most secure way to store your bitcoin or other cryptocurrencies. For the most part, however, they require a little more knowledge to set up.
A good way to set up your wallets is to have three things: an exchange account for buying and selling, a hot wallet for storing small to medium crypto amounts that you want to trade or sell, and a cold hardware wallet for storing larger holdings for long-term maturities.
Alternative Ways To Buy Bitcoin
While exchanges like Coinbase or Binance remain some of the most popular ways to buy bitcoin, this is not the only method. Below are some additional processes that Bitcoin owners use.
Bitcoin ATMs
Bitcoin ATMs act like personal Bitcoin exchanges. Individuals can insert cash into the ATM to purchase Bitcoin, which is then transferred to a secure digital wallet. Bitcoin ATMs have become increasingly popular in recent years; Coin ATM Radar can help track down the nearest machines.
P2P exchanges
Unlike decentralized exchanges that bring buyers and sellers together anonymously and facilitate all aspects of the transaction, there are some peer-to-peer (P2P) exchanges that provide a more direct connection between users. Local bitcoins are an example of such an exchange. After creating an account, users can make requests to buy or sell bitcoin, including information on payment methods and price. Users then browse offers to buy and sell and select trading partners with whom they wish to transact.
Local Bitcoins facilitate some aspects of trading. While P2P exchanges do not offer the same anonymity as decentralized exchanges, they allow users to shop for the best deal. Many of these exchanges also offer rating systems so users can evaluate potential trading partners before making transactions.
