Bitcoin how to invest

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Bitcoin how to invest

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Are you looking to buy Bitcoin, but don't know where to start? Here's MU30's guide to help get you in the game.

There are tons of complex Bitcoin terms that sway folks away from actually buying Bitcoin (as well as the extreme volatility). So today, I’ll take a closer look at what a Bitcoin “wallet” really is, what “mining” means in the Bitcoin world, and all those other complicated concepts involved in diving into the Bitcoin community.

Before I get started, I want to make sure to mention that Bitcoin is, as I said above, extremely volatile, so in the grand scheme of things, putting money into a 401(k) or other retirement accounts will always be a safer long-term investment than trying to jump on the Bitcoin bandwagon. But for those of you with the stomach to withstand the ups and downs of the cryptocurrency marketplace, I figured I’d give you the information you need.

First things first: how much is a single bitcoin worth…and why does the price change so often?

How Do You Buy Bitcoin? - A Beginners Guide To Buying And Selling Bitcoin - First things first: how much is a single bitcoin worth…and why does the price change so often?

First things first, you probably want to know how much bitcoins translates to in dollars. As of April 27th, one bitcoin is worth $54,741 in U.S. dollars. Now you see why it’s so popular.

Like any currency, Bitcoin has value because we give it value. But it’s not that simple.

Supply and demand

Of course, supply and demand have a factor in any currency, including cryptocurrencies. So the sudden popularity of Bitcoin, especially this past year, has helped drive the price well over $10,000.

There’s also a limited number of Bitcoin – 21 million to be exact. Since there are over seven billion people in the world, if everyone could easily mine (see below) bitcoins, the currency wouldn’t have much value. But not everyone does – so the precious few that do attain a high value.

It’s difficult to get

Just like gold, Bitcoin is difficult to mine and requires very specific technology (and a lot of energy) to do so.

The harder something is to get; the more people want it – raising its value.

More places are accepting Bitcoin

Currency has no value if you can’t use it. But more and more businesses are accepting Bitcoin as a legitimate payment around the world. Microsoft, Dell, some airlines, and even pizza places accept Bitcoin. And in some countries (Australia, for example) Bitcoin is viewed the same as traditional currencies.

Now that you know the basics of the price behind Bitcoin, it’s time to actually buy some (if you want to, of course).

Step 1: get a Bitcoin wallet

Before you buy bitcoins, you’ll need to set up a Bitcoin “wallet”. A Bitcoin “wallet” is just a virtual storage center, just like your physical wallet is what holds your cash and debit and credit cards.

There are a few options when it comes to these wallets:

  1. A “wallet” made from software that’s stored on your computer’s hard drive.
  2. An online wallet offered by companies like Coinbase and Ledger.
  3. An offline option that acts like a vault. These use special “keys” that only you have access to, which adds an extra layer of protection for your crypto (this is also called “cold storage,” which I’ll discuss more below).

If you’re an everyday user, online services are your best option, as long as you don’t need complete anonymity and don’t mind the long setup procedures. However, some people believe that this erases the point of Bitcoin and its anonymity.

If you’re an investor, any of these platforms will work since you likely won’t be regularly spending from your wallet.

Now that you understand what a Bitcoin wallet is, you’re probably wondering how you actually find the wallet that’s best for you. Here are some of the most secure wallets:

Coinbase

Coinbase is the most widely used online Bitcoin wallet. It’s free, and comes with an easy-to-use app!

You can also buy, sell, exchange, and trade bitcoin on Coinbase – making it one of the most user-friendly Bitcoin sites.

However, there are a lot of risks with keeping bitcoin on the same site where you buy it, and Coinbase (as well as any other online wallet server) has had a poor track record in the past. But they do offer a more secure option, known as “vault”.

Electrum

According to US News:

Electrum is a popular, free storage option in the Bitcoin community, and is one of the most, if not the most, well-respected desktop storage apps out there.

Based on Electrum’s site, this holds true. This one is probably one of the best storage options for investors, since it is software-based, rather than online- providing an extra layer of security.

Cold storage

For those who don’t trust the security of wallets, cold storage options allow you to store your bitcoins offline. Some people keep their Bitcoin info on a USB locked in a safe deposit box. Others use a paper wallet, which is simply a document containing all of the data necessary to generate any number of Bitcoin private keys (a secret number that allows bitcoins to be spent).

The problem with cold storage is obvious – if your USB drive or paper wallet gets stolen, or you lose it, you have no way of getting your bitcoins back.

Step 2: choose a Bitcoin exchange

After you have a wallet, you’ll need to register with a ‘fiat-to-crypto’ exchange. This means a company that accepts regular money in exchange for cryptocurrency such as Bitcoin. In crypto parlance, ‘fiat’ currency is any government-issued money like U.S. Dollars, Euros, or Sterling.

When you buy bitcoin from a fiat-to-crypto exchange, the company sells you cryptocurrency from their own reserves. This means that they can set the price and charge a fee for their service. For this reason, fiat-to-crypto exchanges are sometimes referred to as ‘broker exchanges.’ 

Some examples of reliable trusted, and secure exchanges include:

How to choose the best exchange

There are hundreds of fiat-to-crypto exchanges to choose from, so how do you choose the best one? Well, there are two primary considerations:

The location of the exchange

Most people find that using an exchange based in their country is more economical due to banks’ lower fees. It is usually free to transfer money from a bank account to a cryptocurrency exchange located in the same country. If you send money to an exchange based in another country, you will be liable for additional fees such as foreign transaction fees and currency conversion fees. 

The exchange fees

The next consideration is the fees you will have to pay. Here are some of the fees you may need to look out for: 

  • Cash advance fees. Many credit card companies charge a cash advance fee for cryptocurrency purchases. This fee may lead to higher interest rates on your balance. If you plan to pay with a credit card, check with your card provider before purchasing. 
  • Buying fees. The buying fees charged by exchanges can vary widely. In general, debit or credit card purchases will always be more expensive than bank transfers. Always check the fees and pricing page of any exchange before making a purchase. This can help you find the most economical way to buy bitcoin.

Step 3: register and complete security checks

How Do You Buy Bitcoin? - A Beginners Guide To Buying And Selling Bitcoin - Register and complete a security check

Once you’ve found an exchange, you’ll need to register and complete security checks. The exact details will vary from one exchange to the next. Nevertheless, in general, you must visit the exchange’s homepage and click on “Register.” Once you enter your email address and choose a password, the exchange will send you a confirmation email.  

Next, open your email inbox and click on the link. This will take you to the dashboard page of your new cryptocurrency exchange account. 

Step 4: complete security checks

From your main screen, the dashboard, you’ll notice there will be a few more steps to complete before you can start buying bitcoin. These steps vary between different exchanges but typically involve satisfying anti-money laundering and ‘Know-Your-Customer’ rules of the country in which the exchange is located. 

Most exchanges ask you to add your phone number. This allows two-factor authentication (2FA) and prevents anyone from accessing your account without having access to your password and phone. 2FA effectively adds extra security to your account by requiring you to enter your password and a short code sent to your phone when you log in to your account or make a major transaction.

Next, you’ll be asked to upload a photo or scan of your ID, such as your passport or driver’s license. Some exchanges ask for a selfie, while others use an employee to conduct an ID check over your webcam. 

Step 5: add a payment method

You must add a bank account, debit card, or credit card to make your first bitcoin purchase on most exchanges. Adding a bank account is recommended for buying large amounts of bitcoin as the transfer fees tend to be lower. Credit and debit cards are only recommended for smaller purchases as they carry higher fees. If you’re buying a large amount of bitcoin, it’s unwise to use a card. 

Link your bank account

You can make and accept fast payments if you add and verify your bank account. Transfer fees are generally less than 1%, and many exchanges waive the charge altogether. 

You can seamlessly transfer money from your bank account to the exchange instantaneously. Linking your bank account lets you sell bitcoin and withdraw funds to your bank account, which isn’t possible if you pay for bitcoin with a card. 

Each exchange is different, but the setup process looks something like this:

  • Enter your bank account details. 
  • Send a small amount of cash to the exchange so you can verify ownership. 
  • Include the reference number and the amount so the exchange can track your deposit and verify your account. 

While this process may seem quite involved, you only have to do it once. 

Debit and credit cards

Buying bitcoin with a debit or credit card is more convenient than linking a bank account, but doing so can incur higher fees. Most exchanges charge between 3%-5% for bitcoin purchases made with a card. 

Some banks classify bitcoin purchases as ‘cash advances’ on credit cards, which will attract an additional fee. If you pay with a card, you’ll need to add a bank account or Bitcoin wallet if you want to withdraw your bitcoin from the exchange later. 

The advantage of using a card is that they don’t have any complicated setup instructions to follow. 

Step 6: deposit funds to your exchange account

How Do You Buy Bitcoin? - A Beginners Guide To Buying And Selling Bitcoin - Deposit funds into your exchange

For this step, choose the amount of cash and transfer it to the exchange. The fees and time will depend on the payment you chose. Card purchases can be instantaneous, while bank transfers may take a little longer to go through. 

Once you’ve completed this step, you’ll have money in the ‘fiat’ wallet of your exchange account. You can use the cash to buy Bitcoin.

Step 7: buy Bitcoin with cash, or get paid in Bitcoin 

The final step is to use the cash in your exchange wallet to buy Bitcoin. Click on the ‘Buy/Sell’ button and select the value of altcoins you wish to purchase.

Once you’ve agreed to the transaction costs, like transaction fees, click on “Buy” and wait for the transaction to be completed. 

Those who don’t have the technology or understanding of complex computer software, can buy bitcoins with cold hard cash, credit or debit cards (apps like Coinbase currently accept Visa and Mastercard), and wire transfers. You can spend as much as you like, and you obviously don’t have to buy a whole bitcoin. You can purchase fractions of bitcoins.

You can also get paid with bitcoins. If you’re trying to break into the Bitcoin world, finding a side hustle that pays you in bitcoin is a great way to get started.

Alternative: use an online broker that deals with Bitcoin

If you don’t want to go through the hassle of getting a Bitcoin wallet and doing all the other preliminary steps I described above, one alternative solution is to open an account with an online brokerage that lets you buy and sell Bitcoin.

This makes it a lot easier (and faster) to get started. The downside to doing this is that your Bitcoin will always be housed with that brokerage (instead of your own “wallet”). But as long as you’re fine keeping it there, then this might be an easier path for you.

Robinhood is a good option if you want to get started as quickly as possible. It takes only a couple of minutes to open a Robinhood account and you can get started trading stocks (and Bitcoin) right away. 

After you’ve bought your Bitcoin

How Do You Buy Bitcoin? - A Beginners Guide To Buying And Selling Bitcoin - After you've bought bitcoin

After you’ve purchased Bitcoin, here are some things you should consider:

Transfer bitcoins to your wallet

So you have a wallet and you have bitcoins, but if you’ve never been in the Bitcoin game before, you may not know how to combine the two.

That’s where your wallet ID (or address) comes in. This is sort of like your bank account info that you give to get your check directly deposited into your account each pay period. You’ll enter your address into the proper field each time you buy or trade bitcoins.

Ledger offers a range of Bitcoin storage devices. Their most secure wallet is the Ledger Nano S.

TREZOR is another option. It generates your Bitcoin private keys offline, and it’s the original hardware wallet that was built to secure bitcoins.

Trade with bitcoins

Like any method of trading (think stocks), Bitcoin trading is a risky endeavor, but it is one of the better ways to make money through Bitcoin.

This site explains Bitcoin trading best:

[exchanges] act as intermediaries for currency transactions, converting wealth from Bitcoin to US dollars to other national currencies, back to dollars or Bitcoin. And that’s how you make money. By exploiting the constantly shifting relative values of various currencies…

Since the price of Bitcoin does fluctuate constantly, holding onto your bitcoins until you believe there will be a rise in price, and then selling can make you a lot of money.

This is buying and holding (or hodling, as it’s known in the Bitcoin community).

Spend your bitcoins (at legal locations)

If you buy bitcoins to spend rather than just trade, you probably want to know where you can spend them.

Since Bitcoin has grown in popularity, in part, thanks to the media, more and more vendors are accepting Bitcoin. Microsoft is the most notable company that accepts Bitcoin, but others include:

  • REEDS Jeweler.
  • Newegg.
  • Expedia.
  • WordPress.com.
  • Subway.
  • Whole Foods (via gift cards).
  • Dish Network.
  • Overstock.
  • Tesla.
  • Mint.

When you get more experienced, you can “mine” Bitcoin

Bitcoin mining is like digging for gold online – that’s why it’s called “mining”.

With paper money, a government decides when to print and distribute money, but Bitcoin doesn’t have a central regulator, which is what allows anyone to start mining.

The actual process of mining involves one (or more) computer(s) with special software that, in simplest terms, solves complex math problems. Your computer must correctly come up with the right combination of 64 digits – also known as nodes. You’re then issued a certain number of bitcoins in exchange for solving them correctly.

Summary

Buying and selling bitcoins is becoming easier, thanks to apps like Coinbase. All you have to do is set up a wallet for safe storage, and you can get to buying. But, as with any investment, make sure you understand the risks!

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