What do I need to buy bitcoin?
1. Digital Wallet: In order to conduct transactions on the bitcoin network, participants need to run a program called a “wallet.” Bitcoin are not technically “coins,” so it only seems right that a bitcoin wallet would not actually be a wallet.
Instead of leather, wallets are made up of two unique and distinct cryptographic keys: a public key and a private key. The public key is the location where transactions are deposited to and withdrawn from.
This is also the key that appears on the blockchain ledger as a user’s digital signature, not unlike a username on a social media newsfeed. The private key is the password required to buy, sell, and trade the bitcoin in a wallet.
2. Personal Documents: The Securities and Exchange Commission of countries require users to verify their identities when registering for digital wallets as part of its Anti-Money Laundering Policy.
In order to buy and sell bitcoin, you will need to verify your identity using several personal documents including your driver’s license and social security number.
3. Secure Internet Connection: If you choose to trade bitcoin online, use discretion about when and where you access your digital wallet. Trading bitcoin on an insecure or public wifi network is not recommended and may make you more susceptible to attacks from hackers.
4. Bank Account, Debit Card, or Credit Card: When you exchange USD or another currency for bitcoin, you will need funds to make those transactions. Bitcoin wallets can connect directly to your bank account, debit card, or credit card.
5. Bitcoin Exchange: After you’ve set up your wallet with a payment method, you’ll need a place to actually buy bitcoin. Users can buy bitcoin and other cryptocurrencies from online marketplaces called “exchanges,” similar to the platforms that traders use to buy stock. Exchanges connect you directly to the bitcoin marketplace, where you can exchange traditional currencies for bitcoin.
Before You Buy: Is Bitcoin Anonymous?
Anyone can view a history of transactions made on the blockchain, even you. But while transactions are publicly recorded on the blockchain, identifying user information is not.
When reviewing the transaction history of your bank account, for example, you’ll notice that the names of vendors are included on your bank statement. On the bitcoin blockchain, however, only a user’s public key appears next to a transaction — making transactions confidential but not anonymous.
This is an important distinction. International researchers and the Federal Bureau of Investigation have claimed time and again that they can track transactions made on the blockchain to user’s other online accounts, including their digital wallet. That’s a direct result of that Anti-Money Laundering Policy we mentioned earlier.
Step One: Sign Up for a Bitcoin Wallet
If you’ve made it through the winding road of explanations leading up to this point, congratulations! You may very well be ready to buy your first (fraction of a) bitcoin. The last thing you’ll need before you’re out the door is a place to store them.
When it comes to choosing a bitcoin wallet, you have options, but the Louis Vuitton and Gucci of the cryptocurrency world right now are “software” and “hardware” wallets. Software wallets are mobile applications that connect with your traditional bank account.
These wallets allow for quick and easy access to bitcoin, but the drawback is they put your money in the hands of a third-party company. Although the leading software wallets are trustworthy, popular third-party companies have collapsed, or been hacked, in the past. Much like you wouldn’t store thousands of dollars in your mattress, users with larger sums of bitcoin should consider storing their money more securely.
Coinbase is the most popular software wallet available in the United States, in part because it has a website, mobile application, and stores 98 percent of customer currencies offline for added security. For beginners, Coinbase is the best and easiest place to start because it is connected directly to a bitcoin exchange, which simplifies the buying and selling process.
Blockchain.info is another popular wallet connected to the bitcoin exchange, but the wallet is not supported by a mobile application. Users can also download mobile-only wallets such as Bitcoin Wallet for Android or Blockchain Bitcoin Wallet for iOS.
Hardware wallets are a little more old-school but tend to be considered more secure because they are kept offline. These wallets store a user’s private key on a physical hardware device similar to a flash drive, which prevents hackers from accessing a user’s private key through an internet connection.
Step Two: Connect a Bank Account
In order to purchase bitcoin, you need to connect your wallet to a bank account, debit card, or credit card. Although these payment methods all perform the same function — exchanging traditional currency for bitcoin — they each carry their own set of fees.
Transactions made using a bank account can take 4-5 days to process on Coinbase, but are generally recommended for first-time investors. By linking a bank account to your wallet, you can buy and sell bitcoin and deposit that money directly into your account. Bank accounts are generally recommended if you are dealing with larger sums of money.
Debit and credit cards, on the other hand, allow you to buy bitcoin almost instantly. The drawback is that on Coinbase and other popular exchanges, debit cards can only be used to purchase crypto — and even then, only in smaller amounts. Users cannot sell bitcoin or deposit money into their bank account when their wallet is connected to a debit card.
Exchanges can vary in reputation, reliability, security, processing fees, exchange rates, and cryptocurrencies available for trading. Coinbase
Step Three: Choose a Bitcoin Exchange
Bitcoin exchanges are online marketplaces where you can trade bitcoin for traditional currencies, say BTC for USD. Just like when you go to make a purchase online, you have options. There’s eBay, Amazon, Etsy, and Alibaba — to say nothing of the millions of private retailers who use these websites to sell their product.
The same is true of buying bitcoin. Even if two exchanges trade the same cryptocurrency, it is likely that they each offer slightly different services. Exchanges can vary in reputation, reliability, security, processing fees, exchange rates, and cryptocurrencies available for trading. Before settling down with an exchange, date around. Here are our top five recommendations for where to start.
Best for Beginners: COINBASE & LUNO
Coinbase is the most popular and respected digital currency exchange in the United States. Although Coinbase only trades in five cryptocurrencies — Bitcoin, Bitcoin Cash, Ethereum, Litecoin, and Ethereum Classic — the exchange offers a way to securely buy and store cryptocurrency in one location.
Coinbase charges a one percent fee for U.S. transactions from a bank account or Coinbase USD wallet. Purchases made using a credit or debit card are charged a 2.49 percent fee. Plus, Coinbase secures cash balances up to $250,000 in the event of theft or breach in online storage.
Best for On the Go: Square Cash
The Square Cash app is a leader in peer-to-peer money transfers, right alongside PayPal-owned Venmo. The Cash app comes from Square, the company that makes those mobile credit card readers. Square is a huge financial technology company that includes many other services — one of which is trading bitcoin. The Cash App allows users to buy and sell bitcoin without processing fees.
Unlike most online exchanges, the Cash App stores your bitcoin in your Square Cash Account, rather than a separate digital wallet. If you’re worried about security, however, you can send the bitcoin in your Square Cash Account to another wallet of your choosing. Square limits purchases at $10,000 per week, but there is no limit to what you can sell.
Best for Bitcoin on a Budget: Robinhood
Robinhood launched in 2013 as a fee-free stock brokerage. In February 2018, the company expanded into the bitcoin and ethereum markets, along with market data for another 15 currencies, allowing users to trade cryptocurrency without a fee.
As is the case with Square, Robinhood stores bitcoin in the same Robinhood account that is used for stocks. Robinhood is mobile first and just recently added a Web version, so it is best for people comfortable managing money from their phone or tablet. The drawback of trading bitcoin on Robinhood is that the application is only available in 17 states, as of February 2019.
Best for Big Spenders: Coinbase Pro (Formerly GDAX)
If you feel comfortable trading on Coinbase and want to step up your trading volume, you may be ready to switch from Coinbase to Coinbase Pro. Formerly known as Coinbase Global Digital Asset Exchange (GDAX), the trading platform uses interfaces similar to Bloomberg terminals and active stock, commodity, and option trading platforms.
Coinbase Pro offers options to make market orders, limit orders, and stop orders in addition to traditional buying and selling. Instead of trading exclusively from USD to cryptocurrency, Coinbase Pro allows users to trade between cryptocurrencies, say between Ethereum and Bitcoin.
Coinbase Pro charges fees ranging from 0.10 percent to 0.30 percent based on your trading volume. Most people trade less than $10 million per month and will fall into the 0.30 percent tier. If you want to try Coinbase but with much higher volume, this platform is the way to go.
Best for Branching Out: Binance
Binance may be your best bet if you’re looking to diversify your cryptocurrency portfolio. The online exchange supports multiple currencies and even more digital currencies, including Bitcoin, Ethereum, Ethereum Classic, Litecoin, Ripple, Bitcoin Cash, and many fledgling cryptocurrencies you may not have heard of.
Many exchanges that trade this many cryptocurrencies charge higher fees, but Binance charges a flat rate of 0.1 percent for trades. While this is platform offers a huge range of currencies at a low cost, there are some bugs reported with the Android mobile app and some users have reported delays withdrawing certain currencies.
Best for Buying in Cash: Peer-to-Peer
If you have a wallet, but it isn’t connected to a bank account, debit, or credit card, you can buy bitcoin using cash through a peer-to-peer exchange. Unlike typical bitcoin wallets, peer-to-peer exchanges work similarly to Craigslist for cryptocurrency, allowing buyers and sellers in the same areas find each other and meet up to trade bitcoins for cash.
With peer-to-peer exchanges, it’s important to remember that you are trading high-valueh currency with strangers you have never met before. If you choose to trade bitcoin in this way, we recommend that you meet buyers and sellers in a public place with high visibility.
Your bitcoin exchange and bitcoin wallet do not need to be the same. While most exchanges offer wallets for their users, security is not their primary business. If you do choose to use a wallet offered by an exchange other than Coinbase, we do not recommend that you use that exchange’s wallet to store bitcoins in large amounts or for long periods of time. Instead, make your transaction and transfer your bitcoin to a more secure wallet.
Step Four: Place Your Order
One exchange, three steps, and four thousand words later, you’re now ready to buy your first bitcoin. It’s important to keep in mind that although one bitcoin costs several thousand dollars, bitcoin can be divided up to eight decimal points. That means you can buy 1 bitcoin for $3,890, 0.1 bitcoin for $389, or even 0.00000001 bitcoin for $.0000389 if it suits your budget.