The ultimate beginner's guide to trading Bitcoin
Why Should You Buy Bitcoin?
Even if you’re not actively involved in the cryptocurrency markets, it’s likely you’ve heard of Bitcoin
. As the original cryptocurrency, Bitcoin boasts the highest trading value of the whole cryptocurrency market, and overall, it is used as the benchmark for all other cryptocurrency pricing.
Many other cryptocurrencies can’t even be purchased through traditional fiat currencies, and Bitcoin is the go-to currency of choice for most exchanges out there. This means that Bitcoin isn’t going anywhere any time soon, with its value being the one thing that really swings the whole cryptocurrency market.
Although being first to market has some serious advantages, it also has some serious drawbacks as well. Bitcoin first launched back in 2009, when blockchain technology was not even in existence. Since then, there have been huge improvements to the blockchain methodology, and now Bitcoin’s method for processing payments has been left to look a bit sluggish in comparison to more modern blockchains (such as Ethereum
However, this isn’t to discourage a purchase, Bitcoin is still the most used cryptocurrency in the world. Whether buying plane tickets or purchasing clothing from a virtual retail outlet, the possibilities for crypto are continuing to expand. This is also one of the reasons why Bitcoin has grown in such prevalence and popularity since its introduction in 2009.
While the coin is purely based within the digital community, it is still considered a tangible asset. It can, therefore, be used for both short- and long-term investment strategies, and can even be used as a ‘hedge’ against open-market volatility (for example, when the signs of a global recession begin to appear). In other words, Bitcoin profits can offset another holding that suddenly loses value, which makes it similar to commodities or Forex trade decision.
As a liquid form of investment, Bitcoin can be bought and sold relatively easily – unless you need to buy/sell a very, very large quantity. It is, therefore, an excellent addition to portfolios that might otherwise be focused upon long-term holds. Indeed, savvy investors have turned sizeable profits within a short amount of time due to the anonymity and quick trade times associated with blockchain-based cryptocurrencies.
Additionally, thanks to real-time trading capabilities and a growing number of dedicated smartphone applications, Bitcoin may very well be poised for an impressive amount of further growth in the future. While many new cryptocurrencies are entering into the marketplace, Bitcoin is by far the most well-known trading instrument. It will therefore likely continue to serve as a benchmark indicator and, as a result, other investment possibilities such as futures contracts are now being offered.
What are the Pros and Cons of Buying Bitcoin?
Transparency is always important when considering any form of investment and the same holds true in terms of those who are looking to buy Bitcoin. Like any form of investment, there are both benefits and possible drawbacks to examine;
- Relative stability: The overall global supply of Bitcoin is low when compared to other traditional forms of currency. This is important, as it signifies that its value will not be subject to sudden and unpredictable changes. Bitcoin is not directly tied to traditional financial markets, meaning other assets could fall because of external circumstances, whereas Bitcoin is less likely to.
- Decentralisation: Bitcoin is not governed by any type of central bank, so if a national institution (i.e. the Bank of England) decides to raise interest rates, there will be no direct impact on the value of Bitcoin. As noted in the previous point, values may rise and fall, but due to decentralisation, Bitcoin’s value fluctuations are at least one-step removed.
- Position: Bitcoin is considered to be the benchmark cryptocurrency, which is why other holdings often trade against it. You can think of this in the same way as to how the fiat world values other assets (such as gold and oil) based on the value of the USD.
- Anonymity: Much like other cryptocurrencies, Bitcoin’s stored within a secure cryptocurrency wallet. These wallets have no personal data attached and can’t be traced back to the individual that set them up. This was one of the original appealing aspects of Bitcoin, as well as cryptocurrencies as a whole.
- Ease of trade: If you need to buy Bitcoin as a means to offset losses within long-term sectors such as precious metals or blue-chip stocks, the ease of trade is vital. Happily, a growing number of online investment platforms recognise Bitcoin as a valid form of investment. Bitcoin can also be traded against fiat currency (BTC to USD, for example).
- Short term volatility: The volatility associated with the Bitcoin sector can be unpredictable on occasion. This may cause novice investors to incur substantial losses within a short period of time. This is also why only the most modern trading platforms should be employed in order to remain one step ahead of the curve.
- Lack of regulation: Bitcoin is not overseen by well-known governing bodies such as national trading commissions. This opens up the possibility that speculators or those investing on margin might drive the price up or down, causing deliberate volatility that other investors will not be able to predict or offset. In these circumstances, the value of Bitcoin could suddenly plummet.
- Relative youth: As it has only existed since 2009, Bitcoin is a relatively new form of investment. As the underlying mechanics are still being developed, it is always wise to perform a significant amount of research before making any move towards investment.
What are the Best Payment Methods to Buy Bitcoin
As Bitcoin was both the original cryptocurrency and has been around the longest, it also has the most payment options available to purchase. There are multiple different ways to buy bitcoin with varying payments methods;
- Paypal: Buying Bitcoin with PayPal is slightly complicated, but it is actually possible to purchase Bitcoin with PayPal. Some exchanges offer a way to purchase directly via PayPal, whereas others have a more convoluted system that has multiple steps to eventually finalise a purchase.
You can find our full guide on how to Buy Bitcoin with PayPal by clicking here.
- Cash: For obvious reasons, this is probably the riskiest way to purchase Bitcoin and for good reason – You need to withdraw your hard-earned money in cash, find a seller of Bitcoin, meet them and pass over your cash. Obviously, this is heavily reliant on trust but there are websites out there such as LocalBitcoins that aim to facilitate and regulate this process.
- Credit/Debit Card: Many exchanges and brokerages support credit and debit cards, but not all of them do. This is mainly down to the difficulty of directly purchasing cryptocurrency with fiat currency, as there aren’t any real systems that enable a smooth transfer from one to the other. Larger exchanges and brokerages offer a way to purchase via Credit/Debit card by holding your funds in escrow whilst it finds a seller.
You can find our full guide on how to Buy Bitcoin with Credit and Debit Card by clicking here.
- Bank Transfer: Surprisingly, this is the most common form of payment method for cryptocurrency purchase. This is due to the strict KYC processes of most exchanges and brokerages, and also how easy it is to transfer funds from one bank account to another. This works in a similar way to other payment methods by holding your funds in escrow until you find a buyer unless you purchase with a brokerage.
There are some other alternative methods for buying Bitcoin including ATM purchases, e-wallets, specific debit cards and even CFD and trading derivatives.
Buying Bitcoin in Your Country
As Bitcoin is a globally based cryptocurrency, there are literally hundreds of different trading platforms to choose from. It is nonetheless prudent to become involved with an exchange or broker that offers both content and functionality in the language you speak.
Also, some countries have either restricted or completely banned the purchase of cryptocurrency, so you may not actually be able to buy any Bitcoin if that’s the case. For example, New York still has very strict rules around the purchase of Bitcoin and there are other countries around the world that just flat out ban the buying or selling
of the cryptocurrency.
Is There a Difference Between Buying and Trading Bitcoin?
Yes. Buying Bitcoin normally means the exchange of fiat currency for that of cryptocurrency, and in this case for Bitcoin. Trading Bitcoin is slightly different, and you may not own the digital currency, but instead, you’ll have a contract that’ll trade on its value.
Most people that are looking to buy Bitcoin are either investing in a very long term asset, or they are more likely looking to support the Bitcoin blockchain, and to use the coin to purchase things online. As the industry is completely unregulated, purchasing Bitcoin and owning the asset is not covered by any regulatory body, so if the cryptocurrency was lost, or stolen then you would not have any of your funds covered at all.
People that are looking to trade are looking for quick gains and want to gain on the market valuations. Really, people that want to earn a profit off of the increase (or shorted decrease) of the price of Bitcoin find it much easier to trade the coin rather than deal with the difficult buying process. Fortunately, an added benefit of trading the coin is
There are some other nuanced differences, but there are both advantages & disadvantages to each method of obtaining Bitcoin.
What are the Fees and Commissions Involved When Buying Bitcoin?
Much like any other form of the underlying asset and trading vehicle, those who wish to get Bitcoin will need to take into account the associated transaction fees. These can generally be broken down into a handful of primary categories:
Transaction fees can be common on some exchanges when you buy bitcoins. Market makers (those who create a new Bitcoin order that cannot be immediately matched by another seller or buyer) will normally incur lower fees than a “taker” (those who place instant orders that can be immediately fulfilled). Transaction fees can likewise be offered at a flat rate per execution or they might lower as the amount of the trade increases.
These are another way for exchanges and trading platforms to earn a slight income off of account holders. The good news is that these will vary between different providers. It is worth mentioning that hubs which do not charge any type of deposit fee could very well hike up their withdrawal charges or the fees associated with each transaction.
Many traders are likely to encounter some type of withdrawal fee if they wish to sell a Bitcoin holding. For example, some providers will charge a variable rate (normally between 2% and 4%). Others might have fees which are capped at a specific amount regardless of the size of the trade. A handful of cryptocurrency exchanges are not associated with any type of withdrawal fee. Still, keep in mind that third-party charges such as those implemented by e-wallets such as PayPal may still apply.
Commissions and Spreads
There may be times when spreads or commissions are attached to a transaction anytime you buy BTC. Spreads are often encountered by those who are enacting CFD (contract for difference) trades in order to speculate on a rising or falling market. The spreads themselves can vary depending upon the provider. Average spreads of 80 pips are generally considered amenable for most transactions.
Those who are involved with leveraged positions should keep a close eye on the spread, as small movements can often have a considerable impact on profit and loss margins. Commissions might also be charged on a per-trade basis although a growing number of providers are offering commission-free positions in order to keep abreast of the growing competition.
Brokerages Versus Exchanges
Exchanges essentially act as the middlemen between a trade, so they are likely to charge moderate to high fees (depending upon the amount as well as the applicable terms and conditions). Brokerage houses tend to deal with larger positions through a dealer marketplace. In other words, they pair similar buyers and sellers with one another, merely acting as the host. Fees tend to be lower and there can be a greater degree of flexibility. However, the trade-off here is that individual investors who might hold only small amounts of Bitcoin may not be able to leverage such mechanics.
These various fees and transactions are important to address by anyone who is looking to buy Bitcoin for short- or long-term requirements. The good news is that many third-party comparison sites will provide a breakdown of such details in order to obtain the clarity and insight needed to make a firm decision.
Get a Crypto wallet and hold Bitcoin
There are various platforms that act as intermediaries in the purchase of Bitcoin online. Before you buy Bitcoin directly you must own a wallet, which will involve getting a Bitcoin address.
Getting a wallet involves deciding on a provider to use and then either downloading a wallet or using a web browser version. Most exchanges offer you the opportunity to use their wallet or you can normally get a wallet via the cryptocurrency directly.
There are two main places to buy Bitcoins:
- Peer-to-Peer platforms. A great example is LocalBitcoins, which connects buyers directly to sellers. This is a simple process but there are risks attached. Make sure to do your due diligence regarding the person on the other side of the trade. Check their reputation and preferred payment method.
- Exchanges. Platforms like Coinbase facilitate the buying process. You can buy online, either using your credit card or via bank transfer.
You can also buy them directly from another person in cash, or make some kind of exchange. This currency is still readily available and has as many possibilities are those offered by cash.
Buying Bitcoin with USD
Finding Bitcoins exchanges in the USA is relatively easier than in other jurisdictions of the world. Most companies dealing in Bitcoins have operational activities in most states of the US.
As there are many companies that deal with bitcoin throughout the US, it is unsurprising that some of these may be false or scam companies. Before you buy bitcoin with USD, you should always do your due diligence about the company in question.
There are now many exchanges and banks throughout the world that allow you to make the conversion, bitcoin to USD.