How to Buy Bitcoin: A Step-by-Step Guide
Table of Contents
- Introduction
- What is Bitcoin?
- How to Buy Bitcoin in Four Steps
- Risks Associated with Bitcoin Investment
- Conclusion
Bitcoin is a type of cryptocurrency that has been growing in popularity over the past few years. Its value has fluctuated greatly since its inception, and while some believe that its value could continue to rise in the future, it remains a highly volatile asset.
The first section of this article will provide an overview of what Bitcoin is, including its history and how it works. This will help readers understand the basic concepts behind the cryptocurrency and its potential uses.
The second section will outline the steps involved in buying Bitcoin. This will include information on how to set up a digital wallet, how to purchase Bitcoin from an exchange, and how to transfer the cryptocurrency to your wallet.
The third section will discuss the risks associated with investing in Bitcoin. This will include information on the volatility of the cryptocurrency, the potential for fraud and scams, and the regulatory landscape surrounding Bitcoin.
The final section will provide a brief conclusion, summarizing the key points of the article and offering some advice for those considering investing in Bitcoin. Overall, this article is designed to provide readers with a clear and neutral overview of Bitcoin and its associated risks and benefits.
What is Bitcoin?
Bitcoin is a decentralized digital currency that was invented in 2008. Unlike fiat currencies, which rely on financial institutions like banks, building societies, and payment platforms to transfer money, Bitcoin is a peer-to-peer currency. It is not issued by any state, government, or authority, but rather by the Bitcoin network itself. Bitcoin holders can send funds to the digital wallets of others in exchange for goods, services, or other currencies.
How does a new currency work?
To understand how Bitcoin works, imagine a new currency called Forbescoin that a group of friends started. Each member starts with 1 Forbescoin, and they trust each other to be honest about how much of the currency they and others hold.
If someone in the group gives someone else 0.5 Forbescoin in exchange for a lift to work, each member updates their ledger to show that the sender now has 0.5 Forbescoin remaining, and the recipient has 1.5 Forbescoin.
As a reward for their honest record-keeping, each group member has the opportunity to make their copy of the ledger the ‘official’ version and earn more Forbescoin. To do so, they must correctly guess a long, random string of letters and numbers within 10 minutes. The more computing power they have, the more guesses they can make within this window, and the greater their chances of winning.
When someone successfully guesses the string, they have the opportunity to add their version of the ledger to the blockchain, a history of all transactions up to that point. In doing so, they earn an amount of Forbescoin as a reward, but only if 51% or more of all participants agree that the record is accurate, after having mathematically cross-referenced it against their own ledgers.
This is effectively how Bitcoin operates, but on a global scale. Instead of guessing a number from 1-100 in 10 seconds, participants guess a long, random string of letters and numbers within 10 minutes. The more computing power they have, the greater their chances of winning.
The mining process
This ‘mining’ process is how new Bitcoins are minted. It is known as a ‘proof of work consensus mechanism’. Proof of work secures the network against fraudsters by making participants work, using their computing power, to add their version of the ledger to the blockchain, and by requiring a consensus among the network to rubber stamp it.
It would be practically very difficult, if not impossible, to amass the computing power required to control 51% of the network, meaning the ledger can be considered a reliable, accurate, and indelible record of Bitcoin transactions.
How to Buy Bitcoin (BTC) in 4 Steps
1. Choosing a Crypto Exchange
To purchase Bitcoin (BTC) or any other cryptocurrency, an individual needs to use a crypto exchange, where buyers and sellers meet to exchange their currency for the crypto coin of their choice. There are several exchanges available, but beginners may prefer one that offers ease of use, low fees, and high security. Investors may consider top-rated crypto exchanges like eToro or Coinbase for this purpose.
Investors should also ensure that the exchange has a built-in Bitcoin wallet on its platform. If not, they will need to find a wallet of their own. While some investors may opt to buy their crypto on platforms like Paypal, it is important to note that buying crypto this way often means they cannot withdraw their coins and move them to another platform. If investors want to hold their crypto in a different wallet, they’ll need to sell their holdings and then re-buy them on a different exchange.
2. Decide on a Payment Option
After choosing an exchange, investors need to fund their account before investing in Bitcoin. Depending on the exchange, they can fund their account through bank transfers from a current or savings account, bank transfers, or a cryptocurrency wallet.
It is advisable to use electronic transfers from a bank account as fees can reduce the amount of money that can be invested. Other payment options may have higher fees involved.
3. Place an Order
Once the account is funded, investors can place their first order to buy Bitcoin. Depending on the platform they’re using, they may be able to purchase it by tapping a button, or they may have to enter Bitcoin’s ticker symbol (BTC). They’ll then have to input the amount they want to invest.
It is important to note that buying a single Bitcoin requires a large upfront investment. For instance, if Bitcoin’s current price was £30,000, the investor would need to invest that much to buy one Bitcoin. If they invested less, say £1,000, they’d get a percentage, in this case 3.33%, of a Bitcoin.
4. Select a Safe Storage Option
Several crypto exchanges have an integrated Bitcoin wallet or a preferred partner where investors can safely hold their Bitcoin. However, some investors may not feel comfortable leaving their crypto connected to the internet, where it may be more easily stolen by hackers.
Most major exchanges have private insurance to reimburse clients if this happens, and increasingly, they’re also storing the majority of customer assets in offline so-called ‘cold storage’.
Investors who want a potentially higher level of security can store their Bitcoin in an online or offline Bitcoin wallet of their own choosing. However, if crypto is moved from an exchange, investors may have to pay a small withdrawal fee. Additionally, if investors use a third-party crypto wallet custodian, they may also be permanently unable to access their coins if they lose the private key that serves as the wallet password.
The table below shows the most popular methods investors use to store cryptocurrencies in the UK, as of October 2023.
| Storage Method | Percentage of Investors |
|---|---|
| Exchange wallet | 40% |
| Hardware wallet | 30% |
| Software wallet | 20% |
| Paper wallet | 10% |
Hot Wallets vs. Cold Wallets
Investors have two main options when it comes to storing their cryptocurrency: hot wallets and cold wallets. Both have their advantages and disadvantages, and it’s important to understand the differences between them before deciding which one to use.
Hot wallets are online accounts that store an investor’s personal and private keys. These keys are necessary to make trades, but they also give hackers access to the owner’s assets. Hot wallet providers have been hacked several times over the years, so security is a major concern. However, hot wallets are convenient since investors can access them from anywhere and don’t have to worry too much about losing access.
Cold wallets, on the other hand, are not connected to the internet. They are essentially thumb drives that require a ‘seed phrase’ to unlock. This air gap between the web and the investor’s personal and private keys makes cold wallets arguably more secure than hot wallets. However, once a cold wallet is plugged into a web-connected device, the air gap and its security is effectively lost, making the wallet vulnerable to hackers.
Another disadvantage of cold wallets is that they have to be bought, while hot wallets are often provided for free. However, if an investor forgets their seed phrase, it can be much harder to recover it than if they were using a hot wallet.
In summary, hot wallets are convenient but less secure, while cold wallets are more secure but less convenient. Investors should carefully consider their needs and preferences before choosing which type of wallet to use.
Selling Bitcoin
When an investor decides to sell their Bitcoin, they can place a sell order through their exchange. Most exchanges offer multiple order types, allowing investors to sell only when Bitcoin reaches a certain price or immediately. Investors can choose to sell their entire holdings or only a specified amount. Once the sale goes through, they can transfer the money to their bank account. However, the exchange may have a holding period before a transfer can be made back to the bank account. This is a normal process to ensure transactions clear.
Selling Bitcoin may result in a profit, and if those profits exceed a certain threshold, investors may be liable for capital gains taxes. Therefore, it is important for investors to keep track of their profits.
It is recommended that investors stay up-to-date with the market trends and the latest news before making any decisions to sell their Bitcoin. This can help them make informed decisions and maximize their profits.
In summary, selling Bitcoin is a straightforward process that can be done through an exchange. Investors should keep track of their profits and be aware of any tax implications that may arise.
Should investors consider buying Bitcoin?
Investing in Bitcoin can be tempting, especially when its price is skyrocketing. However, investors should exercise caution as its volatility can lead to significant losses. Experts recommend that investors only allocate a small percentage of their funds to buying cryptocurrency and should only invest what they are prepared to lose. It is important to note that cryptocurrency is unregulated in the UK, and the Financial Conduct Authority has warned investors about the risk of losing all their money with no possibility of compensation. Therefore, investors should thoroughly research and understand the risks before considering investing in Bitcoin.
Frequently Asked Questions (FAQs)
What information is required to purchase Bitcoin?
Investors must provide some personal information for identity verification purposes when buying cryptocurrency from a crypto exchange. In the UK, crypto exchanges must comply with Know Your Customer (KYC) and Anti Money Laundering (AML) regulations. Therefore, they are obligated to ask for information such as the investor’s address and date of birth. Investors may also need to provide an official document like a driving license. Biometric checks may also be required to prove that the investor is the same person as identified on their documents.
Is Bitcoin a good hedge against inflation?
The idea that Bitcoin is a store of value that provides a bulwark against inflation is debatable. However, it is inarguable that Bitcoin and cryptocurrencies, in general, are volatile and unpredictable. The UK’s financial services regulator, the Financial Conduct Authority, has warned potential investors that they should be prepared to lose all their money. Even if returns on Bitcoin investment are good, they cannot be relied upon, and therefore, Bitcoin cannot be considered a reliable hedge against inflation.
Can Bitcoin be purchased with PayPal?
Starting October 1, 2023, Bitcoin purchases via PayPal will be paused for UK customers until early 2024.
What is the cost of purchasing Bitcoin?
The cost of purchasing Bitcoin depends on the current price of Bitcoin. At the time of writing, one Bitcoin was worth £18,658. This means that most investors would be investing in a share of a Bitcoin, rather than a whole Bitcoin. For example, a 1/100 share of a Bitcoin would cost £186. Crypto exchanges also charge transaction fees when investors buy and sell Bitcoin. Many charge a flat fee of around 1.5% of the transaction amount.
What are some alternative ways of investing in Bitcoin?
Although there are no other ways to buy Bitcoin other than trading fiat or other cryptocurrencies for Bitcoin, there are alternative ways to invest in Bitcoin without holding it directly. One such way is Bitcoin mining, which involves competing to earn new Bitcoin by adding a block of transactions to the blockchain as a result of correctly guessing the required alphanumeric string. Investing in companies that produce the graphics processing units (GPUs) used by Bitcoin miners, such as Nvidia, could be another alternative way to invest in Bitcoin. Alternatively, investors could invest in an organization that holds Bitcoin, such as car manufacturer Tesla, which reportedly holds almost £150 million worth of Bitcoin.
Note: Cryptocurrency is unregulated in the UK. The UK regulator, the Financial Conduct Authority, has repeatedly warned investors that they risk losing all their money if they buy cryptocurrency, with no possibility of compensation.
