Investing in Bitcoin can look intricate, but it's much simpler if you break down the process into steps. Buying bitcoin is becoming 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, your wallet or exchange account can be compromised. For this reason, proper storage and security measures are essential.
- Trading or investing in Bitcoin only requires an account on an exchange, although there are other safe storage practices that are advised.
Before You Start...
Here are some things that every aspiring bitcoin investor needs. They are 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. You should also have a 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 as of early 2020, Bitcoin ATMs increasingly required government-issued IDs.
Privacy and security issues are essential for Bitcoin investors. Although there's no Bitcoin in physical form, it is usually a bad idea to brag about significant holdings. Anyone who obtains the private key to a public address on the Bitcoin blockchain can authorize transactions. While it is evident that the private key should be kept secret, criminals may try to steal private keys if they learn extensive 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 very confidential but unfortunately not anonymous. In a way, Bitcoin transactions are more transparent and traceable than cash, but Bitcoin can be used anonymously.
This is a crucial distinction. Some international researchers and the FBI have claimed that they can track transactions using the Bitcoin blockchain, tracing them 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 the same person sends it to another wallet, it can still be traced back to the Coinbase purchase 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 the cryptocurrency. It's generally best practice to use an exchange that allows users to withdraw their crypto into their wallet to keep it more secure. Many brokerage and exchange platforms do not allow this. For those who want to trade bitcoin or other cryptocurrencies consistently, this feature may not matter.
Many types of cryptocurrency exchanges exist. Since the ethos of Bitcoin is decentralization and has individual sovereignty, there are some exchanges that allow users to remain anonymous and don't require users to enter personal information. The exchanges that allow this operate autonomously and are typically decentralized, meaning there is no central point of control. To put it simply, there is no person, CEO, or group that a regulator can go after if they have concerns about illegal activity.
While these systems can be used for nefarious activities, they also provide services to the unbanked world. Such individuals may include refugees or individuals living in countries with 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 it being used for illegal works, 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 a Know Your Customer (KYC).
In the United States, these exchanges include Gemini, Kraken, Binance U. S., and Coinbase, to name a few. Each of them has grown significantly in the number of features they offer. Kraken, Gemini, and Coinbase 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.
Remember to use safe internet practices when you are creating a cryptocurrency exchange account. This involves using two-factor authentication and using a unique and long password, including a variety of lowercase letters, numbers, special characters, and uppercase letters.
Step Two: Link your exchange to a payment option.
After you've selected an exchange, you now need to collect your documents. Depending on the exchange, this may include pictures of a driver's license, a Social Security number, and information about your source of funds and employer. The information you may need may depend on the region you live in and the laws therein. The process is mostly similar to setting up a normal brokerage account.
Once the exchange has ensured your identity and legitimacy, you can now connect a payment option. With the exchanges above, you can connect a debit or credit card or even your bank account directly. Even though you can use your credit card to purchase cryptocurrency, you should generally avoid it due to cryptocurrencies' volatility.
While Bitcoin is legal in the U.S., some banks are not too friendly with the idea of using it 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 credit and debit cards. It is vital 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 exchange and connected a payment option, you can now buy Bitcoin and other cryptocurrencies. In recent years, cryptocurrency and its exchanges have slowly become mainstream. Exchanges have improved significantly in terms of their liquidity and 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 stockbrokers. 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 of the crypto exchanges in the market 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 various order types, exchanges also offer options to set up recurring investments that allow customers to include cost averaging in their choice investments. With Coinbase, for example, users can set recurring purchases for each day, week, or month. Getting an account on an exchange is all you need to do to buy Bitcoin or other cryptocurrencies. Still, 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 wallet gives only you control over the private key to your money. In addition, you can store your money away from an exchange and avoid the risk of your exchange being hacked and losing your money.
Some wallets have more and better features than others. There are those that can store numerous types of altcoins, while others are bitcoin only. Some wallets also offer the ability to exchange one token for another.
As you are choosing a bitcoin wallet, you have several options. The first thing you need to understand about crypto wallets is hot wallets (online wallets) and cold wallets (paper or hardware wallets).
Online wallets are also referred to as "hot" wallets. These are wallets that run on Internet-connected devices such as computers, phones, or tablets. However, this type 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 convenient 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 do not use enough security measures when using hot wallets can have their funds stolen. This happens frequently, and it can happen in several ways.
For example, boasting on a public forum like Reddit about how much Bitcoin you hold while using little to no security, as well as storing it in a hot wallet, would not be wise. Nonetheless, these wallets can be made more secure if precautions are taken. Some of these include strong passwords, safe internet browsing, and two-factor authentication and are considered the minimum requirements.
Hot 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 and keep the bulk of your money is in other investment accounts or savings accounts. The same applies to 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. In the event where the exchange is hacked or your account is compromised, you would lose your money. There is a heavily repeated concept in cryptocurrency forums and communities that goes, " not your key, not your coin."
The most concise 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. Cold wallets are also called offline wallets or hardware wallets.
They store a user's private key on something that is not connected to the Internet. This can come with software that works in parallel, allowing them to view their portfolio without compromising their private key.
This type can be said to be the most secure way to store cryptocurrency offline is in a paper wallet.
What is a paper wallet? It is a wallet that you can generate from specific websites. It then generates both public and private keys that you print out on a sheet of paper. Accessing cryptocurrency in these addresses is only possible if you have this paper sheet with the private key. Several people laminate these paper wallets and store them in lockers at their bank or even safe at home. You can use these wallets for high security and long-term investment because you can't sell or trade bitcoin stored this way quickly.
One of the most famously used types of cold wallets 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 because 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 as opposed to a company saying that it is safe to use.
If you want the safest way to store your bitcoin or other cryptocurrencies, go for cold wallets. Nonetheless, they require a little more knowledge to set up.
An excellent 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.
- A cold hardware wallet for storing more significant holdings for long-term maturities.
Alternative Ways To Buy Bitcoin
Exchanges like Binance or Coinbase or Binance remain some of the most popular ways to buy bitcoin, but they are not the only method. Below are some other processes that Bitcoin owners use.
Bitcoin ATMs act like personal Bitcoin exchanges. Individuals can insert cash into the ATM to purchase Bitcoin. This cash is then transferred to a secure digital wallet. You'll be happy to know that Bitcoin ATMs have become increasingly popular in recent years; Coin ATM Radar can help track down the nearest machines.
Unlike decentralized exchanges that anonymously bring buyers and sellers and facilitate all aspects of the transaction, some peer-to-peer (P2P) exchanges provide a more direct connection between users.
An example of such an exchange is local bitcoins. After creating an account, users can request to buy or sell bitcoin, including 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. Although P2P exchanges don't offer the same anonymity as decentralized exchanges, they do 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.