Every few weeks, we’re going to send you a cool new video, just like this one, explaining some Bitcoin basics. You can use them to learn more about Bitcoin yourself, or you can forward them to friends or family members who have questions.
If you’ve followed our previous lessons, then you’re probably somewhat of a Bitcoin expert by now.
However, nothing will teach you more about Bitcoin and how it works than having a firsthand experience with a live Bitcoin transaction. By buying even a small amount of bitcoins, you’ll probably learn more than by watching this whole video series. (Sign up for the video series for free here).
So let’s get started!
Get a Bitcoin Wallet
Before you can buy Bitcoins, you’re going to need a wallet to hold them. If you’ve watched our previous episode about wallets, then you’re all set. However, if you’re completely new to Bitcoin, or if you can’t quite recall what we talked about in the video, here’s a short refresher:
Bitcoin wallets are programs that help you send and receive Bitcoin. They generate your Bitcoin address, which serves as your personal address for receiving bitcoins.
If you’re buying small amounts of Bitcoin, you can use any trusted software wallet. It could be a mobile wallet or a desktop wallet-it doesn’t really matter.
For large amounts of Bitcoin, you’ll want to use only Hardware or Paper wallets. These wallets aren’t connected to the Internet, and they eliminate the possibility of someone stealing your funds unless they’re actually holding your physical wallet.
To make it easier on you, we’ve listed some recommended wallets, depending on your device and operating system, at the bottom of this video.
Once you choose your wallet, open it and copy your Bitcoin address. You’ll need it later on.
How many Bitcoins do you want to buy?
Got your address? Good, you now need to ask yourself a very important question: How much money do you intend to invest in Bitcoin?
Bitcoin is a VERY risky asset. This means you should never buy any amount you can’t afford to lose. It’s important to think this through. If this is the first time you’re buying bitcoins, choose an amount that won’t affect you financially if Bitcoin drops to zero.
In general, we tend to be overly optimistic when we invest, and we forget about the very real possibility of a downside. Our personal rule of thumb is to never invest more than 5% of your disposable income or total wealth.
Keep in mind that you can always buy less than 1 Bitcoin. One bitcoin can be divided up to 8 decimal points. This means that you can buy half a bitcoin, a quarter of a bitcoin, or even one-hundredth of a bitcoin.
Of course, the amount you’re going to spend on Bitcoins will lead you to your next step: choosing a Bitcoin exchange.
Choosing a Bitcoin exchange
Choosing an exchange is hard work. Each exchange has different rules, accepted payment methods, and fees, along with other factors to take into account. If you want to avoid the hassle, you can use our “Buy Bitcoin” page, which matches you up with the best exchange based on your location. There’s a link to that page at the bottom of this video as well.
This, of course, is a very rough match, but it will give you the best result 95% of the time. If you want to do your own due diligence, however, here’s what you need to look out for.
The first thing you’ll want to check is that the exchange accepts users from your country. Not all exchanges accept customers from all around the world.
The second thing you’ll want to check is what payment methods are accepted by the exchange. Some exchanges accept a wide variety of payment methods, and some accept only wire transfers.
Payment methods that allow the buyer to request his money back, such as credit cards or Paypal, will usually be accompanied by higher fees. This is because the seller is taking the risk that you’ll cancel the payment after you get your coins. On the other hand, payment methods that can’t be reversed, such as wire transfers, are usually cheaper.
The third thing you’ll want to check is how much you’ll need to pay in fees for your transactions. There are three kinds of fees: deposit fees, transaction fees, and withdrawal fees. Each one is different and can affect the total amount of money you’ll receive in the end.
The fourth thing you’ll want to be aware of is the exchange rate. Some exchanges have low fees, but their exchange rates are higher relative to the competition. This means that the fees are “hiding” in the exchange rate.
Fifth, you’ll want to know your buying limit. Your buying limit will depend on your payment method and your identity verification level. If you’re looking to buy a large amount of bitcoins, some exchanges won’t allow it due to their low limits.
Finally, you’ll want to check out the exchange’s reputation. Is it well known in the community? How well is the support in the event you get lost in the process? Have there been a large number of complaints against the exchange? Keep in mind that no exchange is free of negative reviews, but it’s important to consider the volume and the content of those reviews.
Brokers vs. Trading platforms
One important distinction to make is the difference between trading platforms and brokers. Trading platforms are sites that automatically connect buyers and sellers. This means that you buy from people who’ve placed sell orders on the site without ever communicating with them directly. The platform usually takes a small fee for the service.
Conducting transactions on trading platforms like Bitstamp or Kraken is usually the cheapest way to get bitcoins, but often it’s not very user friendly. Trading platforms have options such as limit orders and stop loss that can confuse inexperienced users. Also, when you place an order, it may not be fulfilled immediately due to a lack of sellers at the price at which you want to buy.
In order to avoid this hassle, you can use brokers. Brokers are sites that simplify the process by allowing you to buy coins through them at a predetermined price. When you buy from broker sites, the process is usually much simpler, but it’s also more expensive.
In the end, it doesn’t really matter if you’re buying your coins from a trading platform or a broker. What matters is that the company is reliable and that you’re happy with the price you’re paying. Sometimes it’s worth it to spend a bit more money in order to finish the process hassle free.
As a side note, if you’re looking to buy large amounts of Bitcoin-let’s say over $10,000-there are specific exchanges and brokers that deal in these sort of transactions. If this is the case for you, take a look at the resources section at the bottom of this video.
Buying the coins
Now that you know how much you want to spend and you’ve chosen your exchange, it’s time to make the trade. Sign up for the site you’ve chosen and complete the registration process. Most exchanges today will have a Know Your Customer process, also known as KYC, that you’ll have to go through.
This means you’ll need to supply the exchange with some additional information like your ID, a proof of residence, and in some cases even a proof of income. As Bitcoin becomes more and more mainstream, exchanges have become subject to strict regulations by the government, and in many cases, they’re unwillingly forced to request this information from you.
Once you finish the registration and your identity is verified, you can finally buy your bitcoins. I hate to break it to you, but the process doesn’t end there.
After the transaction is complete, it’s highly advised that you move your bitcoins from the exchange into your own personal wallet.
Getting your coins off of the exchange
If Bitcoin’s history has taught us anything, it’s that if you keep your money on an exchange, you don’t actually own that money-the exchange does. If the exchange becomes insolvent or gets hacked, you risk losing that money for good. This happened in the past with MT.Gox, and it’s happened more recently with exchanges like BTC-e and Bitfinex.
Once the coins are in your account, make sure to withdraw them to the Bitcoin address you’ve copied from your wallet. After the coins arrive safely in your wallet, you can proudly say that you’ve bought your first Bitcoin.
Other options to buy Bitcoins include Bitcoin ATMs. Bitcoin ATMs are machines that accept cash, also known as fiat money, and send you Bitcoins in return. Some ATMs allow you to only buy Bitcoins and some will allow you to sell your Bitcoins as well by giving you cash in return.
Many people love to use ATMs because of the relative anonymity throughout the purchasing process. You don’t have to wait for long identity verification processes to finish. Just enter your money and get your coins instantly.
Bitcoin ATMs are run by companies that usually charge a specific fee for their service, so make sure you’re aware of the fees before making the transaction. If you want to find a Bitcoin ATM nearby use the link in our resource section below.
Buying from individuals
Before we end this lesson, I want to touch upon one other topic. Some people will prefer to buy bitcoins from an individual and not an exchange. In this case, there are a few things to watch out for:
First, try to see if you can verify the seller’s identity. Some people will want to remain anonymous, and that’s fine, but verifying someone’s identity will dramatically reduce your risk of being scammed.
Second, try to use some sort of escrow service that will hold your money until the seller sends you the coins. If that’s not possible stick to cash and meet with the person face to face. In any case never use irreversible payment methods like wire transfers before receiving your coins.
Finally, you’ll want to wait for the Bitcoin transaction to have at least 2–3 confirmations before considering the deal complete. Of course, this depends on the amount of money you’re exchanging. Smaller amounts can do with only one confirmation.
Keep in mind that buying from an individual usually involves a lot of uncertainty, and sometimes it’s just not worth the few bucks you’ll save in the process.
That’s it for today’s video. All that’s left for you to do now is go and get your first Bitcoin. Remember, if you ever get stuck, use the resource section at the bottom of this video, or just shoot us an email. Good luck, and I’ll see you….in a bit.
