Investing in Bitcoin can seem complex, but actually trading it only requires having an account with a service or exchange and utilizing safe storage practices.
To get started, you will need an account with a cryptocurrency exchange, personal identification documents if the exchange uses Know Your Client (KYC) verification, a secure internet connection, a way to make payments, and a personal wallet separate from the exchange account.
Acceptable methods of payment for purchasing Bitcoin include bank transfers, debit cards, and credit cards. Additionally, you can also purchase Bitcoin at specialized ATMs and through peer-to-peer exchanges.
Before You Buy Bitcoin
Privacy and security are crucial concerns. Investors who possess the private key to a public address on the Bitcoin blockchain have the ability to authorize transactions. It is important to keep private keys confidential, and it is necessary for investors to understand that the balance of a public address is publicly visible.
Individuals have the ability to generate multiple public addresses and distribute their Bitcoin among them. A wise strategy is to keep substantial investments at public addresses that are not linked to those used for transactions.
The transaction history on the blockchain is transparent, but the user's personal information remains confidential. On the Bitcoin blockchain, only the user's public key is associated with a transaction, maintaining confidentiality but not anonymity.
Bitcoin transactions are more traceable than cash transactions because they are publicly visible and it is challenging to trace the parties involved on the cryptocurrency's blockchain.
However, researchers and the FBI have stated that they are able to track transactions made on the Bitcoin blockchain to users' other online accounts, including their digital wallets.
When an investor creates an account on Coinbase, they are required to provide their identification and if they send it to another wallet, it can still be linked back to the Coinbase purchase that is associated with the account holder's identity.
How to Buy Bitcoin
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- Step 1: Select a cryptocurrency trading platform or location. Exchanges are a popular choice because they provide a wide range of features and a larger selection of cryptocurrencies to trade, allowing investors to purchase, sell, and hold digital currencies, as well as transfer their crypto to an online wallet for safe storage.
There are various types of cryptocurrency exchanges available. Some of these platforms allow users to remain anonymous and are decentralized, meaning that they do not require users to provide personal information. These types of exchanges can be beneficial for certain groups of people, such as refugees or those living in countries with limited infrastructure for government credit or banking, as they can help them participate in the mainstream economy.
In contrast, popular exchanges in the United States are centralized and comply with laws that mandate users to submit identification documents. Examples of these exchanges include Coinbase, Kraken, Gemini, and Binance, which offer Bitcoin and an increasing number of alternative cryptocurrencies.
- Step 2: Link your exchange account to a payment method. Depending on the exchange, you may need to provide personal identification, such as a driver's license or Social Security card, as well as details about your employment and source of funds. The process is similar to setting up a traditional brokerage account.
Most exchanges allow you to connect your bank account directly or link a debit or credit card. While it is possible to use a credit card to buy cryptocurrency, keep in mind that the volatility of cryptocurrency prices may increase the overall cost when combined with credit card interest. Additionally, while Bitcoin is legal in the United States, some banks may question or even block transactions to crypto-related sites or exchanges.
Fees for deposits using a bank account, debit card, or credit card can vary among exchanges, and they also charge fees for each transaction.
- Step 3: Submit a Trade
Cryptocurrency exchanges now offer similar features as traditional stock brokerage platforms. They provide various types of orders and investment options. Most exchanges offer both market and limit orders, and some also offer stop-loss orders.
For example, Kraken offers the most order types such as market, limit, stop-loss, stop-limit, take-profit, and take-profit limit orders.
Additionally, exchanges also offer options for recurring investments, enabling users to invest a fixed amount on a regular schedule. For example, Coinbase allows users to set up recurring purchases on a daily, weekly, or monthly basis.
- Step 4: Secure Storage
Bitcoin and other cryptocurrency wallets provide a more secure way to store digital assets. By keeping crypto in a personal wallet rather than on an exchange, investors have control over the private key to their funds. While some exchanges do offer wallets, it is generally not recommended for storing large or long-term cryptocurrency holdings.
Cold Wallet vs Hot Wallet
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- Cold Wallet
A cold wallet is not connected to the internet and has a lower risk of being hacked. These offline wallets or hardware wallets store a user's private key on a device that is not connected to the internet and include software that allows investors to view their portfolio without compromising their private key.
A paper wallet is a type of wallet that is generated on certain websites and creates both a public and private key that is printed on paper. Many people laminate these paper wallets and store them in safe deposit boxes at banks or in a safe at home.
A hardware wallet is a device, often in the form of a USB drive, that securely stores a user's private keys offline. These wallets offer advantages over online wallets or "hot wallets" as they are not affected by viruses or other malware that can infect a computer. With a hardware wallet, the private keys never come into contact with a computer connected to the internet or potentially vulnerable software.
Cold wallets are considered the most secure way to store bitcoin and other cryptocurrencies, but they require a higher level of technical knowledge to set up.
- Hot Wallet
Online wallets, also known as hot wallets, are digital wallets that are stored on internet-connected devices such as computers, phones, or tablets. These wallets generate the private keys for your coins on these devices.
However, the user of this type of wallet is not the holder of the private key for the cryptocurrency that is stored in the wallet. Exchange wallets, on the other hand, are custodial accounts provided by the exchange. If the exchange is hacked, the investor's funds are at risk. The phrase "not your key, not your coin" is commonly repeated within cryptocurrency communities, highlighting the importance of having control over one's own private keys.
It is important for hot wallet holders to implement strong security measures to prevent theft, such as using strong passwords, enabling two-factor authentication, and practicing safe internet browsing. These are considered the minimum requirements for securing your digital assets.
Online wallets, or hot wallets, are suitable for storing small amounts of cryptocurrency or digital assets that are frequently traded on an exchange, much like a checking account.
Read More: Top Cryptocurrencies To Buy Now in 2023 for Long-Term Growth
How to Buy Bitcoin With PayPal
Bitcoin can be purchased using PayPal by connecting a debit card or bank account to your PayPal account, or by using the balance in your PayPal account to purchase cryptocurrencies from a third-party provider.
Four cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash, can be directly purchased through PayPal. Residents of all states, except Hawaii, can use their existing PayPal accounts or set up new ones to make purchases.
Additionally, you can use your cryptocurrencies to purchase products and services through PayPal's 'Checkout With Crypto' feature.
When purchasing bitcoin directly from PayPal, the company earns money from the spread between the market price of bitcoin and its exchange rate with USD. Additionally, PayPal charges a transaction fee for each purchase, which varies depending on the dollar amount.
A downside of buying cryptocurrencies through PayPal is that the purchased crypto cannot be transferred to an external wallet or personal wallet. Also, only a few exchanges and online traders allow the use of PayPal to purchase bitcoin, such as eToro.
How to Buy Bitcoin With a Credit Card
Purchasing bitcoin using a credit card is similar to using a debit card or ACH transfer. However, not all exchanges permit buying bitcoin with credit cards because of the additional processing fees and potential for fraud.
When using a credit card to buy bitcoin, the transaction may include additional charges, such as processing fees passed on by the exchange.
Additionally, credit card issuers consider bitcoin purchases as cash advances and charge high fees and interest rates. For example, American Express charges the current cash advance fee plus an annual percentage rate of 25% and limits users to $1,000 worth of bitcoin purchases per month.
However, there are also credit cards available that offer rewards in the form of bitcoin, such as the BlockFi Bitcoin Rewards Credit Card, which function similarly to traditional rewards credit cards.
Alternative Ways to Buy Bitcoin
- Bitcoin ATMs
Bitcoin ATMs are similar to in-person bitcoin exchanges. They allow people to put cash into the machine and use it to buy bitcoin, which is then sent to their online wallets. These machines have become more prevalent in recent years and can be found at retailers like Walmart.
When buying bitcoin from an ATM, there are two fees associated with the transaction: a purchase fee and a conversion fee for converting the fiat currency to bitcoin. These fees are generally higher than other options available. On average, the purchase fee for buying bitcoin from an ATM is around 8.4% of the total purchase amount, and the fee for selling bitcoin at an ATM is around 5.4%.
- P2P Exchanges
Peer-to-peer (P2P) exchanges are platforms that connect users directly with one another. An example of such an exchange is LocalBitcoins. By creating an account, users can create listings to buy or sell bitcoin, detailing their preferred payment methods and prices.
While P2P exchanges do not offer the same level of anonymity as decentralized exchanges, they provide users with the ability to compare prices and find the best deal. Additionally, many P2P exchanges have rating systems in place, which allows users to evaluate potential trade partners before conducting a transaction.
Mainstream Brokerages
Robinhood Markets, Inc. (HOOD) is an exchange that offers cryptocurrency trading. It does not charge any commission for buying or trading cryptocurrencies and instead generates revenue from payment for order flow, which is when it directs its trading volume to other trading platforms or brokerages.
As of 2022, Robinhood supports trading of seven cryptocurrencies: Bitcoin, Bitcoin Cash, Ethereum, Bitcoin SV, Dogecoin, and Ethereum Classic. However, on other exchanges such as Coinbase, you can trade more than 100 cryptocurrencies. Additionally, traditional investment firms such as Fidelity Investments have announced plans to include bitcoin investment options in 401(k) accounts.
How to Sale Bitcoin
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Bitcoin can be sold at the same places where it was originally purchased, including cryptocurrency exchanges and peer-to-peer platforms. The process for selling bitcoin on these platforms is usually similar to the process for buying it.
Exchanges typically charge a percentage of the sale amount as a fee. For example, Coinbase charges 2.49% of the total transaction amount as a fee. Additionally, exchanges often have daily and monthly withdrawal limits, so the cash from a large sale may not be immediately accessible to the trader.
However, there are no limits on the amount of bitcoin that can be sold.
What are The Steps Involved in buying Bitcoin?
The steps for buying Bitcoin include: selecting a platform or exchange to buy from, choosing a payment method, and making sure to securely store your purchased Bitcoin. It's worth noting that there may be additional fees for using an online wallet.
What are The Most Common Places to Purchase Bitcoin?
The most common places to buy Bitcoin include cryptocurrency exchanges, brokerages, and payment services like PayPal. Additionally, some investors choose to indirectly own Bitcoin by investing in companies that hold the cryptocurrency, such as Tesla or MicroStrategy.
What are The Most Popular Places to Buy Bitcoin?
The most popular venues for buying Bitcoin include cryptocurrency exchanges, brokerages, and payment services like PayPal. Some investors also choose to indirectly own Bitcoin by investing in companies that hold the cryptocurrency, such as Tesla or MicroStrategy.
What Should I Expect to Pay When Buying Bitcoin?
When purchasing Bitcoin, you can expect to pay a fee per trade and the cost to convert your fiat currency to Bitcoin. The fee per trade is based on the amount of the trade, with larger trades carrying higher fees.
Is My Bitcoin Purchase Covered by SIPC?
No, Bitcoin purchases are not protected by SIPC. However, some exchanges, like Coinbase, may offer FDIC insurance for fiat balances in individual accounts up to $250,000 per account.
The Bottom Line
Purchasing Bitcoin involves four steps: choosing a platform or exchange, selecting a payment method, placing an order, and ensuring secure storage of the purchased cryptocurrency. It is important to research and carefully consider the pros and cons of each service. Bitcoin can be purchased from various sources such as Bitcoin ATMs, payment services like PayPal, and mainstream brokerages like Robinhood.
Read More: Crypto Staking Basics
Source: https://www.investopedia.com
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