Bitcoin is an online alternative currency system, which acts as a form of digital money. Bitcoin is used both as an investment, and as a method of payment for goods and services, and is touted as a means to do so without needing to involve any third parties. Despite their growing popularity, most businesses still do not accept Bitcoin, and their usefulness as an investment is both highly questionable and potentially risky. Before proceeding to buy Bitcoin, it is important to understand what it is, and its advantages and disadvantages.
Part 1 Understanding Bitcoins
Understand Bitcoin basics. Bitcoin is a completely virtual currency, that allows consumers a way to exchange money for free, without the use of a third party (like a bank, credit card company, or other financial institution). Bitcoin are not regulated or controlled by a central authority like the Federal Reserve and all Bitcoin transactions take place in an online marketplace, where users are anonymous and untraceable for the most part.
- Bitcoin allows you to exchange money instantly with anybody in the world, without needing to create a merchant account, or use a bank or financial institution.
- Transferring money does not require names meaning there is little risk of identity theft.
Learn about Bitcoin mining. To understand Bitcoin, it is important to understand Bitcoin mining, which is the process by which Bitcoin are created. While mining is complex, the basic idea is that each time a Bitcoin transaction is made between two people, the transaction is logged digitally by computers in a transaction log that describes all the details of the transaction (like the time, and who owns how many Bitcoins).
- These transactions are then shared publicly into something known as a “block chain”, which states every transaction, and who owns every bitcoin.
- Bitcoin miners are individuals who own computers that constantly verify the block chain to ensure it is correct and up to date. They are the individuals that confirm transactions, and in exchange for doing so, they are paid in bitcoin, which increases the supply.
- Since Bitcoin is not overseen by a central authority, mining ensures that the individual transferring the bitcoin has enough, that the agreed upon amount is transferred, and that the balance for each member of the transaction is correct afterwards.
Gain familiarity with the legal issues surrounding Bitcoin. Recently, the federal agency responsible for combating money laundering announced new guidelines for virtual currencies. The updated guidelines will regulate Bitcoin exchanges, but will leave the rest of the Bitcoin economy alone, for now.
- The Bitcoin network is resistant to government regulation, and it has gained a loyal following among people who engage in illegal activities like drug dealing and gambling due to the fact money can be exchanged anonymously. However, transactions are still traceable, and the FBI was able to seize numerous bitcoin wallets used by bad actors.
- Federal law enforcement may eventually conclude that Bitcoin is a money-laundering tool and may look for ways to shut it down. Shutting down Bitcoin completely would be a challenge, but intense federal regulation could push the system underground. This would then diminish the value of Bitcoins as legitimate currency.
Part 2 Learning The Advantages and Disadvantages of Using Bitcoins
Become aware of Bitcoin’s advantages. Bitcoins major advantages include low fees, protection from identity theft, protection from payment fraud, and immediate settlement.
- Low fees: Unlike using traditional finance systems, whereby the system itself (like PayPal or a bank) is compensated with a fee, Bitcoin bypasses this entire system. The Bitcoin network is maintained by the “miners”, who are compensated with new Bitcoin.
- Protection from identity theft: Bitcoin usage does not require a name, or any other personal information, simply an ID for your digital wallet (the means used to send and receive Bitcoin). Unlike a credit card, where the merchant has full access to your ID and credit line, Bitcoin users operate totally anonymously.
- Protection against payment fraud: Because Bitcoin are digital, they cannot be counterfeited, which protects against payment fraud. In addition, transactions cannot be reversed, like what occurs with a credit card charge back.
- Immediate transfer and settlement. Traditionally when money is transferred, it involves significant delays, holds, or other hassles. The lack of a third party means that money can be transferred directly between people with ease, and it without complexities, delays, and fees associated with making purchases between parties that are using different currencies and providers.
Become aware of the downsides of using Bitcoin. With traditional banking, if someone makes a fraudulent transaction on your credit card or your bank goes belly-up, there are laws in place to limit consumer losses. Unlike traditional banks, Bitcoin does not have a safety net in place if your Bitcoins are lost or stolen. There is no intermediary power to reimburse you for any lost or stolen Bitcoins.
- Keep in mind the Bitcoin network is not immune to hackers, and the average Bitcoin account is not completely secured against hacking or security breaches.
- One study found 18 of 40 businesses offering to exchange bitcoins into other currencies have gone out of business, with only six exchanges reimbursing their customers.
- Price volatility is also a major downside. This means that the price of Bitcoin in dollars fluctuates wildly. For example, in 2013, 1 Bitcoin was worth about US$13. It then quickly moved to over US$1200, and is now approximately US$18597.99(as of 16/12/2017). This means if you are converting to Bitcoin, it is important to stay in it, as moving back to USD could result in a significant loss of funds.
Understand the risks of Bitcoin as an investment. One of Bitcoins popular uses is as an investment, and this deserves a special word of caution before proceeding. The main risk of investing in Bitcoin is it’s extreme volatility. With prices moving rapidly up and down, the risk of loss is substantial.
- In addition, because Bitcoin’s value is determined by supply and demand, should Bitcoin end up being subject to government regulation in any form, it could reduce the amount of people who want to use Bitcoin, which could theoretically make the currency worthless.
Part 3 Setting Up Bitcoin Storage
Store your Bitcoins online. (recommanded) (binance.com) In order, you first need to create a storage site for your Bitcoins, and this is the first step to purchasing Bitcoin. Currently, there are two ways you can store Bitcoins online:
- Store the keys to your Bitcoins in an online wallet. The wallet is a computer file that will store your money, similar to a real wallet. You can create a wallet by installing the Bitcoin client, which is software which powers the currency. However, if your computer is hacked by a virus or hackers or if you misplace the files, you may lose your Bitcoins. Always back up your wallet to an external hard drive to avoid losing your Bitcoins.
- Store your Bitcoins via a third party. You can also create a wallet by using an online wallet via a third party site like Coinbase or blockchain.info, which will store your Bitcoins in the cloud. This is easier to set up, but you will be trusting a third party with your Bitcoins. These sites are two of the larger and more reliable third party sites, but there are no guarantees about the security of these sites.
Create a paper wallet for your Bitcoins. One of the most popular and cheapest options for keeping your Bitcoins safe is a paper wallet. The wallet is small, compact, and made of paper that has a code. One of the benefits of a paper wallet is the private keys to the wallet are not stored digitally. So it cannot be subject to cyber attacks or hardware failures.
- Several online sites offer paper Bitcoin wallet services. They can generate a Bitcoin address for you and create an image containing two QR codes. One is the public address you can use to receive Bitcoins and the other is a private key, which you can use to spend Bitcoins stored at that address.
- The image is printed on a long piece of paper that you can then fold in half and carry with you.
Use a hard-wire wallet to store your Bitcoins. Hard-wire wallets are very limited in number and can be difficult to acquire. They are dedicated devices that can hold private keys electronically and facility payments. Hard-wire wallets are usually small and compact and some are shaped like USB sticks.
- The Trezor hard-wire wallet is ideal for Bitcoin miners who want to acquire large numbers of Bitcoins, but do not want to rely on third party sites.
- The compact Ledger Bitcoin wallet acts as USB storage for your Bitcoins and uses smartcard security. It is one of the more affordable hardwire wallets on the market.
Part 4 Exchanging Bitcoins
Choose an exchange service. Obtaining Bitcoin through an exchange is the easiest way to obtain Bitcoin. An exchange works like any other currency exchange: You simply register and convert whatever your currency is into Bitcoin. There are hundreds of available exchanges, and the best exchange option depends on where you are located, but the more well known exchange services include:
- Cryptaw: This is a Singapore Based wallet service which allows user to trade Singapore Dollars for Bitcoins. The company currently has only web platform which is also mobile friendly.
- CoinBase: This popular wallet and exchange service will also trade US dollars and euros for Bitcoins. The company has web and mobile apps for more convenient Bitcoin buying and trading.
- Circle: This exchange service offers users the ability to store, send, receive, and exchange Bitcoins. Currently, only US citizens are able to link their bank accounts to deposit funds.
- Xapo: This wallet and Bitcoin debit card provider offers deposits in fiat currency that are then converted to Bitcoin in your account.
- Some exchange services allow you to also trade Bitcoins. Other exchange services act as wallet services with limited buying and selling capabilities. Most exchanges and wallets will store amounts of digital or fiat currency for you, much like a regular bank account. Exchanges and wallets are a good option if you want to engage in regular trading and don’t need total anonymity.
Provide proof of your identity and contact information to the service. When signing up for an exchange service, you will need to provide personal information to the service to create an account. Most countries legally require any individual or financial system using a Bitcoin exchange service to meet anti-money laundering requirements.
- Though you are required to provide proof of your identity, exchanges and wallets do not provide the same protection that banks do. You are not protected against hackers, or given reimbursement if the exchange goes out of business.
Buy Bitcoins with your exchange account. Once you set up your account via an exchange service, you will need to link it to an existing bank account and arrange to move funds between it and your new Bitcoin account. This will usually be done via a wire transfer and entails a fee.
- Some exchanges allow you to make a deposit in person to their bank account. This will be done face to face, rather than through an ATM.
- If you are required to link to a bank account to use the exchange service, it will likely only admit banks from the country where the exchange service is based. Some exchanges allow you to transfer money to overseas accounts, but the fees will be much higher and there may be a delay changing the Bitcoins back into local currency.
Part 5 Using a Seller
Search for sellers on LocalBitcoins. This is the primary site used to make face-to-face trades with a local seller. You can arrange a meet up and negotiate prices for the Bitcoins. The site also has an added layer of protection for both parties.
Use Meetup.com to find sellers. If you are not comfortable with one on one trades, use Meetup.com to look for a Bitcoin meetup group. You can all then decide to buy bitcoins as a group and learn from other members who have used sellers to buy Bitcoins before.
Negotiate the price before the meet up. Depending on the seller, you may pay a premium of around 5-10% over the exchange price for a face-to-face trade. You can check the current Bitcoin exchange rates online via http://bitcoin.clarkmoody.com/ before agreeing to the seller’s rate.
- You should also ask the seller if they prefer to be paid in cash or via an online payment service. Some seller may allow you to use a PayPal account to pay, though most seller prefer non-reversible cash as payment.
- A reputable trader will always negotiate the price with you before you meet up. Many will not wait too long to meet up once the price is finalized, in case Bitcoin’s value takes a dramatic shift.
Have access to your Bitcoin wallet. When you meet the seller face-to-face, you will need to access your Bitcoin wallet via your smartphone, tablet, or laptop. You will also need Internet access to confirm the transaction has gone through. Always check that the Bitcoin has been transferred into your account before you pay the seller.