Disclaimer: everything written in this article are based on my own experience and are my own opinions, and nothing should be construed as financial advice. Always DYOR.
With the world going up in flames thanks to riots and a pandemic, many fundamental economical and social problems are being exposed. Along with the chaos came a lot of volatility in the financial markets, and since the big crash in March I have been getting a lot of questions from friends and colleagues about how to get started with buying bitcoin.
I have thus written a beginner’s how-to guide to investing in bitcoin. May it give you the background info needed to help you understand the space better, and may it guide you to safely make your first bitcoin purchase.
Why is Bitcoin Valuable
This is usually the first question asked by every person who does not understand monetary economics. People will say, “bitcoin is just some internet money that’s not backed by anything.” The truth is, your everyday fiat currency (“fiat” refers to standard government-issued currencies such as the US Dollar, British Pound, Chinese Yuan, etc.) nowadays is just some electronic money that’s not backed by anything other than government promises.
Years ago, we could at least hide stacks of bills under our mattress, for peace of mind knowing that we have possession of our own money (older generations who came from socialist countries still have this habit). In most developed countries now, however, we are no longer using cash, and money has become entirely digital. This means that fiat currencies of today are basically numbers in a database, controlled by the government or the bank. This is very bad for the average citizen, because it means that we as individuals have completely surrendered the control of our own money to the authorities.
Bitcoin is the saviour that we needed. Due to its unique, decentralized network, bitcoin transaction outputs are being broadcasted and verified by the entire network’s nodes, spread out around the globe. This means that for every transaction that happens on the bitcoin blockchain, people who are running nodes around the world are acting as verifiers and accountants. There is no central authority or third party that can confiscate or freeze your assets or transactions without your permission. On top of that, there will ever only be 21,000,000 BTC in existence, with the mining of new bitcoins becoming more and more difficult over time. Similar to gold, this gives bitcoin a rare property of being a scarce asset.
Because of these decentralized, censorship resistant, and scarce properties, bitcoin allows us to truly control our own money in the form of an asset that is likely to appreciate rather than depreciate. In our current day and age, this is increasingly important as banks and governments are becoming more and more intrusive on privacy, and the Central Banks are printing money like crazy to dilute the purchasing power of our fiat savings. Bitcoin and gold are hedges against failing fiat currencies, and judging by how things are going in 2020, everyone should be diversified into BTC and gold.
You Can Buy a Fraction of a Bitcoin
Most of you probably already know this by now, but I still occasionally encounter surprised faces when I tell people that they can buy a fraction of a bitcoin. Many often fret over the “high” price of bitcoin, thinking that they cannot afford to buy something that is priced at almost $10,000 USD, but in fact it is easy to get started with a much smaller investment to test the waters.
A bitcoin (BTC) is denominated to the 8th decimal place: 0.00000001 BTC being the lowest unit of a bitcoin, called a “satoshi” or “sat” for short. For example, if you are to buy $500 worth of BTC at the current BTC price of $9,600, you will receive 500/9600 = 0.05208333 BTC.
It is of many bitcoin supporters’ belief that several years down the road, in a future where fiat has depreciated tremendously, bitcoin will become more commonly denominated in satoshis rather than BTC. Imagine something like, “this item is worth 600k sats.”
Make Sure It’s Bitcoin
Bitcoin (BTC) has been in existence since 2009, however due to some disputes and politics in the space, we now have several cryptocurrencies with “bitcoin” in their names. These alternative coins (collectively known as “altcoins”) resulted from the “forking” of the bitcoin blockchain, and are totally different digital assets from the real BTC.
One such altcoin (shitcoin) is called “Bitcoin Cash,” with the ticker symbol “BCH.” On some websites and wallet apps, it may not be obvious whether you are dealing with BCH or the original BTC, so make 100% sure to check the symbol before buying or sending any coins. BTC and BCH use different wallet formats and if you try to send one to the address of another, your coins will be lost. There are many stories of newbies who bought BTC but mistakenly sent the BTC to a BCH wallet and thus lost their coins forever.
Beware, and stay away from the imposter forks. Look for BTC only.
How to Buy Bitcoin with Fiat Currency (“Regular Money”)
To buy BTC with fiat currency, you have two options – through over-the-counter (“OTC”) transactions or through an exchange platform.
OTC transactions refer to directly buying bitcoin from another person, usually met through introductions, social groups, or online from OTC sites such as hodlhodl.com. For example, you meet up with Simon who has 0.1 BTC to sell for $1,000, you hand him the amount of money in cash (or bank transfer, or Alipay, etc.) and he sends the BTC to your wallet address. Ta da! Simon gets some cash in the local currency and you get some BTC. In countries where exchanges are not legally allowed to operate (e.g. China) or where political instability means very few exchanges are willing to accept citizens of that country (e.g. Iran), OTC transactions play a major role in purchasing/selling BTC. OTC trading is also a good way to buy/sell BTC off the record, for your privacy.
The other method of buying BTC with fiat money is through online exchanges, and this is by far the most common and beginner-friendly method. You need to register an account with an exchange, pass KYC/AML checks, and then deposit some money from your bank account into your exchange account via a wire transfer or SEPA (if you are European). Once the money arrives in your exchange account, you can go ahead and buy bitcoin or other cryptocurrencies. Some exchanges accept faster payment methods such as credit cards, which means you do not need to wait for 2 or 3 days for your bank deposit to be completed, but the fees are usually higher. There are many bitcoin exchanges on the market today, and you need to pick the right ones to use for your situation. I will go into more detail on several reputable exchanges below.
For people who are unfamiliar with the money flow in a fiat/bitcoin transaction, this is how it works (note that selling BTC and cashing out to fiat is the opposite way):
$ in your bank ->(wire)-> crypto exchange’s bank -> funds added to your crypto exchange account -> you can use the funds to buy BTC
Note that in order to buy BTC with fiat on an exchange, you will need to pass fairly comprehensive KYC/AML verification. This often involves submitting a photo of your passport, a proof of your residency such as a utility bill or rent contract, and sometimes a selfie photo of you holding your passport.
The Most Reputable Crypto Exchanges
There are several exchanges that are household names in the industry by now, and act as the major entry points for fiat money into the cryptocurrency world. I’ll list them below with a quick summary on each one:
Bitfinex – Been around for a while and has traditionally been the exchange with the largest trading volume. Bitfinex is run by some brilliant people in the space with libertarian ideals, and I am a big fan of the team. It allows fiat deposits in common fiat currencies such EUR, USD, and JPY, but is not open to citizens or residents of the USA. The exchange’s UI/UX is a bit more technical but the exchange has large volumes and high liquidity, and it has one of the most reliable and user-friendly trade engines in the space. Bitfinex was the victim of a hacking incident back in 2016, resulting in losses of millions of dollars of bitcoin, however the company has since recovered from the incident, improved their security, and paid back all the lost funds for its users. Their recovery from this hack showed me that the company is here to stay, and they are serious about their business and customers. I have an account with Bitfinex myself and I use it often for more sophisticated trading.
Bitstamp – Originated in Slovenia but now operating worldwide with offices in London and New York, Bitstamp is the oldest surviving bitcoin exchange in the world and has a reputation as a conservative and highly reliable company. It is a popular exchange for European residents, since European residents can deposit funds via SEPA transfer along with regular wire transfer. Nowadays, Bitstamp is one of my exchanges of choice for buying BTC with fiat, as they provide a fairly fast KYC process and an easy user experience for depositing fiat currency.
Kraken – Kraken is a California-based exchange that has been around for a while, offering good options for fiat entry, accepting major currencies such as USD, EUR, JPY, and CAD. Along with Coinbase, Kraken used to be my go-to exchange back in 2016 when I first started getting into the space, as it was one of the few exchanges that accepted bank wire in Canadian Dollars. Nowadays I don’t use Kraken as much, but it remains as one of the most reliable and most fiat-friendly options for users. It is also open to US citizens. If you are trying to deposit money on other exchanges but are experiencing trouble with banks, then Kraken will probably be your best bet. The CEO of Kraken, Jesse Powell, is also a highly respected figure in the bitcoin space with excellent reputation.
Coinbase – Widely known as the noob-friendly industry standard and the most regulator-friendly (a.k.a. sucks up to authority the most). It is an established company based in California, compliant with US regulations (read: in bed with the IRS), and has a simple and easy-to-use interface. Supports deposits/buying by residents of USA, Canada, UK, Australia, and nearly all EEA (European Economic Area) member states. Purchase methods include bank transfer and credit/debit cards. When I first started buying bitcoin back in 2016, there were very few good options for buying BTC online based on my nationality, so my best option was to use Coinbase through credit card purchases. Nowadays there are better options and I am no longer buying bitcoin with credit card through Coinbase, but I would still recommend it as a newbie-friendly platform – just don’t get sucked into all the other useless coins they try to advertise. The company has picked up a lot of bad PR in the bitcoin space in recent months due to issues with performance and company direction.
There are many other exchanges out there that accept fiat money, but few are as reliable or reputable as the above mentioned. In fact, many of the other exchanges out there can be very shady and unreliable. If you are new to the space, you should definitely stick to the 4 options above.
Along with BTC, you can also purchase altcoins through these exchanges, including the likes of Litecoin (LTC), Ethereum (ETH), and others. The intrinsic values of these other coins though are highly debatable, and I would stay away from buying or trading them until you have done some in-depth research.
Where to Store Your Bitcoin
Most people simply keep their bitcoin in their exchange accounts — this is convenient and allows the funds to be easily accessible for trading or selling back into fiat money. However, the longer-term and more sophisticated investors often keep bitcoin in their own wallets, so that in the event of an exchange being hacked or the IRS suddenly demanding the exchange to freeze everyone’s funds, they will not have the risk of losing their money.
There are many wallet options out there, but it is important to separate the wheat from the chaff. Many fake wallet apps and scams have been reported over the years, so make sure you only use reputable wallets from authentic sources.
Bitcoin wallets can be online or offline, and can be “soft” (software) or “hard” (paper or hardware). Offline hardware wallets (or “cold storage”) tend to be the most secure option, with hackers having no chance to access your funds since the device is not connected to the internet, but they are a bit more complex to use.
Personally, I store some of my long-term bitcoin holdings with a hardware wallet called Ledger Nano S. I find it to be fairly user friendly and reliable.
I also use some online software wallets for convenience’s sake. The best one in my opinion is the Green wallet from Blockstream. It has both mobile and desktop versions and is backed by one of the top development companies in the space.
I will not delve into detail on the various types of wallets and how to use them for now. If you are interested in storing your coins in your own wallet, do a Google search and read a reputable guide that explains your options in detail, and always be careful when transacting your bitcoin.
Bitcoin is a major disruptive technology that is reshaping the landscape of money, and cryptocurrencies are here to stay despite all the naysayers. I hope this guide provides an easy-to-understand introduction to the basics of purchasing bitcoin. On the road to bitcoin investing, you will come across many opinions and overconfident claims, and plenty of news both fake and real. As with everything in today’s information era, it is paramount to do your own research (#DYOR), because there will always be the snake oil salesmen looking to misdirect you for their own profit.
For example, I have seen many so-called “crypto experts” up-selling totally useless trash that claim to revolutionize the world with blockchain tech (e.g. XRP, and all the dead shitcoins). The madness of crowds can be a dangerous thing, and it is wise to always look at things objectively. Lastly, bitcoin and the cryptocurrency space is still an immature and highly volatile market prone to huge swings in price, so as with all risk/reward scenarios, make sure to only invest what you are willing to lose.
Lastly, don’t ask me *when* to buy or sell, or if *x time* is a good time to buy or sell. I am not god and I do not control the crypto markets, therefore I cannot tell you with certainty which direction the price will go. For most people who are not seasoned traders, the dollar cost averaging method often works best. Check out my other post about newbie pitfalls to avoid for more details.
PS: If you are a bitcoiner, you can earn free bitcoin rebates when you buy stuff online, simply by using Lolli. Lolli is a startup aiming to bring bitcoin mainstream — use Lolli, support me and support the revolution of money.