2017 has been a good year for Bitcoin. At the start of the year, the price of a Bitcoin was just under $1,000. By June, the price had climbed to more than $2,500, according to the Motley Fool. The value of Bitcoin means that plenty of investors are interested in getting their hands on some (so to speak). Here’s how to buy Bitcoins and what you need to know before you invest.
Get A Bitcoin Wallet
The first step when you buy Bitcoin is choosing a wallet. A Bitcoin wallet isn’t a physical object, like a wallet you’d keep your cash and credit cards in. It’s got more in common with a traditional bank account, as it’s mainly a place to stash your Bitcoin until you want to spend it.
A Bitcoin wallet stores information about the Bitcoins you’ve purchased, according to Investopedia. For example, each Bitcoin has its own address. When you buy it, you get the private key that allows you access to the address. If you sell Bitcoin or use it to buy something else, you transfer the key to another person or business.
Bitcoin wallets come in four forms. The big difference between the forms is in where you can use it and how you can access it.
- Desktop Wallet. Desktop wallets are the least flexible of the bunch. You install the wallet on your computer (different wallets work with Mac, Windows, Linux or on all three OSs). With a desktop wallet, you can create your own Bitcoin address and can securely store private keys. Although you have full control over your Bitcoin when you use a desktop wallet, you’re limited to accessing your Bitcoin. You need to use your computer to get to the wallet.
- Mobile Wallet. Mobile wallets have the features of a desktop wallet with the key difference being that they are installed on your phone. That means you can take Bitcoin with you “on the go,” using your wallet to make purchases at places that accept Bitcoin when you’re out and about. Some desktop wallets also have mobile versions, but many Bitcoin wallets are mobile-only and don’t offer a desktop version.
- Web Wallet. A web wallet is browser-based, meaning you don’t have to download an app or software to your computer. You can access a web wallet from any device. The big drawback of a web wallet is that many of them store your private keys and other personal information online, making it easier for hackers to get your private details. Often, desktop or wallets will also have a web version as well.
- Hardware Wallet. A hardware wallet is an actual object (usually a USB drive) that contains the addresses and private keys of the Bitcoin you purchase. Hardware wallets are often the most secure option since your Bitcoin isn’t permanently online or connected to a device that could be compromised. In fact, some types of hardware wallet allow you to securely access your Bitcoin, even if the device you are running the hardware on is compromised.
Since your Bitcoin wallet is going to hold any coins you buy, you want to make sure you do whatever you can to secure it and keep it safe. One way to protect your wallet is to encrypt it and to require multiple signatures each time you want to make a transaction.
You don’t want to do that with Bitcoin, either. Keep smaller amounts in your wallet and transfer larger amounts of the currency to offline, cold storage.
Choose an Exchange
When you travel to a different country, you first visit a currency exchange to trade your country’s currency for the currency of the place you’re visiting. When learning how to buy bitcoins, you first need to choose the exchange you want to use.
Just as there were several options for Bitcoin wallet, there are also several Bitcoin exchanges out there. A Bitcoin exchange is a marketplace where you can purchase Bitcoins using your current currency (be it US dollars, UK pounds, the Euro or what have you).
There are numerous exchanges available, but some only work in certain countries. The biggest one might be Coinbase, which is available in 32 countries and has around 9 million users.
Keep in mind that some exchanges also offer a Bitcoin wallet, so you don’t necessarily have to separate your purchase of Bitcoin from its storage.
Make A Purchase On The Exchange
Different exchanges have different rules when it comes to making payments. Some let you connect to a bank and transfer money from your checking or savings account. Others let you use a credit card or debit card to make a purchase. Some exchanges let you buy Bitcoins using other forms of cryptocurrency.
It’s also worth noting that some exchanges limit the amount you can buy each week, based on the payment method you choose. For example, you can only buy $150 in Bitcoin weekly using a credit or debit card on Coinbase, according to CNBC.
As soon as your payment method is connected to the exchange, you can start buying Bitcoin. To do that, type in the amount you want to spend (in your currency) and where you want the Bitcoin to go, such as a wallet.
Keep in mind that you might have to pay a fee for each purchase, which would go directly to the exchange and would be added onto your final purchase cost.
Exchanges & Regulations
The importance of proceeding with caution when buying Bitcoins on an exchange or storing them in a wallet can’t be stressed enough. The cryptocurrency world doesn’t have the same regulations and consumer protections in the place that you’d find in the fiat currency world.
For example, if someone steals your credit card in the US and rings up $5,000 in charges on it, you’d be responsible for $50 of those charges, at the most. Many credit card companies waive all your responsibility in the case of theft or fraud.
Now let’s say someone breaks into your Bitcoin wallet and transfers out $5,000. You have no way to get it back unless that thief has a change of heart and decides to return the money to you. Bitcoin transactions are irreversible, meaning that once they are done, they’re done.
Remember that there’s no government or central bank overseeing Bitcoin. That’s part of its appeal for many people, but it also makes trading and dealing with it a bit more risky for the end user.
There have been cases of serious Bitcoin theft. The biggest one so far happened in 2014, when hackers swiped the equivalent of US$350 million from Mt. Gox, which was the largest Bitcoin exchange at the time. Mt. Gox went bankrupt soon after.
More recently, hackers stole the equivalent of $70 million from another exchange. Fortune reported that the risk of Bitcoin theft is very real, as about one-third of all platforms have been hacked at some time or another.
If you’d rather skip the hassle and stress of buying Bitcoin over an exchange, it is possible to do a face-to-face, in-person trade. That might seem weird since you wouldn’t be getting a physical coin in return, but people do it frequently.
How to buy Bitcoins over the counter involves finding a seller, using a site like LocalBitCoins or by posting an ad on a site like Craigslist. You then arrange with the seller regarding how you’ll make the trade.
Some people do meet in person and hand over cash to get an agreed upon amount of Bitcoin. Others complete the transaction entirely online, using their credit card or a payment method like Paypal.
Although buying from a real person can feel safer, it still has some risks. If you arrange to meet in person, the seller could steal your cash and run off with it. If you make the trade online, the seller might never follow through.
It’s also possible for a seller to miscalculate the value of Bitcoins and send you too few or too many. If the mistake is found out, ideally, the seller will send you more to make up the difference, or you’ll hand over extra cash.
Although a Bitcoin ATM can be a convenient way to buy the currency, especially if you’re not particularly tech-savvy, it has its drawbacks. One is the high cost. While an exchange might charge you a few dollars or a fee around 2 percent, the Philadelphia Inquirer reported that Bitcoin ATMs could charge fees of up to 12 percent.
Bitcoin Investment Trusts
If you’re looking for an out-of-the-box way to save for retirement, one option is to invest in the Bitcoin Investment Trust. The trust is a sort of ETF (exchange-traded fund), but for Bitcoin. When you invest it in, you aren’t exactly buying Bitcoin, per se.
Instead, you’re buying shares of the trust, just like you would buy shares of Amazon or Apple. You can purchase shares of the trust from any brokerage and don’t have to go through the hassle of setting up a Bitcoin wallet, finding an exchange or tracking down an ATM.
There is a drawback, though. The Bitcoin Investment Trust is currently overvalued in comparison to the actual price of Bitcoin.
Although the cost of a share fluctuates with the market, throughout the summer of 2017, shares of the Bitcoin Investment Trust were selling for about twice the amount of Bitcoin itself, according to CNBC. Buying an overvalued stock or ETF puts you at greater risk for losing money.
Bringing It Together
Now that you know where to buy Bitcoin, the final step is to choose the method that works for you. An exchange lets you buy and sell the currency without too much hassle, although you’re at the mercy of it when it comes to security and avoiding theft. Buying from another person might seem like a safer route, but you should always do your research first and bring along a friend if you’re going for a face-to-face meeting.
Finally, there’s the issue of the Bitcoin Investment Trust. While buying Bitcoin can be a good way to boost your net worth, it might be a better idea to let the trust settle down before you decide to invest in it.