Everything You Need to Know About Buying Bitcoins and How the Blockchain Works
So you want to buy Bitcoins. Bitcoins are one of many trendy cryptocurrencies sold on the internet today. Whether you’re totally new to Bitcoins or you’re just looking for the best BTC exchanges, we’re here to help you make the smart choice.
Keep reading to learn everything you need to know about how Bitcoins work, how to pick an exchange, and how the blockchain technology behind Bitcoin really works.
How to Buy Bitcoins
Buying Bitcoins is simple. Here’s the basic process you’ll need to follow:
- Step 1) Find a Bitcoin exchange
- Step 2) Trade a currency (like US Dollars, Euros, or RMB) for Bitcoins
- Step 3) Transfer your Bitcoins to a secure Bitcoin wallet
A Bitcoin exchange, by the way, can be as simple as an ATM. Pretty much every major city in the developed world now has at least one Bitcoin ATM. Other Bitcoin exchanges can be found online.
That’s it! Below, we’ll explain more specific instructions – like how to choose a good Bitcoin exchange and how to avoid getting scammed.
How to Choose a Good Bitcoin Exchange
There’s no “best Bitcoin exchange” on the internet today. There are several major Bitcoin exchanges, and there are several preferred exchanges. Different people have different tastes, and different exchanges offer different services.
While researching Bitcoin exchanges, you’ll need to pay attention to important traits that separate good exchanges from bad ones. Pay attention to things like:
Good Security:
Major Bitcoin exchanges face hacking attempts every day. Even leading exchanges have suffered leaks in the past. It’s part of dealing with some of the most talented hackers in the world. Nevertheless, you’ll want a Bitcoin exchange with strong security and a limited history of leaks.
Your Privacy:
One of the best parts about buying Bitcoins is that you can do it with 100% privacy. However, the only real way to privately buy Bitcoins is with cash or a cash deposit. Not all exchanges support this. It’s easy to find exchanges that accept bank transfers, credit card payments, debit card payments, and PayPal, for example. However, each of these payment methods is tied to your personally-identifiable information. If you want to avoid being tracked, then you need an exchange that offers cash or cash deposit exchanges.
Purchase Limits:
Most Bitcoin exchanges have no limits. If you have enough money, you can buy as much Bitcoin as you want. However, certain exchanges do have limits. If you’re working with an individual seller, then that individual may have lower limits than an exchange. Unless you’re buying more than, say, 25 Bitcoins, you shouldn’t have trouble with purchase limits.
Liquidity:
How fast do you need to access your Bitcoins? Are you buying Bitcoins for a purchase today? Different exchanges give you access to your money at different speeds. The fastest way to get your Bitcoins is through a Bitcoin ATM. Check this website for a map of Bitcoin ATMs worldwide. If you don’t want to use an ATM, then certain brokers offer instant buys through credit card, debit card, and bank transfers.
Fair Exchange Rates:
One of the confusing parts about Bitcoin for newbies is the exchange rate. There is no “official” exchange rate for Bitcoin into world currencies. Instead, Bitcoin prices are based on the average price of Bitcoin across all exchanges. One reliable site for Bitcoin averages is Coindesk.com. Make sure the exchange you choose has a fair exchange rate based on the current price.
Reputation:
Try to pick a trusted, long-standing Bitcoin exchange. Sure, some new Bitcoin exchanges might offer lower rates and better service – but until they’ve built a good reputation over time, you should stick with the known exchanges.
Fees:
Bitcoin exchanges all have fees. You’ll typically see a deposit and withdrawal fee, for example, as well as a fee per exchange. Some exchanges will substantially reduce – or even eliminate – fees if you trade a lot of Bitcoins.
How to Get a Bitcoin Wallet
Without a Bitcoin wallet, you can’t receive, store, or spend your Bitcoins. You need a Bitcoin wallet to use Bitcoins.
Bitcoin wallets aren’t like conventional wallets: they can be apps, websites, devices, or software programs. These wallets contain private keys that give you access to your Bitcoins. Many bitcoin exchanges offer Bitcoin wallets when you sign up, for example. Other people hold physical Bitcoin wallets – or even physical Bitcoins – as a way to store their cryptocurrency.
The two main types of Bitcoin wallets available today include:
Hardware Wallets
These are physical electronic devices – similar to a USB stick or thumb drive – built for the sole purpose of managing your Bitcoins. Many people like hardware wallets because they perform like physical wallets: you need to connect your wallet to a computer, phone, or tablet in order to spend the Bitcoins inside.
Popular hardware wallets include the KeepKey, Trezor, and Ledger Nano S.
The only way to lose Bitcoins through a hardware wallet is if someone steals your Bitcoins. Even then, you can protect your hardware wallet with a PIN code. And, if you lose your wallet for any reason, you can use a secret backup code to maintain access to your Bitcoins.
The only real downside of hardware wallets is they’re not free. You have to pay for the physical device. Expect to pay between $50 and $100 for a good Bitcoin wallet – although cheaper options are available for under $20.
Hot Wallets
Hot Bitcoin wallets are apps or software programs found on smartphones, tablets, or computers. Hot wallets generate your private Bitcoin keys.
Hot wallets are typically seen as the easiest way to store and spend Bitcoins, but security is a concern. Those who own a lot of Bitcoins typically use hot wallets to store a small amount of Bitcoins, while using hardware wallets for their main Bitcoin fund.
Payment Methods: How to Buy Bitcoins
There are four main ways to buy Bitcoin using payment methods you know and love. Those methods include:
- Purchase Bitcoins online using your credit card, debit card, or bank transfer
- Buy Bitcoins from a local Bitcoin ATM
- Buy Bitcoins using a cash deposit, or with cash locally from an individual seller
- Convert PayPal to Bitcoin online through your PayPal account
We’ll dive into each of these payment methods below:
Buying Bitcoins with Credit or Debit Cards
This tends to be the most popular method of buying Bitcoins. After all, most people have a credit or debit card, and are familiar with how to use them. Buying Bitcoins with a credit or debit card also means you instantly gain access to your Bitcoins.
The downside with credit/debit card Bitcoin purchases is that exchanges typically charge higher fees. The other problem is that your Bitcoins are tied to your personal information. You need to prove your ID to buy Bitcoins with a credit card.
Popular exchanges for credit/debit card Bitcoin purchases include Coinbase, Coinmama, CEX.io, and BitPanda. Coinbase is only available in the United States, Canada, Europe, and Singapore; BitPanda is only available in Europe. CEX and Coinmama are both global exchanges.
Bank Transfers
Bank transfers are the preferred way to buy a large amount of Bitcoin. Exchanges also typically charge lower fees for bank transfers compared to credit or debit card transfers.
The main downsides of a bank transfer are the slow speeds (takes about 5 business days to complete, in some cases) and the ID verification. Just like with credit or debit card purchases, your ID is tied to your Bitcoins.
Coinbase, BitPanda, and Gemini all allow Bitcoin purchases with bank transfers.
Cash
Cash is the preferred method for those who want to deal with Bitcoins anonymously. A cash deposit lets you access your Bitcoins quickly (even instantly) while remaining totally anonymous.
There are some major downsides with cash exchanges. You’ll almost always pay higher rates (expect to pay 10 to 15% above market rates for a cash exchange). It’s also easier to get scammed or robbed. If you’re working with a disreputable exchange, then your cash might disappear with no record.
If you want to use cash to purchase Bitcoins, use services like LocalBitcoins, BitQuick, or Wall of Coins. However, the best method may be to find a Bitcoin ATM in your local area. Every major city in the world has a Bitcoin ATM. New York City has about a dozen, for example. Even Bitcoin ATMs have a cash rate that’s 10 to 15% higher than the current exchange rate.
PayPal
PayPal doesn’t officially let you buy Bitcoins. Accessing Bitcoins through PayPal is difficult. In fact, PayPal’s terms of service explicitly forbids merchants from accepting PayPal payments for Bitcoins.
However, there are some ways to get around this problem. You can buy digital items with PayPal, then sell those items for Bitcoin, for example. As an example, payment platforms like VirWoX let you buy Second Life Lindens (yes, the currency used in Second Life) with your PayPal balance, then trade those SLL for Bitcoins.
There are downsides: you lose more money by exchanging your money twice. There’s also the problem that PayPal could shut down your account if it discovers what you’re up to. Ultimately, the exchange fees with PayPal / Bitcoin transfers add up to about 10 or 12% – similar to what you pay for cash transfers.
When to Buy Bitcoins: How to Time the Market
Bitcoin is traded 24 hours a day, 365 days a year. Bitcoin trading never stops. The price is constantly fluctuating.
Like with most markets, it’s hard to time the Bitcoin exchange rate. You can use tools like Bitcoin Wisdom or Cryptowatch to analyze historical Bitcoin exchange rate data.
Many people are attracted to Bitcoin because they heard of people who bought hundreds of Bitcoins for $20 USD back when the cryptocurrency first hit the internet. Those people became millionaires overnight when the price of Bitcoin shot up. If you’re buying Bitcoin because you expect that type of success, then you’ll probably be disappointed.
If you’re interested in that type of overnight success, however, then there is a chance that it can be found in the altcoin markets.
What Are Altcoins?
When visiting Bitcoin exchanges and websites, you may see information about buying “altcoins”. Altcoins are cryptocurrencies other than Bitcoin.
Bitcoin was the first cryptocurrency to become really popular. Since the rise of Bitcoin, however, hundreds of other cryptocurrencies have emerged.
People invest in altcoins because they’re hoping for a Bitcoin-like rise in value. The vast majority of altcoins, however, have virtually no value.
In general, you should avoid buying currencies that go through sudden spikes and drops in price and volume. However, if you’re feeling brave, and don’t mind exposing yourself to risk, then certain altcoins are worth the price. A growing number of altcoins are accepted as online payments – just like Bitcoin.
How Blockchain Cryptocurrency Technology Works
The blockchain is an essential part of the cryptocurrency world. Without the blockchain, Bitcoin wouldn’t exist.
The blockchain was created by Satoshi Nakamoto – the mysterious creator (or group or creators) behind Bitcoin. It’s an ingenious invention that has already changed the future of banking and global economics.
A blockchain allows digital information to be distributed – not copied. It’s the reason Bitcoin works as it does. As Quora.com explains, “blockchains create the backbone of a new type of internet”. It was first used to create Bitcoin, but blockchains are already being used in all corners of the tech world.
Here’s the best definition of the blockchain, from Don & Alex Tapscott, authors of Blockchain Revolution (2016):
“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
In a more simplified sense, picture an Excel Spreadsheet that’s duplicated thousands of times across a network of computers. Now, imagine that the network is programmed to constantly update all of those spreadsheets simultaneously. That’s basically what a blockchain is. It’s like Google Docs for banking.
The blockchain consists of a shared database. That database isn’t stored on any single person’s computer. There’s no centralized version of the blockchain. The blockchain exists everywhere at the same time – which means the information on the blockchain is public and easy to verify. With the blockchain found on millions of computers worldwide, it’s easy for anyone to verify information on the blockchain. All you need is an internet connection.
Bitcoin and its blockchain were first invented in 2008. Amazingly, since 2008, the Bitcoin blockchain has operated without any significant disruption. It’s proven itself to be transparent and incorruptible over the years.
About every 10 minutes, a new “page” or “block” of valid transactions is confirmed through the Bitcoin blockchain. That means new files need to be added to the files on all the computers.
Parts of the Blockchain
The blockchain is essentially a network of “nodes”. A node is an individual computer connected to the blockchain network. Each node gets a copy of the blockchain. That copy is automatically downloaded when you join the blockchain network. As part of the blockchain network, each node also has the job of validating and relaying transactions on the blockchain.
Each node is a blockchain administrator.
Why would someone become a node? Each node has a chance of winning Bitcoins. Each node is constantly solving computational puzzles. You know how people talk about Bitcoin mining? Essentially, Bitcoin mining is just using a powerful computer to solve algorithms.
Future Uses for the Blockchain
Bitcoin was the first major use for the blockchain – but it certainly won’t be the last.
The potential for blockchain technology is enormous. The biggest implications for the blockchain are on the world of finance.
Blockchains could cut out the middleman for money transfers, for example. That could facilitate the transfer of money worldwide. Instead of having a middleman – like a bank – charging money for each transaction, we could use the blockchain to securely transfer money worldwide at minimal cost.
Most Popular Altcoins and Cryptocurrencies Available Today
Cryptocurrency markets fluctuate constantly. Here are the most popular cryptocurrencies – including Bitcoins and altcoins – available today based on market capitalization.
- Bitcoins ($23.1 billion market cap)
- Ethereum ($7.1 billion)
- Ripple: ($2.0 billion)
- Litecoin ($0.8 billion)
- Dash ($0.65 billion)
- Ethereum Classic ($0.6 billion)
- NEM ($0.45 billion)
- Monero ($0.33 billion)
Ultimately, new cryptocurrencies emerge regularly. Some rise and fall. Some stick around, while others disappear into the depths of internet history.
By following the tips listed above, you can learn how to buy Bitcoin from Bitcoin exchanges and how to safely transfer your money. We’ve also taught you about the blockchain and some of the most popular altcoins available online today.
