Cryptocurrencies are going through a challenging phase right now. At the time of writing, Bitcoin, the poster boy of crypto coins, is trading at less than half the value it had achieved at its peak in November last year.
Many, however, look at these falls in valuation as an opportunity to get more involved. Like President Nayib Bukele of El Salvador, who last year made sure that his country became the first in the world to use Bitcoin as a legal tender, and is now trying to recoup some lost money by taking advantage of the lower prices.
El Salvador just bought the dip! 🇸🇻— Nayib Bukele (@nayibbukele) May 9, 2022
500 coins at an average USD price of ~$30,744 🥳#Bitcoin
Not everybody, though, has the Presidential powers to order Bitcoin buys. Most of us have to do the work ourselves, and the entire process of buying Bitcoin can be quite complex to navigate. If you are a beginner in this space, here's the complete guide to buying Bitcoin.
What is Bitcoin?
Bitcoin is a digital currency created in 2009 to facilitate online transactions between parties without the need for a financial institution such as a bank. To keep the trust in the currency, all transactions are logged in a public ledger, also known as a blockchain, and are visible to anyone.
Since a centralized authority does not issue the currency, transactions on the blockchain need to be confirmed by a third party. This is done by utilizing specialized computers to solve complex mathematical problems, hence the name cryptocurrency.
Bitcoin is just one of the globally popular cryptocurrencies. Over the years, the meteoric rise in the value of Bitcoin in U.S. dollars has made this cryptocurrency a popular investment asset.
How can beginners invest in Bitcoin?
As the popularity of Bitcoin has increased, there is an increasingly large number of ways you can invest in Bitcoin. The most popular is to use a cryptocurrency exchange or a broker. An exchange is a platform where buyers and sellers can trade cryptocurrencies.
A cryptocurrency broker works as a stockbroker and is a firm or an individual that acts as an intermediary to buy and sell cryptocurrencies. Brokers are generally used by those who trade or invest large amounts of money, such as asset managers. They are also used by speculative investors and those who trade on derivatives. This is when the investor doesn't actually own the crypto coins but speculates on the price movement, 'betting' that it will go up or down.
Most individual retail investors begin with an exchange, where they actually own the coins.
Like any other investments, Bitcoin investments are also subject to market risk, and beginners should exercise caution when making them. Cryptocurrency transactions are currently not regulated by any financial authorities and do not carry the same protection against fraud and theft as that offered on fiat currency held in banks.
Bitcoin and other cryptocurrency investments are also not protected by insurance from the Securities Investor Protection Corporation. However, at some exchanges, fiat balances in individual accounts may be FDIC-insured up to a certain amount.
Before making any transactions, you should also check out the legal, regulatory, and tax implications of purchasing and selling bitcoin where you live.
How much does a Bitcoin cost? What is the minimum amount to invest in Bitcoin?
Bitcoin prices are somewhat volatile and keep shifting drastically. At the time of writing this, Bitcoin was priced at just under $30,000, but it has seen a high of $47,000 and a low of $28,000 this year alone.
However, you do not have to make massive investments while buying Bitcoin. As a digital currency, a Bitcoin is further divisible into smaller units. It is possible to simply buy a share of a Bitcoin without emptying your coffers in just one go.
You can invest as little as $10 and own a small part of a coin. However, because most platforms charge fixed fees for each transaction, it is usually better to invest in larger amounts at once rather than engage in multiple small transactions and pay a fee each time.
How to buy Bitcoin with PayPal
Most readers are aware of the services that PayPal offers to make global transactions over the internet. The payments company is now doing the same for cryptocurrencies as well. If you have a PayPal account, you can buy Bitcoin and a handful few other cryptocurrencies directly through the website. It is as simple as that.
In most states in the U.S. (but not all), you can use existing PayPal accounts to buy Bitcoin and then spend them with the 'Checkout with Crypto' option. However, to take advantage of this option, PayPal will require further details such as a name, physical address, date of birth, and tax identification number.
While this is very easy, buying Bitcoin with PayPal has several restrictions. You can use your Bitcoin only at sites that accept payments with PayPal and nowhere else. PayPal also charges fees for every transaction involving Bitcoin or other cryptocurrencies, including a flat fee and a percentage of the total transaction amount. This is like deciding to pay for your groceries in cash and then paying the grocer an additional fee to accept the cash.
You can also use the balance of your PayPal account to purchase cryptocurrencies from a third-party provider. However, only a few third-party sites currently allow users to buy Bitcoin using PayPal.
Although Bitcoin purchased through PayPal initially could not be transferred out of PayPal into external crypto or personal wallet, this is set to change soon. A digital wallet is where owners hold their digital currencies and is secured with a private key known only to the holder. This is a password that prevents your wallet from unauthorized access and is used when making payments.
How to sign up for a Crypto Exchange
For most people, the first step in buying bitcoin involves choosing a crypto exchange. There are many crypto exchange options available today. While most offer similar options, beginners must be careful about what they are signing up for. Some crypto exchanges promise little or no transaction fees. However, most such platforms limit the types of cryptocurrencies you can buy, and many do not offer wallet services. This means that users need to use a separate wallet-providing service to store their Bitcoin.
Globally known platforms like Coinbase, Kraken, or Bitfinex are ideal starting points for beginners since they offer a good mix of straightforward transaction fees and security measures. Note that these exchanges are not decentralized and follow laws that require users to submit identifying documentation.
Before you buy Bitcoin, you must set up an account with the crypto exchange you choose. To set up an account, the exchange will need:
- your personal information such as name, date of birth, address, etc., Depending on where you live and the laws in place, you may also need to provide personal documents, such as copies of your driver's license or Social Security card, and information about your employer and/or source of funds,
- an email address with a strong password. Most exchanges also use a 2 step verification for added security.
After your identity has been verified and your account approved, you need to connect a payment option to fund your account. Most exchanges allow you to connect your bank account, debit, or credit card. Note that the list of fiat currencies accepted varies from one crypto exchange to another, and some banks do not permit or restrict activity on crypto exchanges.
Peer-to-peer exchanges where buyers from all over the globe are matched also offer an alternative method to buy Bitcoin. These exchanges are attractive since they offer no-to-low transaction fees and tend to work in regions with strict laws against crypto trading. However, the platforms also come with a higher risk of scams by fake users, generally requiring you to store your Bitcoin on the platform's wallet and slow trades that a party can back out of.
How to place an order for Bitcoin on a Crypto Exchange
Depending on the platform you sign up for, you may have to tap on the Bitcoin ticker or search for Bitcoin from the available crypto coins list and then buy the coin.
If you have traded stock through an online brokerage before, you will see that buying Bitcoin at an exchange is not very different. Depending on the funds in your account, you need to place a 'Buy Order'. This is an instruction to buy X units of Bitcoin at Y price.
Crypto exchanges offer several different order types, similar to stock brokerages. Most offer both market orders, limit orders, and stop-loss orders. Some also offer stop-limit, take-profit, and take-profit limit orders and recurring orders.
Once your buy order is confirmed, the Bitcoin is issued to you. Since the transaction also needs to be recorded on Bitcoin's blockchain, there might be a notable delay between your buying transaction and the Bitcoin showing up in your wallet. Depending on how busy the blockchain is, your transactions may take between 10 minutes to two hours to get confirmed.
Where to store your Bitcoin
Most of the exchanges offer a hosted wallet to store Bitcoin. This is where the exchange holds the Bitcoin you buy, and you do not have to worry about losing the private key to your wallet. This is more or less like a bank account, where your money is held safely without you fretting about its security. However, hosted wallets come with limited features and security — they can be hacked and the Bitcoin stolen.
Enthusiasts who want to explore Bitcoin applications further use personal wallets where only the owner has control of the private key to execute transactions with it. This avoids the risk of the exchange getting hacked. However, if the private key is lost or forgotten, there is no way to claim ownership or conduct transactions of the Bitcoin you bought.
Setting up a personal or self-custody wallet can also be straightforward. Thanks to smartphones, all you need to do is
- Download the self-custody wallet app,
- Create an account. Here you may not even need an email address,
- Write down your private key, a 12-word phrase,
- Transfer the crypto you buy to the self-custody wallet.
However, these online or "hot" wallets are always connected to the internet and risk being targeted in online attacks. To safeguard themselves from such attacks, some Bitcoin holders also turn to "cold", or hardware wallets. These are physical devices that store the private keys to your Bitcoin in an offline location. So, even if hackers get into your computer, your Bitcoin remains out of their reach.
Cold wallets can be the size of a thumb drive and cost around $100. To use them, you will need to
- Buy the hardware wallet from a reputed provider,
- Install their proprietary software in the drive and create your wallet,
- Transfer your crypto from your existing wallet to the cold wallet.
How to Buy Bitcoin With a Credit Card
While tapping into your credit limit might seem like an easy option, it is important to remember that Bitcoin is a volatile and risky asset, and you might end up paying high-interest rates on an investment that has lost value.
Due to the risk of fraud, many exchanges do not allow purchases with credit cards. When they do, there are usually added processing fees. On top of this, credit card companies also recognize when you are using the card on these platforms. Credit card issuers treat bitcoin purchases as cash advances and charge high fees and high-interest rates on these transactions. So, it can be expensive to buy Bitcoin with a credit card.
How to Buy Bitcoin using an ATM
Bitcoin ATMs act like an in-person bitcoin exchange and offer the option of paying cash for your Bitcoin purchases. These look and function much like your bank's ATMs, and you might also find them at your nearest supermarket or Walmart. These ATMs charge a little extra for the convenience they bring to you.
Buyers insert cash into the ATM and purchase bitcoin that is then transferred to your online wallet.
However, ATMs can be an expensive option. There are two charges associated with ATM bitcoin purchases: a purchase fee and a conversion fee for converting a fiat currency to bitcoin. Both fees are relatively steep compared to those of other options. For example, the average Bitcoin ATM fee is around 11 percent or 12 percent, with some ATMs charging up to 25 percent. Most Bitcoin ATMs in the U.S. will also require a government-issued ID.
What is the safest way to buy Bitcoin?
To ensure that your investments are safe, always ensure that you carry out your transactions on a crypto exchange that is trusted by many other users and not just because it offers free transactions or promises high returns. Crypto coin investments that offer immediate returns are a tell-tale sign of a scam, and there are many crypto scams out there.
Even after you buy Bitcoin, you must store it in a safe digital wallet with perfect security measures. Since cryptocurrency transactions are recorded in a public ledger, it is effortless for hackers to find out how much Bitcoin you hold. If your wallet is hacked and your Bitcoin has been stolen, law enforcement authorities will not swing into action to recover it.
If you have stored your Bitcoin in a personal, self-custody wallet, you need to be more vigilant about being targeted.
To keep your Bitcoin safe, stay away from schemes that offer you great returns in short times, and do not write down your private keys as part of email messages and then send them over.
Some websites also let you create paper wallets, where the public and private keys can be printed on paper that holders then laminate and keep in safe deposit boxes, away from prying eyes. However, going through this process might be overkill if your holdings are small.
If you are looking at trading Bitcoin, a recommended way to keep your assets safe would be to keep some Bitcoin in an online wallet to trade regularly and move significant holdings to a cold wallet.
If you are looking to diversify your investment and buy Ethereum, Dogecoin, or even NFTs, check out our guides for those too.