How to Buy Bitcoins
As Bitcoin continues to grow in popularity, more and more people are interested in purchasing them. There are several different ways to obtain bitcoin, including exchanges, peer-to-peer directories, and Bitcoin ATMs. To own Bitcoin, you must first have a Bitcoin Wallet, and it is essential that you understand the fundamentals of Bitcoin before you invest in them.
Basics of Bitcoin
Bitcoin was released in 2009 and is generally considered the first cryptocurrency. It is now the most widely used alternative currency, with an impressive market cap of over $100 billion.
A cryptocurrency is a digital asset that uses blockchain technology to create a financial transaction database that can be anonymous and secure while also being safe and transparent.
To be considered money, a currency must be durable, portable, divisible, and recognizable – all traits that Bitcoin has. Bitcoin is a functional store of value primarily because it cannot be printed or debased. In fact, only 21 million bitcoins will ever exist. Its underlying price is determined by supply and demand, and the limited number of bitcoins in circulation is meant to keep the inflation level stable.
Bitcoin is powered by blockchain, so it is important to understand how this works before purchasing the currency. A blockchain is a database of records that have been independently verified by a network that has no central authority. Each time a transaction occurs, hundreds or thousands of members across the network individually validate, timestamp, and encrypt it. Every one of these verified records is a block, and all of the blocks are linked together to form a blockchain.
The word mining is also commonly associated with Bitcoin, and this refers to the distributed consensus system that is used to confirm pending transactions and add them to the blockchain. It also creates a competitive lottery that prevents individuals from having access to sequential records in the blockchain. In essence, no one person can control what is included in the blockchain or make changes to existing blocks.
Since each of the blocks in the chain is confirmed and encrypted independently, there is inherent data integrity. Essentially, you can trust the information within the blockchain without having to explicitly trust the source. It also provides a complete audit trail, allowing a transaction to be audited and traced all the way to its origination.
How to Buy Bitcoins
If you would like to own Bitcoins or use them for payment for goods or services, you can acquire them through several different methods: exchanges, peer-to-peer directories, or specialized ATMs. Before you can obtain Bitcoins, you must first have a digital wallet to store them in.
A Bitcoin wallet is what maintains the private key used to sign transactions and prevent them from being altered once entered into the blockchain. These wallets are available for free on all major operating systems and can be set up in minutes.
One of the most popular wallets is from Coinbase, an online platform that allows you to store and initiate transactions with Bitcoin. While many people assume that your Bitcoins are stored within the wallet, this is not the case. Bitcoins are not actually stored anywhere, but rather balances are maintained using keys used to create them.
These keys can be public or private and are made up of a long string of letters and numbers that are linked through a mathematical encryption algorithm. A public key is similar to a bank account number – it is an address that others can send Bitcoins to. A private key, on the other hand, is like an ATM pin that is used to authorize your Bitcoin transactions. This private key is what is stored in your personal Bitcoin wallet.
Another popular wallet is Exodus, which offers all-in-one offline capabilities and is free to use. This wallet also has graphics tools that will help you visualize your Bitcoin portfolio.
Once you have selected your Bitcoin wallet, you must go about acquiring Bitcoins. This can be done using traditional payment methods like debit or credit cards and can be processed through a few different venues. These include exchanges, peer-to-peer directories, and Bitcoin ATMs.
The most popular way to buy and sell Bitcoin is through an exchange, and these are structured similar to the stock market. On these exchanges, the price for Bitcoin will be listed as an ask and bid price. The ask price is the price you will pay if you are buying Bitcoin, and the bid price is what you will receive if you are selling it. The difference between the bid and ask price is called the bid/ask spread, and this is the fee the market makers on the exchange will collect.
Due to the volatile nature of Bitcoin, these prices change very quickly. To start trading, most exchanges require you to set up a profile and link a digital wallet. Once your account is verified, you can begin managing your Bitcoin portfolio through their websites.
To make a trade, you can input the amount of Bitcoin you want to buy or sell and enter the order. This is called a market order, and your transaction will be executed at the best market rate. Another option is to place a limit order, which lets you set the maximum price you will buy for and the minimum price you will sell for. Limit orders will only be executed if the market meets your specified parameters.
The most popular Bitcoin exchange is Coinbase. This digital currency exchange is headquartered in San Francisco and brokers Bitcoin exchanges in about 32 countries. Coinbase also facilitates Bitcoin transactions and storage in 190 countries.
Another growing exchange is Gemini, which is a mobile app-based exchange that allows you to buy, store, and sell Bitcoin. Gemini was founded in 2014 as a New York Trust Company and operates in the US, Canada, the UK, and a few other countries.
Kraken is another US-based Bitcoin exchange that works just like Coinbase or Gemini. Kraken was founded in 2011 and is unique in that it provides its pricing information to Bloomberg Terminal.
A peer-to-peer directory is a more direct method of purchasing Bitcoins. With this option, you can buy Bitcoin directly from a seller without using an exchange as a middleman. Some commonly used directories include LocalBitcoin or Bit Quick, and these tend to provide a wider variety of payment options.
Another way you can buy Bitcoin is to use an ATM. These are only available in select cities, but they allow you to exchange Bitcoin held in certain wallets for cash. There are over 2,300 Bitcoin ATMs in the US, and this number is expected to grow.
There are two distinct types of ATMs – some function as a traditional ATM, but others allow you to sell Bitcoin for cash as well. Rather than connect to a bank account, these kiosks connect to the internet and allow you to buy or sell Bitcoin on an exchange.
A downside to using these terminals are high transaction fees, as well as poor exchange rates. The Consumer Financial Protection Bureau issued an advisory claiming that these transaction fees ranged as high as 7% and some kiosks offered rates $50 over those you could get elsewhere.
Benefits of Bitcoin
Part of the reason that Bitcoin continues to surge in popularity and adoption are the many benefits associated with the currency. One of the primary benefits is payment freedom, as you can send or receive Bitcoins anywhere in the world, regardless of borders or time.
This allows you to be in full control of your money and avoid costly exchange fees and red tape. There is no fee to receive bitcoins, and most digital wallets let you determine your fees while spending based on how quickly you would like the transaction to occur. These fees are unrelated to the amount being transferred, so you can send 1 million Bitcoins for the same price as 1 Bitcoin.
In addition, Bitcoin provides users with full security and control of their transactions. Transactions are irreversible and do not contain personal information, preventing merchants from forcing unwanted charges or gaining access to your private data.
Transparency is another major benefit of Bitcoin. All of the information surrounding the money supply is available on the blockchain for anyone to verify in real-time. This blockchain is cryptographically secured so no one entity can control the currency.
Risks of Using Bitcoins
Although there are many benefits to using Bitcoins, there are some risks as the currency is still very new. Many people are still not aware of Bitcoin, and not every business will accept them as payment for goods and services.
Volatility is another downside to Bitcoin. The amount of currency in circulation is still relatively small, so some trades or business activities can significantly affect its price. This means that the value of the Bitcoins in your digital wallet can vary from day to day, so you should not store money in there that you cannot afford to lose. As the currency grows and more Bitcoins are in circulation this volatility will decrease, but this could take some time.
Bitcoin is still a relatively new idea, so the software behind it still has incomplete features that are in active development. There are tools and features being built to make Bitcoin more secure and accessible, but these improvements are still in the beginning stages.