How to buy Bitcoin: A step-by-step guide
It is relatively easy to buy Bitcoin right now. But before buying Bitcoin, you need a place to store it. In the world of cryptocurrency, that place is called a “wallet,” and they come in a variety of forms. Different types of wallets provide Bitcoin (BTC) owners with many kinds of security, storage and access options.
It is important to mention, however, that your wallet doesn’t technically store your Bitcoin. Instead, it holds private keys, which are essential for accessing a Bitcoin address and being able to spend the funds. Those digital keys are required to sign transactions, and if a user loses them, they essentially lose access to their Bitcoin.
The five main types of BTC wallets are desktop, mobile, online, hardware and paper.
Types of wallets
A desktop wallet is installed on the user’s computer, providing control of funds they send to that wallet, and both thick and thin desktop wallets exist. Thick desktop wallets allow users to download the related blockchain in its entirety, and it provides independent security management of their funds. On the other hand, thin wallets don’t require users to download blocks and can be easily downloaded to a portable device.
The main advantage of a mobile wallet is that the user’s funds are always on hand. It can be a convenient way of paying for goods by scanning QR-codes. In some cases, users can take advantage of their smartphone’s near-field communication feature, otherwise known as NFC, which allows them to just simply tap their phone against a reader without entering any information at all.
One common feature of all mobile wallets is that it is not required to run a full Bitcoin node. This is because a full Bitcoin node has to download the entire blockchain, which is constantly growing and requires significant storage.
If using a web-based wallet, users’ private keys are stored on an online server controlled by someone else and connected to the internet. While it allows people to easily access their funds from any device from virtually anywhere in the world, there is always a risk of the server being hacked or even the organization running the service taking control of your Bitcoin. In general, there’s a lot to consider when buying and managing your Bitcoin.
Hardware wallets are dedicated portable devices that hold private keys offline. There are several different kinds of hardware wallets, but all of them allow users to carry essentially any amount of money in their pocket.
A paper wallet is basically two pieces of information expressed in characters — as well as QR codes — generated using a designated service. One of them is a wallet address that can be used to receive BTC. The other is a private key, through which you can spend Bitcoin stored at that address.
Other Bitcoin storage functionalities also exist. Multisignature, or multisig, wallets require confirmations from multiple sources in order to move or access funds. Some entities also offer Bitcoin custody services, which manage customers’ Bitcoin storage for them.
Where to buy Bitcoin
The number of avenues to Bitcoin ownership is continually increasing, allowing people to choose an option of purchasing cryptocurrency that best suits their needs.
Every new potential Bitcoin buyer will find an array of various exchanges competing for their business. Choosing the right one depends on many different factors, with its location being perhaps the most important one.
Exchanges worldwide fall under different government jurisdictions, requiring various Know Your Customer and Anti-Money Laundering practices, depending on the involved regions. This is why — in order to set up an account and start trading on certain centralized exchanges — you must provide personal information, depending on the exchange and your location.
This leads to the topic of exchange types. A number of different crypto exchange types exist — centralized exchanges, decentralized exchanges, or DEXs, and peer-to-peer exchanges.
Centralized crypto exchanges are online platforms where you create an account with your chosen login details. You must also provide certain personal information, depending on the exchange and the region. On centralized exchanges, you can send funds to that platform in the form of crypto or money from a bank account and can trade with those funds on the platform, including buying and selling Bitcoin. Depending on the exchange, you can trade numerous different crypto asset types, all on one main platform. One of the issues with this model, however, is that you do not technically hold your own funds when they are on the exchange.
DEXs, on the other hand, allow you to make trades from your own wallet. Essentially, DEXs are composed of groups of pooled liquidity for different assets on the blockchain where the DEX is based. DEXs based on Ethereum, for example, facilitate trading for Ethereum-based assets. Bitcoin itself cannot be traded on an Ethereum-based DEX, although certain workarounds exist for that.
Peer-to-peer, or P2P, trading also serves as an option for buying and selling Bitcoin. There are several platforms available for facilitating such transactions, providing an escrow service in order to protect both parties and their funds.
In addition to native crypto exchanges, customers can also buy Bitcoin on PayPal. The platform, however, does not allow users to send their Bitcoin outside of the platform’s ecosystem and does not give users control of their private keys.
An investment trust
An investment trust is a form of collective investment, in which the investors’ money is pooled together from the sale of a fixed number of shares that could have some trust issues when it launches.
The Grayscale Bitcoin Trust (GBTC), the first-ever publicly traded Bitcoin-related investment vehicle, enables people to gain exposure to the cryptocurrency without having to directly buy or store it. GBTC is invested exclusively in Bitcoin and derives its value from the price of BTC. Grayscale also offers different investment products for other crypto assets.
Additionally, a number of Canadian Bitcoin exchange-traded funds, or ETFs, exist — the first of which, the Purpose Bitcoin ETF, was produced by Purpose Investments in 2021. Buying a Bitcoin ETF also gives the purchaser exposure to Bitcoin through mainstream financial avenues, although the investment product type differs from GBTC.
Buying stock in certain companies could also serve as a possible type of investment exposure to Bitcoin. Business intelligence company MicroStrategy, for example, has allocated billions of dollars of its capital toward Bitcoin.
Although users may possibly wonder if Bitcoin stocks are available or wonder how to buy Bitcoin stocks, this classification does not technically exist. You can, however, buy stock in companies involved with Bitcoin, such as companies focused on BTC mining, or buy shares of companies that have invested in Bitcoin.
Buying Bitcoin with credit card or PayPal
It may come as a surprise, but no matter which exact trading method you’re using, it’s still not easy to buy Bitcoin with your credit card or via PayPal, depending on where you are in the world. Exchanges avoid those payment methods, requiring users to connect their bank account instead. Most private sellers tend to be wary of such transactions as well, preferring hard cash.
This is because of so-called “chargebacks.” Most transactions made using credit cards or PayPal can easily be reversed by simply calling the card-issuing company. Bitcoin transactions are irreversible, and since it can be extremely hard to prove that any goods changed hands in a transfer of Bitcoin, this payment method is generally avoided.
Bitcoin ATMs have been appearing in cities all over the world, with numbers continually growing. However, these machines generally charge transaction fees that are considerably higher than those commonly seen on crypto exchanges.
To use a Bitcoin ATM, find a machine in your target area on the internet. You must open an account with the Bitcoin ATM provider online or on-site at the ATM. Opening an account often requires following the Know Your Customer, or KYC, compliance, which can involve providing an ID scan and personal details, then waiting for approval.
Once you show up in person, you insert cash into the Bitcoin ATM and then either scan your mobile wallet QR code or receive a paper receipt with the codes and instructions on how to transfer the Bitcoin funds to your wallet.
It goes without saying that Bitcoin ATMs are very unlikely to appear in countries where Bitcoin is banned or outlawed.
Bitcoin can be used to buy gift cards. Gift cards themselves can also be traded for BTC. All you need to do is purchase any retailer’s gift card, log onto a platform where some sellers accept gift cards, and complete the purchase.
Be on your toes for scammers at all times and be mindful of seller reputations, as well as other, common internet safety measures. In general, awareness and caution can be vital regarding any activity in the crypto space.
Warnings about buying Bitcoin
Legality and protection issues
Bitcoin, in general, has attracted interest from law enforcement agencies, tax authorities and legal regulators. They are trying to understand how the cryptocurrency fits into already existing frameworks and what guidelines to put in place. Your legality in terms of your Bitcoin activities can depend on who you are, where you live, and what you do with the asset.
It’s also worth remembering that crypto exchanges’ protection and security measures, as well as their legitimacy, vary from platform to platform. Different Bitcoin storage methods also have their pros and cons.
Notes of importance about Bitcoin ownership
Safety practices for protecting your Bitcoin depend on the storage type you choose, each having its own preferred practices on how to buy and keep your Bitcoin. Doing research on these practices, as well as on the type of storage that best suits you, is a vital part of Bitcoin ownership. Bitcoin can offer fewer limitations than traditional siloed finance, although such abilities also come with responsibility.