Nowadays, almost everyone has heard of Bitcoin. In this article, we provide a step by step guide for buying and storing bitcoins securely.
Editor’s Note, May 11, 2020: The “Halvening,” is here. This refers to the date when Bitcoin halves the reward that goes to its miners for completing a block. In this halving, the reward will go from 12.5 bitcoins for every block completed to 6.25. This happens roughly every four years, and the last halving led to a massive surge in Bitcoin value. This upcoming halving event has prompted more and more users to ask us about Bitcoin. To answer some of these questions, we updated this guest post from a Bitcoin expert from our community.
What is Bitcoin?
Here are the main points that you need to understand before buying Bitcoin.
1) Bitcoin is a form of digital money, protected by cryptography, which makes Bitcoin transactions secure. That is why it is called a “cryptocurrency.”
2) Bitcoin exists only in a digital form. It is never printed, which means that bitcoin is a form of digital information.
3) Bitcoin is decentralized. There is no specific place where bitcoins are released, nor is there a central server that runs the system. Bitcoin infrastructure is distributed among all users, meaning their devices run the system. Thus, you do not buy bitcoins from any central bank.
4) The amount of bitcoins is limited. You can make an analogy with gold: the amount is also finite. In other words, compared to other currencies like the US dollar or Swiss Franc, the total amount of Bitcoin is limited to 21 million bitcoins, and cannot be increased. Therefore, Bitcoin generally has a determined inflation model. Inelastic supply is one of the reasons that Bitcoin prices have tended to rise over time (but many other factors play a role in determining Bitcoin price). $100 in bitcoins purchased five years ago would today be worth millions.
Advantages and disadvantages of using Bitcoin
1) Decentralization, remember? This not only means that there is no central server, but also that there is no “Central Bank”.
Bitcoins are produced through the process called mining. In the Bitcoin environment, mining refers to the grouping outstanding transactions into blocks and adding them to the blockchain. As a reward for this service, the system “gives” miners bitcoins. Bitcoins can be mined by anyone that has the right computer equipment and expertise. Because Bitcoin is digital, it is “mined” digitally using computing devices specifically designed for that purpose.
2) Lower Fees. There is no specific bank or service like (for example) PayPal that conducts and controls all the transactions. Generally, this means that Bitcoin transaction fees are much much lower. This also means that there are very few extra costs involved in obtaining Bitcoin other than the cost of buying the bitcoins themselves.
3) Transactions can be conducted quickly, no matter whether you send bitcoins to your neighbor, or to a business partner that is on the other side of the world. Generally, the longest time it takes for a Bitcoin purchase to be verified is about an hour instead of days for traditional money transfers.
There is also a lightning network in development that would make transactions even faster and cheaper.
1) Since Bitcoin is a completely new and non-governmental international currency, there is still a lot of uncertainty regarding its legal status. While bank deposits are often insured and protected by law, this type of protection doesn’t exist for bitcoins that you purchase.
2) Bitcoin is intangible. It cannot be touched or seen like gold. This is a reason why some people are wary about buying Bitcoin, as you can never “see” your purchase.
3) It has high volatility. Throughout its history, the price of Bitcoin has experienced dramatic climbs and falls. So no one knows for sure whether it will follow an upward trend or not. The volatility also makes it hard to conduct business with it since Bitcoin prices often vary 10% or more per day. In other words, buying bitcoins is not without risk.
How to buy Bitcoin
New Bitcoin buyers typically have three questions:
- How can I purchase Bitcoin?
- How should I store them?
- How can I spend them?
If you want to purchase Bitcoin, the first thing you need to do is to create a wallet. A Bitcoin wallet is a special software program, where users store the private data necessary to manage their bitcoins and make bitcoin transactions. There are different types of wallets, but the most popular are custodial wallets (software that you download on your PC that store your private key locally), non-custodial wallets (software or services that store your private key), and hardware wallets (dedicated hardware that protects your private key and signs transactions).
Hardware wallets are generally accepted to be the most secure. Setting up a wallet with Trezor or Ledger is a Bitcoin security best practice. These hardware wallets give you full control over your cryptocurrencies. Electrum, a desktop wallet, is also a secure option. (You can even combine Electrum with Trezor and Ledger.)
These may be complicated for new users to set up, but they are the best option if you are storing large amounts of Bitcoin. You should also distribute your bitcoins over several wallets, so you don’t have all your eggs in one basket.
For extra security, you should consider using a ProtonMail encrypted email account for your Bitcoin wallet.
In order to purchase Bitcoin, you need an address. Your Bitcoin wallet will provide you with one. Your address is a set of randomly generated numbers and letters that you share with people you are sending bitcoins to or receiving bitcoins from.
Once your Bitcoin wallet is set up, the next step is to buy bitcoins. If you are a newcomer to Bitcoin, Bitcoin exchanges are the best option. Some of the most popular international Bitcoin exchanges include Coinbase, CEX.IO, Binance, FTX, and Kraken. (There are also decentralized exchanges, like LocalCryptos, where people can exchange cryptocurrencies directly with each other.) There are many exchanges out there, so it is important to pick a reputable one. The process of buying Bitcoin is easier than purchasing regular goods on the Internet because you don’t need to provide a shipping address, just your Bitcoin address.
For new users that feel setting up a hardware wallet is too complicated, Coinbase is an exchange and a wallet, meaning it is very simple for new users to buy and store Bitcoin. Just remember, if you do not control the private keys to your bitcoins, then you don’t really control your bitcoins. And once you begin purchasing large amounts of Bitcoin, we recommend you switch to a hardware wallet.
Purchasing bitcoins from an exchange involves three steps:
- Entering your card data
- Sharing your digital wallet address (Be careful when entering your address, A typo could send your bitcoins to the wrong recipient. It is safest to copy and paste your Bitcoin address directly from your wallet).
Using a ProtonMail email address for your Bitcoin exchange registration is also a good idea if you want additional security.
In addition to exchanges, there are many other methods of purchasing bitcoins. There are broker websites that provide a trading platform for people to exchange their bitcoins directly. Bitcoin ATMs are another option. They are very similar to ATMs maintained by banks, and there are hundreds of them all over the world. You can also mine your own Bitcoin, but this is becoming more and more difficult for ordinary people to do.
How to use Bitcoin
When Bitcoin first appeared in the market, you could only find private individuals who were willing to sell their stuff for bitcoins. For instance, at the dawn of Bitcoin history, one Bitcoin enthusiast paid 10,000 bitcoins for a couple of pizzas. But now everything has changed, and more and more companies accept Bitcoin. For instance, you can buy a Dell laptop using bitcoins, as well as any Microsoft product. You can also pay for ProtonMail upgrades with Bitcoin. Some Bitcoin wallets provide mobile apps that make it even easier to spend your bitcoins.
The idea of Bitcoin is clever and revolutionary. It’s a currency that is not influenced by anything except by supply and demand, and it is not under the control of any government or organization. It could very well be the future of money. If this sounds exciting, now you know everything you need to become a Bitcoin user.
About the author
Mary Ann Callahan is a UK-based freelance journalist who specializes on Bitcoin-related topics. Currently, she writes for CEX.io, a multi-functional cryptocurrency exchange. She writes articles related to blockchain security, Bitcoin purchase guides, and Bitcoin regulations in different countries. Previously, she worked for Boston Globe Media and holds a Master’s degree in Journalism from Columbia University.
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