Investing in Bitcoin (BTC) might seem complicated at first, but it becomes much simpler once you break it down. For example, investing in Bitcoin or trading BTC requires a service or an account on a cryptocurrency exchange, along with additional methods for secure storage.
To get started, you'll need a cryptocurrency exchange account, personal identification documents if using a platform with Know Your Customer (KYC) protocols, a secure internet connection, and a payment method. It's also wise to have a personal wallet separate from your exchange account for enhanced security.
Accepted payment methods for buying Bitcoin include bank accounts, debit cards, and credit cards. You can also obtain BTC through Bitcoin ATMs and peer-to-peer (P2P) exchanges. However, as of early 2020, Bitcoin ATMs increasingly require government-issued identification.
Bitcoin is known for its volatility. If you're willing to take the risk, make sure you understand what you're getting into and have a clear cryptocurrency investment strategy. Avoid investing solely out of fear of missing out on potential gains.
This guide will answer common questions like: How do I invest in Bitcoin? What's the best way to buy Bitcoin? How can I buy Bitcoin with PayPal? How can I buy Bitcoin with a credit card?
Preparing to Buy Bitcoin
Investing in Bitcoin might initially appear challenging, but it becomes more manageable when approached step by step. Buying Bitcoin is getting easier every day, thanks to the increasing reliability of exchanges and wallets. But before you purchase Bitcoin, you need a place to store it.
In the world of cryptocurrency, this storage place is called a "wallet." Crypto wallets come in various forms, each offering different levels of security, storage, and accessibility. The five main types of Bitcoin wallets are desktop, mobile, online, hardware, and paper wallets.
It's important to note that your wallet doesn't technically store your Bitcoin. Instead, it holds private keys, which are essential for accessing a Bitcoin address and spending the funds. These digital keys are required to sign transactions. If a user loses them, they essentially lose access to their Bitcoin.
Types of Bitcoin Wallets
Desktop Wallets
A desktop wallet is installed on a user's computer, giving them full control over the funds sent to that wallet. There are thick and thin desktop wallets. Thick wallets allow users to download the entire blockchain and provide independent security management of their funds. Thin wallets, on the other hand, don't require users to download the entire blockchain and can be easily installed on portable devices.
Mobile Wallets
The main advantage of a mobile wallet is that your funds are always within reach. It offers a convenient way to pay for goods by scanning QR codes. Some mobile wallets even leverage Near Field Communication (NFC) technology, allowing users to tap their phones against a reader without entering any information.
A common feature of all mobile wallets is that they don't require running a full Bitcoin node. A full Bitcoin node must download the entire blockchain, which constantly grows and requires significant storage space.
Online Wallets
When using a web wallet, users' private keys are stored on an online server controlled by a third party and connected to the internet. While this allows easy access to funds from any device anywhere in the world, there's always a risk that the server could be hacked or that the organization managing the service might take control of your Bitcoin. In general, there's much to consider when buying and managing your Bitcoin securely.
Hardware Wallets
Hardware wallets are dedicated portable devices that store private keys offline. Various types of hardware wallets exist, but they all allow users to carry any amount of cryptocurrency in their pocket securely.
Paper Wallets
A paper wallet consists of two pieces of information expressed in characters—along with QR codes—generated through a designated service. One is a wallet address used to receive BTC. The other is a private key, which is used to spend Bitcoin stored at that address.
Additional Options
Other Bitcoin storage functionalities are also available. Multi-signature, or multisig, wallets require confirmation from multiple sources to move or access funds. Some entities also offer Bitcoin custody services, managing the storage of customers' Bitcoin on their behalf.
How to Buy Bitcoin in Four Steps
The number of avenues for acquiring BTC continues to grow, allowing individuals to choose the cryptocurrency purchase option that best suits their needs. If you want to understand how to invest in Bitcoin, follow the steps outlined below.
Choose a Cryptocurrency Exchange
Every potential new Bitcoin buyer will encounter a variety of exchanges competing for their business. Choosing the right one depends on many factors, with your location being perhaps the most important.
Exchanges worldwide operate under different government jurisdictions, requiring various practices for Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, depending on the regions involved. This is why, to set up an account and start trading on certain centralized exchanges, you must provide personal information, which varies by exchange and location.
This leads to the topic of exchange types. There are several different types of cryptocurrency exchanges: centralized exchanges (CEX), decentralized exchanges (DEX), and peer-to-peer (P2P) exchanges. Centralized cryptocurrency exchanges are online platforms where you create an account with your chosen login credentials. You may also need to provide certain personal information, depending on the exchange and region.
On centralized exchanges, you can send funds to the platform in the form of cryptocurrency or fiat money from a bank account. You can then trade those funds on the platform, including buying and selling Bitcoin. Depending on the exchange, you might trade numerous types of crypto assets, all on one main platform. However, one issue with this model is that you technically don't hold your funds when they are on the exchange.
DEXs, on the other hand, allow you to transact directly from your wallet. Essentially, DEXs consist of liquidity pools for different assets on the blockchain where the DEX is based. For example, Ethereum-based DEXs facilitate the trading of Ethereum-based assets. Bitcoin itself cannot be traded on an Ethereum-based DEX, although certain wrapped token solutions exist for that purpose.
Peer-to-peer (P2P) trading also serves as an option for buying and selling Bitcoin. Several platforms are available to facilitate such transactions, providing an escrow service to protect both parties and their funds.
In addition to native cryptocurrency exchanges, customers can also buy Bitcoin on PayPal. However, the platform does not allow users to send their Bitcoin outside the PayPal ecosystem and does not grant them control of their private keys.
Decide on a Payment Method
Exchanges also differ in their accepted payment methods. For example, most major platforms allow you to link your bank account for wire transfers, as well as your debit or credit card. Some accept PayPal payments, and Coinbase also accepts Apple Pay.
When you first sign up for an account and set up a payment method, you must authenticate your identity regardless of the option you choose. In the United States, this usually requires scanning a state-issued ID, such as a driver's license or identification card.
You might also be asked for scanned copies of other documents, such as a passport or proof of address, depending on your jurisdiction and the platform you choose.
Place Your Order
You can start buying Bitcoin once you've been verified and deposited money into your account. This process varies depending on the exchange you choose. Some platforms allow you to buy or sell BTC simply by clicking a "Buy" or "Sell" button and entering the amount you wish to purchase (or sell).
Most cryptocurrency exchanges generally provide at least three fundamental order types: market orders, stop orders, and limit orders. By clicking the "Buy," "Trade," or "New Order" button on an exchange's homepage, you can execute any of these options. You can then select one of the three order types before clicking the "Submit" button.
Store Your Bitcoin Securely
Although major exchanges are becoming more secure, the industry is still plagued by hacks and fraud. Therefore, Bitcoin investors with large sums of money should consider self-custody for their BTC. Experienced traders with strong cybersecurity skills may prefer owning their wallets, as this allows them to move their cryptocurrencies whenever they wish without being tied to an exchange.
How to Buy Bitcoin with PayPal
It might come as a surprise, but depending on your location, buying Bitcoin through PayPal isn't always straightforward, regardless of the specific exchange method you're considering. Many exchanges avoid these payment methods and instead require users to connect their bank accounts. Most private sellers also tend to be wary of such transactions and often prefer cash.
This reluctance is primarily due to "chargebacks." Most transactions made with credit cards or PayPal can be easily reversed by contacting the card issuer. Bitcoin transactions, however, are irreversible. Since it can be extremely difficult to prove that goods changed hands in a Bitcoin transfer, this payment method is often avoided.
You'll need to create a PayPal account before you can buy cryptocurrencies. If you already have a PayPal account, all you need to do to buy Bitcoin is click the "crypto" button and select BTC.
You will need accessible funds, a linked debit card, or a linked bank account to make your purchase. You can spend as little as $1 per week or as much as $100,000. PayPal, like many other cryptocurrency exchanges, charges a fee for buying and selling cryptocurrencies, which fluctuates based on the amount purchased.
How to Buy Bitcoin with a Credit Card
You can buy Bitcoin using a credit card on several cryptocurrency exchanges, but be prepared to pay exchange fees. Transaction fees are how cryptocurrency exchanges make money, and using a credit card could cost you considerably more. If you choose to buy BTC with a credit card, you might also be charged broker fees.
Additionally, your credit card might charge you a foreign transaction fee for each purchase if the exchange is based outside the United States. This cost can range from 1% to 3% of the total purchase price.
The possibility of buying cryptocurrencies with a credit card is also subject to the policies of the card issuer. For example, American Express restricts the purchase of foreign currencies with its card but currently allows the purchase of cryptocurrencies.
If your preferred exchange and credit card provider allow it, the process for setting up these transactions is quite similar to linking and verifying your bank account through Automated Clearing House (ACH).
Other Ways to Buy Bitcoin
You can also purchase Bitcoin using the following methods:
Cryptocurrency ATMs
Bitcoin ATMs have been popping up in cities worldwide, and their numbers continue to grow. However, these ATMs usually charge significantly higher transaction fees than typical cryptocurrency exchanges.
To use a Bitcoin ATM, find one in your area online. You usually need to open an account with the ATM provider online or at the machine itself. Opening an account typically requires compliance with Know Your Customer (KYC) regulations, which may involve providing a scanned ID and personal data, followed by waiting for approval.
Once you appear in person, insert cash into the Bitcoin ATM. Then, scan the QR code of your mobile wallet or receive a paper receipt with codes and instructions on how to transfer the Bitcoin funds to your wallet.
It is highly unlikely that Bitcoin ATMs will appear in countries where Bitcoin is banned or outlawed.
Investment Funds
An investment trust is a form of collective investment where investors' money is pooled from the sale of a fixed number of shares. These trusts might face some trust issues when first launched.
The Grayscale Bitcoin Trust (GBTC), the first Bitcoin-related investment vehicle to be publicly traded, allows people to gain exposure to the cryptocurrency without having to buy or store it directly. GBTC invests exclusively in Bitcoin and derives its value from the price of BTC. Grayscale also offers different investment products for other crypto assets.
Additionally, there are some Canadian Bitcoin exchange-traded funds (ETFs). The first of these, the Purpose Bitcoin ETF, was launched by Purpose Investments in 2021. Buying a Bitcoin ETF also provides buyers with exposure to Bitcoin through conventional financial channels, although this type of investment product differs from GBTC.
Buying shares of certain companies could also serve as a potential type of investment exposure to Bitcoin. For example, the business intelligence company MicroStrategy has allocated billions of dollars of its capital to Bitcoin.
Although users might wonder if Bitcoin stocks exist or how to buy Bitcoin stocks, this classification doesn't technically exist. However, you can buy shares of companies related to Bitcoin, such as those focused on BTC mining, or invest in companies that have allocated significant capital to Bitcoin.
Gift Cards
Bitcoin can be used to purchase gift cards. Conversely, gift cards can also be redeemed for BTC. All you need to do is purchase a gift card from any retailer, connect to a platform where some sellers accept gift cards, and complete the purchase.
Always stay alert and be mindful of the reputation of sellers, as well as other standard internet security measures. In general, awareness and caution are crucial for any activity in the crypto space.
How to Invest in Bitcoin Safely
Keep the following points in mind before investing in Bitcoin:
Legality and Protection Issues
Bitcoin has generally attracted the interest of law enforcement, tax authorities, and legal regulators. They are trying to understand how the cryptocurrency fits into existing frameworks and what guidelines to establish. The legality of your activities with Bitcoin can depend on who you are, where you live, and what you do with the asset.
It's also worth remembering that the protection and security measures of cryptocurrency exchanges, as well as their legitimacy, vary from platform to platform. Different Bitcoin storage methods also have their pros and cons, which should be considered before committing funds to crypto investments.
Bitcoin Ownership
Security practices for protecting your Bitcoin depend on the type of storage you choose, as each has its preferred methods for how to buy and safeguard your Bitcoin. Researching these practices, as well as the type of storage that best suits you, is a vital part of Bitcoin ownership. Bitcoin can offer fewer limitations than traditional siloed finance, though these capabilities also come with responsibilities.
Should I Invest in Bitcoin?
Before searching for the best place to buy Bitcoin, you should ask yourself the following questions:
- Do I fully understand what I'm investing in and how Bitcoin and the cryptocurrency market work?
- Do I find the risk level acceptable?
- Is it significantly more expensive now than it was a few months ago? Why do I want to buy something? Is it only because the price is higher?
- Is there evidence that prices will continue to rise?
- Who do I think will buy it from me at a higher price if I acquire it now to sell later?
- Why, if an asset is so valuable, did I pass on it when it was much cheaper?
- Have I convinced myself that I'm "in the know" in some way?
Generally, it's not a good idea to invest if you don't know the answers to these questions. If you decide to buy BTC, make sure you don't risk your life's savings. For those ready to proceed, it's crucial to explore more strategies for secure and informed investing.
Frequently Asked Questions
What is the easiest way to buy Bitcoin?
The easiest way for most beginners is to use a reputable centralized cryptocurrency exchange. These platforms guide you through the process of creating an account, verifying your identity, linking a payment method, and executing your first purchase. The entire process is designed to be user-friendly.
Can I buy Bitcoin without an exchange?
Yes, you can buy Bitcoin without a traditional exchange through peer-to-peer (P2P) platforms, Bitcoin ATMs, or even in-person transactions. However, these methods often require more technical knowledge or carry higher fees and potential security risks compared to using established exchanges.
How much money do I need to start buying Bitcoin?
You can start buying Bitcoin with a very small amount of money. Many exchanges allow you to purchase fractions of a Bitcoin, meaning you can invest as little as $1, $10, or any amount you're comfortable with. There's no minimum requirement to begin.
Is it safe to leave my Bitcoin on an exchange?
While major exchanges have significantly improved their security, leaving large amounts of Bitcoin on any exchange is generally not recommended for long-term storage. Exchanges are prime targets for hackers. For optimal security, transfer your Bitcoin to a private wallet where you control the private keys, especially if you're holding a substantial amount. To ensure you're using the best methods, get advanced methods for securing your assets.
What is the difference between a Bitcoin wallet and an exchange?
An exchange is a platform where you can buy, sell, and trade cryptocurrencies. It holds your funds on your behalf, similar to a bank. A wallet is a tool, software or hardware, that allows you to store your cryptocurrency yourself by safeguarding the private keys that prove ownership of your Bitcoin. You truly own your crypto when it's in your personal wallet.