How to buy and sell Bitcoin [Complete Beginner's Guide]
Bitcoin has seen unprecedented gains in value since 2009. It has minted millionaires and even bought Lamborghinis. It has been praised as a revolution in finance and the technology behind it has the potential to upend every industry on the planet.
Though, it’s not without controversy.
For every good story about the cryptocurrency, there is a bad one. Investors have lost their money, hackers have shut down exchanges, and governments have issued warnings and even been banned from the buying and selling of bitcoins outright.
Because of this, it is important to know the ins and outs of purchasing, storing, and selling cryptocurrencies.
Sifting through the wild world of cryptocurrencies is no easy feat. There are countless wallets to store bitcoins and just as many exchanges, all with their own set of rules, to buy and sell bitcoins.
The very first step, however, is to set up a wallet. This is where bitcoins will be stored.
What is a wallet?
Though Bitcoin has a very real value attached to it, it is not stored in any one place. It is stored on its own blockchain, shared with every participant using the infrastructure. The process of claiming ownership of the bitcoin, however, is fairly cut and dry.
When bitcoin is bought or sold, it is claimed by a wallet. This wallet is secured with a cryptographic code which has proven to be impossible to crack. This technology is broken down into two basic keys – a private key and a public key. The private key is essentially the users’ signature. It allows a user to access or transfer the ownership of their bitcoin, or even recover a wallet. Think of it as the key to your house. You should never give anyone access to it, because without it, you’re going to left out in the cold.
The public key, on the other hand, is like your email address. This is what you would give to a person or entity in order to receive bitcoin. This is public information, and anyone who has access to this code will be able to see your entire history of transactions. Many people go through great lengths to ensure their identity cannot be tied to this address, though it is becoming increasingly difficult if an individual uses an exchange to buy and sell their bitcoin due to the evolving regulatory landscape in place. But more on that later.
When setting up a wallet, you are generally given the option to set up a ‘recovery phrase.’ This phrase is a list 12-24 words that will allow you to restore your wallet in case of a hardware failure. It is as important as your private key because anyone who gets ahold of that phrase could potentially steal your coin. This phrase is likely the most important 12-24 words that you ever write down, so be sure to keep it somewhere safe – you won’t regret it. To learn more about wallet security, visit How to Backup Your Bitcoin Wallet.
Choosing a wallet
There are many different wallets to choose from and each have their own benefits and drawbacks.
The most common and easy to use wallets are typically web-based wallets which are typically associated with exchanges. Each exchange has its own wallet wherein a user can hold fiat currency, bitcoin, and other cryptocurrencies. These are called ‘hot wallets.’ They generally do not allow users access to their own private key and they are the most vulnerable to malicious actors. While many people prefer to keep their holdings on these wallets simply due to the ease of accessibility, it is not recommended due to the potential security risks.
The best way to ensure that funds remain safe is to transfer the bitcoin to a personal wallet. The main types of personal wallets are: hardware, desktop, mobile, and paper. Each wallet offers its own features and level of security.
The most secure and versatile wallets are hardware wallets. These wallets are sort of like a USB stick in which a user’s private key is held. The two most popular hardware wallets are the Ledger Nano S and the TREZOR. These both offer a number of features including the storage of multiple cryptocurrencies and security functions to ensure that only the owner is able to access the funds.
The next most secure way to store bitcoin is on a paper wallet. These are wallets that are randomly generated and then printed out by the user. Two examples of this service are Bitaddress and BitcoinPaperWallet. While the process is pretty straightforward, to ensure the absolute security of the wallet, it is recommended to use a clean operating system and disconnect from the internet before generating a code. After that, to protect the paper, some people choose to have it laminated. They may also choose to keep the paper in a sealable bag to keep it safe from water damage or other environmental hazards.
Another type of wallet is the desktop wallet. These are common amongst traders who need fast access to their funds but still prefer a certain level of security and anonymity. Desktop wallets are the most diverse in terms of features, with some prioritizing security and others even providing users with the capacity to verify their own transactions. Some of the most popular desktop wallets are Electrum which offers a number of features including the ability to replace fees on broadcasted transactions; Exodus which provides users with an easy and intuitive interface; Bitcoin Core which is a full node wallet allowing users to verify their own transactions; and Armory which prioritizes security and anonymity.
If you’re looking for a wallet to use on-the-go or to pay for goods and services than its likely you’ll need a mobile wallet. While these wallets are more vulnerable to hackers, they do offer a number of features which can make life easier for someone who uses bitcoin for daily purchases. Some of the best mobile app options are MyCelium which offers the ability to sync a hardware wallet for increased security; BRD (formally Bread), a very user-friendly and intuitive app which allows users to hold and exchange multiple cryptocurrencies; and Jaxx, a popular option which allows users access their funds on both their desktop and mobile device.
Buying and selling bitcoin
Once you have a wallet, it’s time to purchase your first bitcoin (or piece of a bitcoin). To accomplish this, there are several options. The most common way to exchange fiat currencies to cryptocurrencies is through exchanges. Exchanges come in all shapes and sizes, offering a number of different choices to their clients.
Most online exchanges offer a list of basic cryptocurrencies, such as Bitcoin, Ethereum, Ripple, and Litecoin, but there are some that may even offer alt-coins or specialty tokens. Almost every exchange will require customers to register and provide background information in order to comply with Anti-Money Laundering (AML) and Know Your Customer (KYC) laws. These laws are put in place in order to ensure there are is no illegal transfer of money occurring on the exchange.
KYC laws require exchanges, forex brokers, banks and other financial institution to collect information for each of their customers. These laws can differ from country to country and even municipality to municipality to municipality. Not only are these regulations designed to collect the information of a customer, they may also require the exchange to determine a customer’s risk to commit money laundering, identity theft or the financing of terrorism. To learn more about each country’s specific laws, you can visit KYCmap.com.
AML laws are specifically designed to prevent the generation of money from illicit activities. These regulations were established at the G7 summit in 1989 as an international movement to combat money laundering.
In complying with these regulations, financial institutions, including cryptocurrency exchanges, have each created their own internal task force responsible for the enforcement of these laws. The failure to take necessary measures to ensure these laws are upheld could result in fines or even jail time.
While each exchange may have their own KYC/AML process, most require users to submit a piece of legal identification, proof of address and sometimes even a personal photo in order to verify users’ identity against their legal identification.
Once this process is completed, users can fund your account through debit, bank transfer and in some cases, a credit card. When this account is funded, it is time to begin trading.
Here is a short breakdown of some of the most popular cryptocurrency exchanges:
Bitfinex is the world’s largest bitcoin exchange by trading volume in U.S. dollars. It has been the point of some controversy in recent years following a hack resulting in the loss of 119,756 bitcoins, or $72 million at the time. It also features a USD-pegged-cryptocurrency which has fallen under regulatory scrutiny, suggesting that it was not, in fact, backed by real cash as the creators suggested.
Coinbase is the most popular U.S. cryptocurrency exchange, with millions of users worldwide. Its user-friendly interface makes it the perfect entry point for many crypto traders, though it is typically known to have higher fees than some of its competitors (Learn more: Is Coinbase safe?).
GDAX is another popular exchange which is run by the same company as Coinbase. It offers some more advanced features including margin trading and generally has lower fees than its sister exchange.
Kraken is another high-volume exchange with a solid reputation, lower fees than Coinbase, and numerous features that allow traders the option to truly optimize their experience.
Gemini is the brainchild of Tyler and Cameron Winklevoss. It is a fully licensed and regulated exchange, meaning it complies with many of the regulatory standards that a bank may face.
While these are some of the most common ways to buy or cash out cryptos, they are just the tip of the iceberg.
Another popular method of buying and selling cryptocurrencies is through over-the-counter trades. These trades take place through peer-to-peer exchanges or through brokers or liquidity providers over messaging apps such as Skype.
One of the most popular peer-to-peer websites to buy or sell cryptocurrencies is LocalBitcoins. The site offers users the possibility to trade directly with others for cash, debit, credit and sometimes even PayPal. While it provides an excellent opportunity to bypass some of the more stringent rules of typical exchanges and can even offer users a greater amount of privacy in their transactions, because of its peer-to-peer nature, there is little in the way of security or accountability if something were to go wrong with a trade. For this reason, large transactions are not recommended.
This is where liquidity providers (LPs) and forex brokers enter the mix. These services are designed with institutional investors, high-volume traders and large businesses in mind.
They offer high two-way liquidity, impeccable customer service, privacy and security. Transactions with these providers rarely make it to exchanges, so there is no potential to move the market, and they have pre-existing banking relationships, typically from previous FX deals, so moving the funds is fast, safe, and easy for clients looking to buy or sell cryptocurrencies.
Keeping your funds safe
After receiving your bitcoin, it is important to keep it secure. This involves basic privacy and security measures which should be observed by everyone. With bitcoin’s tremendous gains, it has also gained the attention of hackers and other bad actors in recent years.
The first and most important step is to choose a strong password which has not been used elsewhere. Additionally, it is recommended not to log into your exchange account or your bitcoin wallet while using public wi-fi as it could make your computer vulnerable to man-in-the-middle attacks. And always be weary of suspicious links. Phishing schemes are extremely popular and could result in your account being drained,
While this will go a long way to protect your stash, it is also recommended to activate two-factor authentication whenever possible. Ideally, one would choose something other than SMS authentication as would-be hackers are notoriously savvy and could potentially fool customer service representatives into hijacking your phone number.
Finally, it is important to take care of your chosen method of storage. If you chose a a hardware wallet, keep it somewhere you will remember and somewhere hidden from environmental impact. And if you have a paper wallet, remember to keep your private key hidden, just like your recovery phrase. Many people have thought of creative ways to store these items, from embedding them in a painting to highlighting words in their favorite book, but it is recommended to find the method that will be the best for you while keeping in mind any potential disasters such as a fire or a robbery.