Know Best Practices involved in Buying Bitcoin when Investing in Bitcoin might initially seem complex, but breaking it into components simplifies the process. To invest or buying Bitcoin, you need a cryptocurrency exchange account and secure storage methods. This requires a cryptocurrency exchange account, personal identification documents for KYC compliance, a secure internet connection, and a preferred payment method for ambitious Bitcoin investors.
Additionally, maintaining a personal wallet separate from the exchange account is advisable. Avoid investing solely due to FOMO (fear of missing out). Bitcoin has shown remarkable growth, with its value increasing nearly 30,000% from October 2013 to early June 2021. As cryptocurrencies and blockchain technology become more integrated into daily life, some experts predict further growth. With over 425 million cryptocurrency owners globally, 219 million hold Bitcoin. This article addresses common questions and best practices for buying Bitcoin.
Before you buy Bitcoin: Best Practices involved in Buying Bitcoin
Buying Bitcoin might seem complex initially, but it simplifies when you break it down into steps. Buying Bitcoin becomes more accessible daily due to increased trust in exchanges and wallets. However, before purchasing Bitcoin, you require a storage solution.
In the cryptocurrency world, this storage is known as a “wallet,” which comes in various forms. Wallet types offer diverse security, storage, and access options. The primary wallet categories are desktop, mobile, online, hardware, and paper.
It’s crucial to note that a wallet doesn’t store Bitcoin; it holds private keys necessary for accessing and spending funds. Losing these keys means losing access to Bitcoin.
Desktop wallets: Installed on a computer, these provide control over funds, with thick and thin options.
Mobile wallets: Offer convenient, on-the-go access to funds through smartphones and QR codes.
Online wallets: Store private keys on external servers, enabling easy access but posing security risks.
Hardware wallets: Portable devices that keep private keys offline for enhanced security.
Paper wallets: Store essential information in printed form, including wallet addresses and private keys.
Additional options include multisignature wallets and Bitcoin custody services.
Buying Bitcoin in 4 Steps
Step 1: Choose a Crypto Exchange
To acquire Bitcoin or any cryptocurrency, you’ll need a crypto exchange where buyers and sellers conduct dollar-to-coin exchanges. As a novice, opt for an exchange that prioritizes user-friendliness, low fees, and robust security. Consider options like Unocoin, WazirX, ZebPay, and CoinDCX if you lack a preferred exchange.
Transferring cryptocurrency between exchanges is feasible. For instance, moving Bitcoin from your WazirX wallet to another exchange necessitates a withdrawal procedure. Obtain the deposit address from your chosen exchange, and you’re ready to transfer your funds.
Step 2: Decide on a Payment Option
After selecting an exchange, funding your account is the next step before investing in Bitcoin . Keep in mind that transaction fees may vary; some platforms charge higher fees for specific funding options.
Using electronic transfers from a bank account is often a cost-effective choice, as it minimizes fees, allowing you to invest more and maximize potential growth.
Step 3: Place an Order
Once your account is funded, initiate your first Bitcoin purchase. The platform you use will determine the method – it could be as simple as tapping a button or inputting Bitcoin’s ticker symbol (BTC) along with your desired investment amount.
Upon completing the transaction, you’ll own a portion of Bitcoin. Given the current high price of Bitcoin, you’ll receive a percentage corresponding to your investment. For example, a $1,000 investment at a $38,000 Bitcoin price would yield 0.026% of a Bitcoin.
Step 4: Select a Safe Storage Option
Most crypto exchanges provide integrated Bitcoin wallets or recommend secure partner wallets. However, some individuals prefer enhanced security by not keeping their crypto online, where it’s vulnerable to hackers.
Crypto exchanges primarily employ offline, or cold, storage for customer assets. If you prioritize top-tier security, consider using an online or offline Bitcoin wallet of your choice. Be aware that transferring crypto off an exchange may entail a minor withdrawal fee. Additionally, if you opt for a third-party crypto wallet custodian, losing your private key could result in permanent loss of access to your coins, a fate that has befallen some Bitcoin millionaires.
Selling Bitcoin
When you decide to sell your Bitcoin, the process mirrors your initial purchase. Your exchange offers various order types, allowing you to choose to sell when Bitcoin reaches a specific price or execute an immediate sale.
If your Bitcoin sale generates a profit, remember that capital gains taxes apply to cryptocurrency sales, necessitating reporting on your tax returns.
Best Broker to Buy bitcoin
Coinbase
Coinbase serves as a preferred choice for novice cryptocurrency traders due to its straightforward sign-up process, accommodating those with no prior investing experience. With a mere $2 as a starting point, investors can initiate their journey with a variety of payment methods, including debit/credit cards and PayPal. Despite its user-friendly approach, Coinbase imposes relatively high fees.
For instance, when purchasing Bitcoin instantly with fiat money, a 3.99% fee applies, translating to $39.90 for every $1,000 invested. Additionally, a 1.49% charge is levied on cryptocurrency trades, equating to $14.90 when swapping $1,000 worth of Bitcoin for US dollars.
Notably, Coinbase’s pricing structure appears somewhat opaque, revealing fees only at the moment of purchase. Nevertheless, millions of customers choose Coinbase daily, drawn not only to its intuitive investing platform but also its robust security framework. As a regulated exchange and publicly traded on the NASDAQ, Coinbase enforces mandatory two-factor authentication, keeping 98% of client-owned cryptocurrencies in cold storage.
Kraken
Kraken, established in 2011, caters to millions of traders worldwide, from the US and the UK to Europe and Australia. While it accepts debit/credit card payments at a 3.75% fee, the more cost-effective but slower alternative is purchasing Bitcoin via a bank account. Kraken boasts the advantage of offering Bitcoin margin accounts, requiring only a 20% upfront payment, thereby enabling 5x leverage. It also features a ‘Pro’ trading suite favored by experienced traders and supports leveraged Bitcoin futures.
Binance
Launched in 2017, Binance has become the largest crypto exchange by trading volume. It facilitates trading in over 350 cryptocurrency markets, including Bitcoin. Once funds have been deposited, users can buy Bitcoin at a commission of merely 0.1%, making it highly competitive at just $1 for every $1,000 traded. However, Binance caters primarily to experienced investors, offering leveraged cryptocurrencies, futures, options, and yield farming. On the security front, Binance enforces two-factor authentication and stores the majority of client-owned funds in cold storage, although it did experience a major hack in 2022, resulting in losses of over $570 million.
Crypto.com
Crypto.com, a popular exchange with over 80 million customers, provides a convenient means to buy Bitcoin via a smartphone. The Crypto.com app facilitates instant debit/credit card purchases at a 2.99% fee, but the most economical method involves a bank transfer. For instance, in the US, ACH deposits are fee-free, clearing within 30 minutes, a worthwhile wait to bypass the 2.99% debit/credit card fee. Customers in various countries also enjoy fee-free bank transfers, including the UK and Australia.
Following the deposit’s arrival, users can purchase Bitcoin with a minimal commission of just 0.075%, equivalent to $0.75 for every $1,000 traded. Moreover, Crypto.com supports over 250 digital assets, including Bitcoin, Ethereum, Cardano, Dogecoin, Polkadot, XRP, and USD Coin. It also offers DeFi tools such as crypto loans, savings accounts, and a decentralized wallet.
Buying Bitcoin: Here’s what to watch
When considering your Bitcoin acquisition options, evaluate the following factors to shape your choice and avoid potential pitfalls:
1. Ownership: Decide between direct Bitcoin ownership or futures contracts, impacting your returns.
2. Profit Potential: Owning Bitcoin directly yields a one-to-one profit increase with its price, while futures allow quicker gains with less initial capital. However, direct ownership limits potential losses.
3. Costs: Bitcoin purchase costs fluctuate, with futures contracts being a cost-effective option, contrasting brokers charging substantial percentages for direct purchases. Frequent trading can erode profits.
4. Security: Newer cryptocurrency platforms may have security vulnerabilities, exemplified by the $570 million Binance hack in 2022. Traditional brokers tend to offer better security due to their longer industry presence.
5. IRS Reporting: Remember that all cryptocurrency transactions, including receiving Bitcoin in commercial dealings, are reportable to the IRS for tax purposes.
Conclusion
In 2023, purchasing Bitcoin becomes a straightforward, affordable, and secure process through a suitable crypto exchange, boasting regulatory licenses from five jurisdictions and a minimal $10 deposit requirement. Bitcoin, a contentious technology, may appeal to investors seeking portfolio diversification. If you aim to amplify the risk-return potential of your portfolio with more volatile assets, consider Bitcoin. Some view it as a shield against inflation, an “inflation hedge.”
However, experts largely dispute its effectiveness in this role, as buying Bitcoin has not endured significant inflationary periods due to its relatively short existence. Furthermore, it fails to function as a hedge against stock market volatility, behaving more like a speculative tech or momentum stock. This contradicts the hedge’s core purpose, which should counterbalance the asset it safeguards, moving oppositely when the market fluctuates.
