Bitcoin is the original and most popular cryptocurrency in the world. Opinions are divided on its future: for some, it is the future of finance, and for others, a bubble is about to burst. As this decentralized version of peer-to-peer electronic money becomes more popular, more people are learning how to buy bitcoins and weather the dizzying price fluctuations.
If you’re interested in jumping on the bitcoin bandwagon, you’ve come to the right place. However, before buying bitcoins, you should have a good understanding of what you’re buying. This one and other similar writing help you get some of the financial concepts that underpin cryptocurrencies, such as Bitcoin, and prepare you with all the knowledge you need to make your first purchase.
What should you know before buying bitcoins?
Before you buy your first bitcoin, let’s look at the basics.
Bitcoin is a cryptocurrency, or “crypto.” Cryptocurrencies are digital currencies that use cryptography to ensure secure transactions. These cryptographic techniques replace the need for a bank or other “trusted third party” to oversee transactions.
As the first cryptocurrency to promise a “purely peer-to-peer version of electronic money,” Bitcoin pioneered many concepts that underpin a growing number of cryptocurrencies. Perhaps most significant about Bitcoin is the promise of a financial system that is decentralized, fast, transparent, and not dependent on the oversight of powerful institutions, such as banks.
Confused? Don’t worry. Before we delve deeper, we will review some key points to understand Bitcoin and cryptocurrencies:
Bitcoin is not physical money. Instead, it is a virtual currency that can be sent electronically through a decentralized network of digital payments.
Unlike fiat money (i.e., government-issued currencies such as the U.S. dollar or the euro), Bitcoin is not backed by a central regulatory authority. Many cryptocurrencies, including bitcoins, have no intrinsic value. Instead, their value is based on supply and demand.
There is a limited quantity of bitcoins. The “demand” for bitcoins comes from the finite number of tokens available. Bitcoin has a maximum limit of 21 million, unlike other cryptocurrencies, which do not have a finite supply.
Bitcoin works thanks to blockchain technology. A blockchain, i.e., blockchain, is like a digital ledger that securely records transaction information. Bitcoin’s blockchain is “decentralized,” meaning it relies on a network of peer-to-peer computers worldwide to verify transactions.
There are thousands of different cryptocurrencies. Bitcoin is the largest and most popular. Between October 2013 and June 2021, its value increased by almost 30,000 %.
How to buy bitcoins in five steps:
Now that you understand the basics of cryptocurrency, it’s time to see how to buy bitcoins, step by step.
First, this involves familiarizing yourself with the basics of bitcoin, deciding what you intend to do with the bitcoins after investing, and finding out what the crypto tax regulations are in your country of residence. Some people have skipped this last step, which has cost them a small fortune in unpaid taxes – learn from their mistakes!
Here’s a five-step guide on how to buy bitcoins. Let’s start with a bit of education.
1. Research bitcoin and taxes
The first step to buying bitcoins is to understand the philosophy behind them.
In January 2009, a person writing under the pseudonym Satoshi Nakamoto launched Bitcoin and the first blockchain network to host it. In his white paper titled “Bitcoin: a peer-to-peer electronic cash system,” Nakamoto presented Bitcoin as a way to make online payments without going through a financial institution. What Nakamoto described was something revolutionary: a transparent financial system that, at the same time, allows for secure and private individual transactions.
Bitcoin was specifically designed to be decentralized, so governments worldwide have struggled to regulate it consistently. For some, this is part of Bitcoin’s appeal. For others, however, it poses additional concerns about Bitcoin’s prospects.
Uncertainty is a real problem because Bitcoin is a highly volatile asset, prone to fluctuate in value by double-digit percentages in days or even hours. Bitcoin is not for the faint of heart, but if you buy bitcoins with a long-term view, you will be better able to weather its short-term fluctuations.
If you buy bitcoins, you should be aware of your country’s crypto tax regulations. Tax laws vary depending on whether your government considers cryptocurrency assets, securities, or currencies. In general, cryptocurrencies can be taxed as income, capital gains, VAT, or other ways. Before making your first purchase, find out about your country’s crypto tax policy, and don’t forget to keep a record of all your crypto activity.
2. Choose a cryptocurrency exchange platform or trading service.
Next, you will need to decide where you will buy your bitcoins. One of the most popular and easiest ways is to use a cryptocurrency exchange or trading service. Many exchange platforms allow you to purchase cryptocurrencies directly, while other trading services let you see the prices of cryptocurrencies without the need for you to have your own.
Bitcoin is the most popular cryptocurrency in the world, so you should have no problem finding it on any cryptocurrency exchange or trading service you choose. However, not all platforms are the same: many have different transaction fees, registration processes, and terms of service. Before buying bitcoins, make sure you have familiarized yourself with the terms and conditions of your chosen platform.
Also, don’t forget to research their reputation. Many people have fallen victim to fraudulent platforms that look legitimate. It is advisable to trust the more established exchanges, which have achieved a solid reputation.
Although cryptocurrency exchange platforms are the most popular way to buy bitcoins, other alternative methods exist. We will discuss them below.
3. Store your bitcoins in a secure crypto wallet.
After selecting the exchange platform, it is time to decide how to store your bitcoins. Generally, you have two options: a hot or cold crypto wallet.
Hot wallets are connected to the Internet and exist in digital form, while cold wallets are physical pieces of hardware that exist offline. Let’s take a look at these.
Hot wallets. There are several ways to open a hot wallet. The easiest is to use the one offered by your cryptocurrency exchange. These are known as “hosted wallets” and are usually free. One of the big advantages of a hosted wallet is that if you forget your password, security checks are generally in place to help you recover it. The biggest drawback of hosted wallets is that they can be more vulnerable to hacker attacks. If that concerns you, you might consider opening a “non-custodial wallet.” This type of hot wallet is not affiliated with any third party (such as an exchange platform), so only you can access it. This makes them harder to hack. However, if you lose or forget your password, it isn’t straightforward to recover, and you’ll probably have to say goodbye to your bitcoins.
Cold wallets. If security is your priority, a cold wallet will be the best option. Essentially, cold wallets (or “hardware wallets”) are offline applications or pieces of hardware that look like USB sticks. They usually do not connect to the Internet, so they are less vulnerable to attacks. Cold wallets cost around €90. To use them, you will need to transfer your bitcoins from your original hot wallet, which may be subject to a small fee.
For more information on the different types of wallets and how they store private keys, see our guide to crypto wallets or cryptocurrency wallets.
4. Add funds to your account
You’ve already chosen your exchange platform and wallet, so now it’s time to add funds to your account. This means adding fiat currencies to a cryptocurrency exchange to exchange them for bitcoins.
How you fund your account can vary depending on your chosen exchange platform. Typical methods include sending money via PayPal or wire transfer.
Please note that each funding method may carry specific transaction fees. For example, the fee for depositing funds into your account via wire transfer may be higher or lower than if you use PayPal. Processing times may also vary depending on the funding method you choose.
5. Decide how many bitcoins to buy and carry out the transaction.
No matter how you look at it, investing in Bitcoin carries risk. When deciding how many bitcoins to buy, you should evaluate the risks and the potential rewards. If you’re currently in debt or don’t have an emergency fund, you’re better off focusing on achieving financial security before delving into the volatile world of cryptocurrencies. It is essential to have a cushion to fall back on. As if the value of Bitcoin plummets, you could be left with nothing.
You should also bear in mind that unless you have (at the time of writing) €36,000 to spare, it is unlikely that you will be able to buy a whole bitcoin. With lower amounts, you will only be able to acquire a fraction of bitcoin. But don’t worry. They are divisible by eight decimal places, so you can invest up to as little as €50 (with which you would get approximately 0.00136% of a bitcoin).
Other ways to buy bitcoins
As mentioned before, there are several alternatives to buying bitcoins. You can buy bitcoins through a bitcoin ATM, a conventional bank, a cryptocurrency broker, or your credit card. Here’s how.
How to buy bitcoins at a Bitcoin ATM
A Bitcoin ATM (or BATM) works like a regular ATM but can only be used to buy or sell bitcoins. There are over 1200 BATMs scattered worldwide, so the first thing would be to locate the nearest one.
Once there, the BATM will ask you a couple of verification questions and send you an SMS to confirm your mobile number. Then, you will have to indicate the receiving address of your Bitcoin wallet, choose your payment method (usually, you can pay with cash or debit card), and specify how many bitcoins you want to buy. The bitcoins you bought will usually arrive in your wallet within a few minutes.
How to buy bitcoins at a conventional bank or a cryptocurrency broker
You can also buy bitcoins through various traditional banks or cryptocurrency brokers. Resorting to a broker is particularly suitable for beginners in cryptocurrencies.
As a stockbroker, a cryptocurrency broker acts on your behalf, buying and selling cryptocurrencies according to their experience in the market. Brokers usually charge a commission for their services and may offer purchase and sell fees that they set themselves. Usually, the broker will manage your Bitcoin wallet in total, so your bitcoins will remain in their hands unless you decide to sell them.
In addition, several cryptocurrency exchange platforms also allow you to link your bank account. This way, you can send money to buy bitcoins through your bank. The compatibility with your bank depends on several factors, such as the chosen exchange platform, location, and type of account you want to link.
How to buy bitcoins with a credit card
If your credit card supports 3D Secure, you can probably use it to buy bitcoins. However, that doesn’t mean you should. Many banks classify this purchase as a cash advance, leading to a higher interest rate on your transaction.
Buying bitcoins with a credit card is usually more expensive than using a bank transfer. It is also risky since if you do not yet have enough money to finance this purchase, you could get into excessive debt.
What can you do with your bitcoins after you buy them?
You have already bought bitcoins… now what? You have several options. You can:
Do nothing! You can keep your bitcoins with the idea that their value may continue to increase over time.
Exchange them. You can exchange your bitcoins for fiat currency or other cryptocurrencies, but be aware that transactions may be subject to taxes.
Buy things. Using bitcoins to buy products and services is becoming increasingly popular. However, the adoption of cryptocurrencies as a means of payment is proving slow.
How to keep your cryptocurrencies safe?
The two main risks are hackers and your memory. To prevent hackers from stealing your bitcoins, consider using a non-custodial wallet or a cold wallet for even more security. Your bitcoins are more exposed to hacking if you store them in a hot wallet on a cryptocurrency exchange platform. You can reduce this danger by moving them to a wallet out of reach of third parties (non-custodial wallet) or with no Internet connection at all (cold wallet).
If you opt for a cold wallet, the risk is that you might forget your Bitcoin private key and be unable to retrieve it. To avoid this, opting for a cold wallet that offers an essential recovery tool is best.
If you want to sell your bitcoins, you can place a sell order on a reliable and secure cryptocurrency exchange platform. You decide if you wish to sell part or all of your bitcoins.
After the sale, it may take some time before you receive your money. You can transfer it back to your bank account as soon as it reaches your exchange account. If you do not want to use an exchange platform, you can sell your bitcoins via a Bitcoin ATM or peer-to-peer trading.