Bitcoin is an alternative online currency system, which functions as digital money. Bitcoin is used as an investment as well as a method of paying for goods and services, and is heralded as a financial system that does not require the involvement of any third party. However, despite its increasing popularity, there are still many businesses that do not accept Bitcoin. Its benefits as an investment are still very questionable apart from the potential risks. Before proceeding to buy Bitcoin, it is important to understand this new system and its advantages and disadvantages.
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Part 1 of 6: Understanding Bitcoin
Step 1. Understand the basics of Bitcoin
Bitcoin is a completely virtual currency that allows customers to exchange currency for free, without using a third party (such as a bank, credit card company, or other financial institution). Bitcoin is not regulated or controlled by a central bank authority such as the Federal Reserve and all Bitcoin transactions are conducted on the online market, so users are anonymous and virtually untraceable.
- Bitcoin allows instant money exchange with anyone around the world, without having to create a trading account, or use a bank or financial institution.
- Money transfer does not require a name. That is, the risk of identity theft is very small.
Step 2. Learn Bitcoin mining
To understand Bitcoin, it is also important to understand Bitcoin mining, which is the process by which Bitcoins are created. The concept of mining itself is quite complex, but the basic idea is that every time a Bitcoin transaction occurs between two people, the transaction is digitally recorded by the computer in a transaction log that explains all the details of the transaction (such as time, and who owns how many Bitcoins).
- These transactions are then shared publicly in the form of a “block chain”, which states each transaction and who owns each Bitcoin.
- Bitcoin miners are computer owners who constantly verify the blockchain to ensure it is correct and up-to-date. They are the ones who confirm various transactions and get rewarded in the form of Bitcoins. The rewards will increase their Bitcoin stock.
- Since Bitcoin is not controlled by a central authority, mining ensures that each person making a transfer has enough Bitcoin, that the amount transferred is as agreed, and that each member's post-transfer balance is correct.
Step 3. Familiarize yourself with the legal issues surrounding Bitcoin
Recently, the US federal agency responsible for fighting money laundering announced new guidelines for virtual currencies. The updated guide will regulate Bitcoin exchanges, but leave everything else in the Bitcoin economy, at least for now.
- The Bitcoin network tends to go against government regulations, and this virtual currency has loyalists among people who are involved in various illegal activities such as drug trafficking and gambling because Bitcoins can be exchanged anonymously.
- US federal law enforcement may eventually conclude that Bitcoin is a means of money laundering and may seek ways to close it. Shutting down Bitcoin in its entirety was a challenge in itself, but very strong US federal regulations could push the system underground. Thus, the value of Bitcoin as a trusted currency will be erased.
Part 2 of 6: Learn the Advantages and Disadvantages of Using Bitcoin
Step 1. Understand the various advantages of Bitcoin
The main advantages of Bitcoin include low fees, protection from identity theft, protection from fraud, and immediate settlement.
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Low cost:
Unlike traditional financial systems, which charge a fee compensation (such as Paypal or banks), Bitcoin bypasses all of those systems. The Bitcoin network is run by miners who are rewarded with new Bitcoins.
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Protection against identity theft:
The use of Bitcoin does not require any name or personal information. In contrast to credit cards, which allow merchants to fully access your identity and line of credit.
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Fraud protection:
Because it is digital, Bitcoin cannot be counterfeited so it is protected from fraud in payments. In addition, Bitcoin transactions cannot be reversed as is the case with credit card chargebacks.
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Immediate transfers and settlements.
Traditionally, money transfers would be accompanied by delays, holding times, and other hassles. The absence of a third party means money can be transferred directly between people easily without the hassle, delay and expense associated with purchases between two parties using different currencies and providers.
Step 2. Understand the drawbacks of Bitcoin, In traditional banking, if someone makes a fraudulent transaction on your credit card or your bank goes bankrupt, there are laws protecting consumer losses
Unlike traditional banks, Bitcoin does not have a safety net if your Bitcoin is lost or stolen. There is no intermediary power to compensate for your lost or stolen Bitcoins.
- Keep in mind that the Bitcoin network is not immune to hacking, and the average Bitcoin account is not completely secure against hacking or security breaches.
- One study showed that 18 out of 40 businesses that offered to exchange Bitcoin for other currencies had gone bankrupt, and only six businesses offered compensation to their customers.
- Price volatility is also one of the main drawbacks. This means that the price of Bitcoin in US dollars is very volatile. For example, in 2013, 1 Bitcoin was equivalent to USD13. That value quickly rose beyond USD1200, and currently the value of Bitcoin is around USD573 (as of 2016-10-28). This means that if you switch to Bitcoin it is very important to stay in Bitcoin, because switching back to USD will result in a sizeable loss of funds.
Step 3. Understand the risks of Bitcoin as an investment
One of the popular uses of Bitcoin is for investment purposes. Therefore, special warnings are needed before doing so. The main risk of investing in Bitcoin is the extreme volatility of its value. The price of Bitcoin goes up and down quickly, and there is a huge risk of loss.
In addition, because the value of Bitcoin is determined by supply and demand, if Bitcoin ends up subject to government regulation of any kind then the number of people who want to use Bitcoin will decrease. Theoretically it would make this currency no longer valuable
Part 3 of 6: Setting Up Bitcoin Storage
Step 1. Store your Bitcoins online
In order to buy Bitcoins, you must first create a repository for your Bitcoins. There are currently two ways to store Bitcoins online:
- Store your Bitcoin keys in an online wallet. The wallet in question is a computer file that will store your money, much like a real wallet. You can create a Bitcoin wallet by installing a Bitcoin client, the software that powers this currency. However, if your computer is hacked by a virus or hacker, or you misplace the files, your Bitcoins could be lost. Always back up your wallet to an external hard drive to avoid losing Bitcoins.
- Store your Bitcoins through third parties. You can also create a wallet using an online wallet via a third-party site such as Coinbase or blockchain.info, which will store your Bitcoins in the cloud. Setting up this way is easier, but you will be entrusting your Bitcoins to a third party. The two sites mentioned are the biggest and more reliable third-party sites, but nothing guarantees the security of the two sites.
Step 2. Create a paper wallet for your Bitcoins
One of the most popular and cheapest options for securely storing Bitcoins is a paper wallet. The wallet is small, compact, and made of coded paper. One of the benefits of paper wallets is that they have private keys that are not stored digitally. So, this wallet cannot be exposed to cyber attacks or hardware damage.
- A number of online sites offer Bitcoin paper wallet services. The site will generate you a Bitcoin address and an image containing two QR codes. One code is a public address that can be used to receive Bitcoins and the other code is a private key that is used to exploit the Bitcoins stored at that address.
- The image is printed on a long strip of paper so that it can be folded and carried.
Step 3. Use a hard-wire wallet to store your Bitcoins
Hard-wire wallets are very limited in number and may be difficult to obtain. This wallet is a special device that can store private keys electronically and facilitate payments. Hard-wire wallets are usually small and compact, some of which are shaped like USB storage devices.
- The Trezor hard-wire wallet is perfect for Bitcoin miners who want to earn large amounts of Bitcoin, but don't want to rely on third-party sites.
- This compact Ledger Bitcoin wallet functions as a USB storage medium for your Bitcoins and uses smart card security. This device is one of the affordable hardwire wallets on the market.
Part 4 of 6: Exchanging Bitcoin
Step 1. Choose an exchange service
Getting Bitcoin through exchange is the easiest way to get Bitcoin. The exchange mechanism is the same as for any other currency exchange: you simply register and convert whatever currency you have into Bitcoin. There are hundreds of Bitcoin exchange services, but the more well-known include:
- CoinBase: This popular wallet and exchange service also sells American dollars and euros for Bitcoin. The company has web and mobile applications for more convenient buying and selling of Bitcoins.
- Circle: This exchange service offers users the features to store, send, receive and exchange funds. Currently, only US citizens can link their bank account to a deposited fund.
- Xapo: This Bitcoin wallet and credit card provider offers storage in fiat currency which is then converted into Bitcoin in your account.
- Some exchange services also allow you to trade Bitcoins. Other exchange services function as wallet services with limited buying and selling capabilities. The majority of exchanges and wallets will store your digital or fiat currency amount, much like a regular bank account. Exchanges and wallets are great options if you want to trade Bitcoin regularly and don't want to go completely unnoticed.
Step 2. Provide proof of your identity and contact information to the service
When registering for an exchange service, you must provide personal information on that service in order to create an account. Most countries in the world require a financial or personal system to use Bitcoin exchange services in order to meet anti-money laundering requirements.
While you are required to present proof of identity, Bitcoin exchange and wallet services do not provide the same protection as banks. You are not protected from hackers, or compensated if the exchange service goes bankrupt
Step 3. Buy Bitcoin with your exchange account
Once you have created your account through the exchange service, you will need to link it to your existing bank account and arrange for the transfer of funds between your bank account and your new Bitcoin account. Usually this is done by bank transfer and is subject to a fee.
- Some redemption services allow you to deposit privately into their bank account. The process is done face-to-face, not through an ATM.
- If you are required to link bank accounts in order to use an exchange service, it is likely that only banks from the country where the exchange service originates are allowed. There are also a number of services that allow you to send money to offshore accounts, but the fees are much higher and there may be a delay in converting Bitcoins to the local currency.
Part 5 of 6: Using Seller
Step 1. Look for sellers on LocalBitcoins
This is the primary site for conducting face-to-face trades with local sellers. You can make an appointment and negotiate the Bitcoin price. The site also adds a layer of protection for both parties.
Step 2. Use Meetup.com to find a seller. If you're not comfortable with face-to-face transactions, use Meetup.com to search for Bitcoin meetup groups
Then you can decide to buy bitcoins in groups or learn from other members who have used certain buyers to buy Bitcoins before.
Step 3. Negotiate the price before meeting
Depending on the seller, you may end up paying a premium of about 5-10% more than the exchange price in a one-on-one sale. You can check the current Bitcoin exchange rate online at https://bitcoin.clarkmoody.com/ before you agree on a seller price.
- You should ask the seller if they want to be paid in cash or through an online payment service. Some sellers may allow you to use your PayPal account to pay, although most sellers like cash because it's irrevocable.
- A reputable seller will always negotiate a price with you before meeting. Many of them will not wait too long to meet once a price agreement occurs, just in case the value of Bitcoin undergoes a drastic change.
Step 4. Meet the Bitcoin seller in a crowded public place
Avoid holding meetings in private residences. You should always be on the lookout for anything, especially if you carry cash to pay to a Bitcoin seller.
Step 5. Have access to your Bitcoin wallet
When meeting face-to-face with a seller, you will need access to your Bitcoin wallet via your smartphone, tablet or laptop. Internet access is also required to confirm that the transaction has taken place. Always make sure that the Bitcoins have been transferred to your account before you pay the seller.
Part 6 of 6: Using a Bitcoin ATM
Step 1. Find a Bitcoin ATM near your location
Bitcoin ATMs are a relatively new concept, but the number is growing. You can use the online Bitcoin ATM map to find the nearest ATM.
Many institutions around the world currently offer Bitcoin ATMs, from universities to local banks
Step 2. Withdraw cash from your bank account
Most Bitcoin ATMs only accept cash as they are not set up to process debit or credit card transactions.
Step 3. Put your cash into the ATM
Then scan the QR code on your mobile or access the required code from your account via mobile to load bitcoins into the wallet.
Exchange rates at Bitcoin ATMs can vary 3% to 7% higher than standard exchange rates
Tips
- Always be vigilant in mining Bitcoin. “Mining” is when you create your own Bitcoins by forming blocks of various Bitcoin transactions. Although mining is technically a way to “buy” Bitcoin, the popularity of Bitcoin makes it difficult to mine and today most mining activities are carried out by a large group of miners referred to as “pools” and companies engaged in Bitcoin mining. You can buy shares of a Bitcoin mining pool or company; mining is no longer something that can be done individually and then make a profit.
- Be wary of anyone who tries to sell you Bitcoin mining software on a regular computer, or equipment that helps you mine Bitcoin. These products are likely scams and will not help in Bitcoin mining.
- Make sure your operating system is secure enough. If you're on Windows, install VirtualBox, mount a Linux VM (eg Debian), and do everything Bitcoin related on that VM. When it comes to desktop wallets, the best right now is Electrum (electrum.org).
