Bitcoins (BTC) frenzy is becoming huge by the day. People are mortgaging their precious properties to purchase and trade Bitcoins. Companies are being founded by investing Bitcoins. Bitcoins have their own exchange rates and ATMs. Fortune 500 companies like Expedia and Dell are accepting Bitcoin payments. Governments and public sector banks are also experimenting with this digital currency.
Are you also looking to make hay while the Sun shines? Are you looking for guidance on Bitcoin trading before you start heavy-duty Bitcoin trading? This article will explain the basics about Bitcoins, and the step-by-step process of buying and trading Bitcoins.
The word “Bitcoin” can be broken into two components “bit” and “coin”. Bit means digital and coin implies currency. Hence, Bitcoins are a type of digital currency-meaning they don’t exist in any physical form like Dollars or Pounds. There are many other types of digital currencies such as Ethereum and Litecoin. But Bitcoins, being the oldest cryptocurrency, have become the most popular and trusted one.
Bitcoins, just like any other asset, can be used for purchasing goods or services. They can even be traded for cash or another digital currency. Actually a Bitcoin is an encrypted unique signature made up of 16 symbols (private key); known only to the person who possesses them. When a purchase or transfer of Bitcoins has to be made, the possessor needs two pieces of information- the public key of the receiver and his own private key. The receiver decodes the private key, and gets it verified by all the people in the chain (nodes). Once all servers on the network verify, the transaction is confirmed and it’s recorded on a public ledger (blockchain) that is visible to everybody. Hence, Bitcoin trading is based on “consensus”. Once a transaction is validated, a new block is added to the ledger and this transaction cannot be reversed or modified by anybody. So, crypto transactions are irreversible.
New Bitcoins are generated by servers in a blockchain whenever a transaction gets verified. When a transaction is initiated, all miners are alerted and they start their calculations. This process is called “mining” and it involves solving complex number-crunching exercises. The Bitcoin system allows only 6 blocks to be added in an hour and the longer the blockchain, the more complex the number exercises become. This limits the total number of Bitcoins in the universe. You can mine Bitcoins on your own using this guide.
How Bitcoins Work
The exciting part about using Bitcoins is that there is no central controlling agency like a treasury to sanction a transaction. Once all nodes ensure there is no double spending (spending already spent currency), the transaction can take place. Hence Bitcoin work on a “peer-to –peer” network.
Since there are no middlemen involved, Bitcoin trading is free-of-cost and more efficient than hard cash transfers. Plus, you will be exchanging encrypted information that is literally impossible to hack, Bitcoin trading is extremely secure. Further, Bitcoin are stored not in real accounts but virtual wallets that are not connected to any human identity. They are anonymous and identifiable only by a 30-characters digital address.
How to Get Bitcoins?
There are four places where you can get your first stash of Bitcoins:
Cryptocurrency exchanges- These are open marketplaces or brokers where you can use regular cash, cheques or wire transfers for purchasing Bitcoins. You can create an account in an exchange and purchase Bitcoins and start trading here. For newbies, trading through exchanges is best. Coinbase, BitHumb, and LocalBitcoins are some exchanges.
Bitcoin ATMs- These machines send Bitcoins to your wallet in exchange for cash. Just feed in your cash, hold up your wallet’s QR code for scanning, and an equal amount of Bitcoins are transferred instantly to your wallet. Use Coinatmradar to find a Bitcoin ATM near you.
Classified sellers: You can buy Bitcoins from individual sellers in exchange of cash or assets. LocalBitcoins is a leading seller in U.S.A..
Sale of assets or services: Sites like Purse can help you sell your goods, assets, or services to get Bitcoins.
How you can get Bitcoins
It’s advisable to read reviews of exchanges and sellers before investing any money. Some cryptoexchanges have gained notoriety for conducting large transactions on their private ledger, using investors’ private accounts.
Preparation Step: Get a wallet
A wallet is used to store your Bitcoins. Instead of holding actual Bitcoins, wallets contain your encrypted signature (private key). Some exchanges like CoinBase are also a wallet. You will need a wallet whether or not you use a cryptoexchange. You can own an account in one exchange and wallet in some other. Wallets allow you to trade freely with individuals and exchanges.
Here are the five main types of wallets and their advantages and disadvantages:
Electronic wallets- These are actually downloaded files that exist on your computer. If they are cloud-based, you will allow a third party, the cloud hosting company) to access your private keys.
Software wallet- These are applications that you will have to download from Google play or Apple store, depending on your system’s iOS. Their advantage is that they give you complete control of your private keys. A downside is their security issues. You will have to take regular backups else you lose your private keys if your system gets stolen or compromised. If somebody hacks your computer, they can access your private keys. These wallets are also of three types- full client, lightweight, and web-based. It’s better to use a lightweight wallet like Electrum or Exodus that downloads only real-time transactions on blockchain, instead of the entire history of transactions since the first Bitcoin was created.
Online wallets- These wallets are cloud-based and allow you to handle your Bitcoins from any computer or location, if you know your passwords. They are easily downloadable and usually free. Their questionable security makes them a risky option. Coinbase and Xapo offer secure online wallets.
Mobile wallets- These are available as mobile applications that you can use on the move. They are great if you want to do shopping using Bitcoins. Bread and Arba are exclusively for smart phones and tablets.
Hardware wallets- These are compact flash drive-like devices that can be plugged in when you start transacting. They are very secure.
Paper wallets- These are hard copy of your private keys. They can be stored safely or gifted to someone, but are prone to water and fire hazards.
Different Types of Wallets and Their Platforms
The type of wallet you choose depends on your spending strategy. You could hold a Bitcoin balance offline (in hardware or paper wallets) and some liquid Bitcoins (in software wallets) for immediate spending. The only word of advice is to keep your private keys secure and share only with trusted people.
Warm-up Step: Find an exchange
Next, you will need to pick a reliable crytoexchange to buy your first Bitcoins. You can buy Bitcoins directly from a Bitcoin holder, but it’s too risky. Exchanges like GDax and CoinBase offer real-time exchange rates that let you buy Bitcoins at fair market value. They also have many great features and tools to manage your Bitcoins. CoinBase also has an integrated wallet.
If you will deal occasionally, you will not be required to open an account in the exchange. But if you plan to be a long-time investor and make big transactions, you will have to sign up into the exchange.
There are three types of exchanges:
Brokers: They are like foreign exchange or gold for cash brokers. They set a purchase rate for Bitcoins and you will have to buy your Bitcoins at that price.
Trading exchanges: These are brokers that connect buyers and sellers and charge a fees from both parties.
Direct trading: They allow peer to peer exchange of Bitcoins at a rate set by each individual seller.
To guide you in selecting the best exchange for your first buy, we created a five-point checklist:
Favorable reviews on forums like Bitcointalk and Reddit will tell you about the reputation of an exchange. Reputable exchanges tell about their regulatory compliance on their websites.
- Full disclosure of fees-related information on the exchange website. Most exchanges charge 1% pre transaction flat rate fees for selling directly to buyers. Large-ticket transactions can be done at lower fees of 0.25%.
- Multiple payment methods such as credit card, online wallets, and wire transfers are great. Bear in mind that if an exchange allows payment only by credit card, they will require you to reveal your identity and also charge processing fees. Wire transfers can take longer.
- A short verification process that lets you start trading instantly.
- A low cryptocurrency exchange rate. Rates can vary by almost 10% between exchanges.
- There should be no geographical restriction on the use of tools and wallets from an exchange. You should enjoy full access to all platform tools from any location you want.
- Usually exchanges have a cap on the amount of Bitcoins that can be transacted per person in a day. The limit is more for fully-verified users and less for occasional users.
In the wake of many money-laundering cases in Bitcoin exchanges, IRS has mandated users to fill a KYC (Know Your Customer) form and offer photo identification in order to get registered at an exchange. These steps may seem cumbersome but are essential to safeguard your investment in the long run.
Read detailed reviews of all leading cryptoexchanges here.
Buying Step: Buy your Bitcoins
Login to your exchange and start purchasing Bitcoins. You can purchase any amount of Bitcoins you wish, evne less than one Bitcoin. You will be charged a transaction fee from the exchange and depending on your payment method (credit card, cash, transfers, or from another exchange) your transaction can be fast or slow.
Next, transfer your Bitcoins to your wallet and get a Bitcoin debit card to start shopping!