Buzz
Bitcoin is an alternative currency system developed on a network platform, representing a form of digital currency. Bitcoin serves both as an investment avenue and a payment method for goods and services, allowing users to utilize it without the need for third-party involvement. Despite its growing popularity, most businesses still do not accept Bitcoin. Additionally, the potential profitability of investing in Bitcoin is not guaranteed and comes with significant risks. Before deciding to buy Bitcoin, it is essential to understand what it is, along with its benefits and drawbacks.
Steps
Understanding Bitcoin
Basic Knowledge About Bitcoin. Bitcoin is entirely a virtual currency that enables consumers to exchange money freely without the need for third-party intermediaries (such as banks, credit card companies, or other financial institutions). Bitcoin is not governed or controlled by a central regulatory authority like the Federal Reserve, and all Bitcoin transactions occur online, where most users remain anonymous, making it difficult to trace their information.
- Bitcoin allows you to transfer currency instantly to anyone worldwide without the need for a commercial account or the services of a bank or financial institution.
- Transfers do not require providing personal names, reducing the risk of identity theft.
Understanding the Bitcoin Creation Process. To grasp Bitcoin, you must understand its creation process, often referred to as Bitcoin mining. This process is complex but essentially means that whenever a Bitcoin transaction occurs between two parties, it is recorded by computers into a transaction ledger, which details all transaction information (such as time and ownership).
- These transactions are then publicly shared in the "Blockchain," a data transmission technology that specifies each transaction and Bitcoin ownership.
- Bitcoin creators are individuals with computers who regularly verify the blockchain to ensure it provides accurate and up-to-date information. They confirm transactions and are rewarded with Bitcoin, thereby increasing the Bitcoin supply.
- Since Bitcoin is not overseen by any central authority, the creation process ensures that the sender has sufficient funds, the agreed amount is transferred, and the final balances of the involved parties are correct.
Exploring Legal Issues Surrounding Bitcoin. Recently, the federal agency responsible for anti-money laundering announced new guidelines for virtual currencies. These guidelines will regulate Bitcoin transactions but do not affect the rest of the Bitcoin market at this time.
- The Bitcoin network is not influenced by government regulations, making it popular among those involved in illegal activities, such as drug trafficking and gambling, due to its anonymous nature.
- Federal law enforcement may eventually classify Bitcoin as a money laundering tool and seek to eliminate it. While completely eradicating Bitcoin would be challenging, stringent federal regulations could drive the system underground, diminishing its value as a legitimate currency.
Benefits and Drawbacks of Using Bitcoin
Recognizing the Benefits of Bitcoin. Key advantages include low fees, protection against identity theft, prevention of payment fraud, and instant transaction processing.
- Low Fees: Unlike traditional financial systems (such as PayPal or banks), Bitcoin does not rely on such systems. The Bitcoin network is maintained by creators who are compensated in Bitcoin.
- Protection Against Identity Theft: Using Bitcoin does not require disclosing personal information, only a wallet ID. Unlike credit cards, where sellers can access your ID and credit limit, Bitcoin users remain completely anonymous.
- Prevention of Payment Fraud: As a digital currency, Bitcoin cannot be counterfeited, helping to prevent payment fraud. Additionally, Bitcoin transactions are irreversible, unlike credit card chargebacks.
- Instant Transaction Processing: Typically, transferring money between accounts takes time. Without third-party involvement, funds can be transferred directly between individuals quickly and without delays or additional fees.
Be Aware of Bitcoin's Drawbacks. With traditional banking, if fraudulent transactions occur on your credit card or the bank goes bankrupt, laws exist to limit your losses. Unlike banks, Bitcoin lacks a safety net if your funds are lost or stolen. There is no intermediary authority to refund stolen Bitcoin.
- Remember, the Bitcoin network is not immune to hackers, and a standard Bitcoin account is not entirely secure against breaches or cyberattacks.
- A study found that 18 out of 40 Bitcoin exchange services ceased operations, with only six cases resulting in customer refunds.
- Rapid price fluctuations are another significant drawback. For example, in 2013, one Bitcoin was worth around $13. Its value surged to over $1,200 and is currently around $573 (as of 08/28/2016). This volatility means that converting Bitcoin back to dollars could result in substantial losses.
Risks of Using Bitcoin as an Investment Channel. Bitcoin is often used for investment, but you should exercise caution before doing so. The primary risk of investing in Bitcoin is its extreme volatility. Rapid price fluctuations can lead to significant losses.
- Additionally, since Bitcoin's value depends on supply and demand, if it becomes subject to government regulation in the future, the number of users may decline, theoretically reducing its value.
Setting Up a Bitcoin Storage Solution
Storing Bitcoin Online. To purchase Bitcoin, you first need to set up a storage solution, which is the initial step in the buying process. There are currently two ways to store Bitcoin online:
- Keeping the keys to an online wallet. An online wallet is a file that stores your funds, similar to a physical wallet. You can create a wallet by installing Bitcoin software, which allows you to buy and sell the currency. However, if your computer is compromised by viruses or hackers, or if you accidentally misplace the file, your Bitcoin could be lost. Always back up your wallet to an external hard drive to avoid losing funds.
- Storing Bitcoin through a third party. You can also use an online wallet via a third party like Coinbase or blockchain.info, where your Bitcoin is stored in the cloud. This method is easier to set up, but you must trust the third party with your Bitcoin. These are larger and more reputable platforms, but there are no guarantees regarding their security.
Creating a Paper Wallet to Store Bitcoin. One of the most popular and cost-effective ways to store Bitcoin is by using a paper wallet. It is compact, made of paper, and contains cryptographic keys. A key advantage of a paper wallet is that the keys are not stored digitally, making it immune to cyberattacks or hardware failures.
- Many websites offer Bitcoin paper wallet services. They generate a Bitcoin address and an image containing two QR codes. One is a public address for receiving Bitcoin, and the other is a private key for accessing the stored Bitcoin.
- The image is printed on a piece of paper, which can be folded and carried with you.
Using a Hardware Wallet to Store Bitcoin. Hardware wallets are limited in supply and can be difficult to obtain. These are specialized devices designed to store electronic keys and facilitate payments. They are small, durable, and some resemble USB drives.
- The Trezor hardware wallet is ideal for Bitcoin miners who want to store large amounts of Bitcoin without relying on third-party websites.
- The Ledger Bitcoin wallet functions like a USB drive for storing Bitcoin and uses smartcard technology. It is one of the more affordable hardware wallets on the market.
Bitcoin Transactions
Choosing a Trading Service. Purchasing Bitcoin through an exchange is the easiest method. Bitcoin exchanges function like any other currency exchange. You simply register and convert any currency into Bitcoin. There are hundreds of exchanges available, and your choice depends on your location. Some well-known trading services include:
- CoinBase: A popular wallet and trading service that allows you to exchange USD and euros for Bitcoin. The company offers web and mobile apps for convenient Bitcoin trading.
- Circle: This service enables users to store, send, receive, and trade Bitcoin. Currently, only U.S. citizens can link their bank accounts for deposits.
- Xapo: A provider of Bitcoin wallets and debit cards, Xapo accepts fiat deposits and converts them into Bitcoin in your account.
- Some trading services also allow you to buy Bitcoin. Others function as wallets with limited buying and selling capabilities. Most exchanges and wallets store digital and fiat currency for you, similar to a traditional bank account. Exchanges and wallets are ideal if you plan to trade frequently and do not require complete anonymity.
Providing Identification and Contact Information for Your Chosen Service. When registering for a trading service, you must provide personal information to create an account. Laws in most countries require individuals or financial systems using Bitcoin services to comply with anti-money laundering regulations.
- Although you must provide identification, exchanges and wallets cannot guarantee the same level of security as banks. You are not protected against hackers or reimbursed if the exchange ceases operations.
Buying Bitcoin Through a Trading Account. After creating an account with a trading service, you need to link it to your existing bank account and set up procedures for transferring funds between your bank account and Bitcoin account. This is typically done via wire transfer, which incurs fees.
- Some exchanges allow you to deposit cash directly into their bank accounts. This is done in person rather than through an ATM.
- If they require you to link a bank account to use their service, they may only accept banks from the country where the service is based. Some exchanges allow you to transfer funds to overseas accounts, but fees are significantly higher, and it takes time to convert Bitcoin into local currency.
Buying Bitcoin Directly from Sellers
Find Sellers on LocalBitcoins. This is the primary website where you can meet and trade with local sellers. You can arrange meetings and negotiate prices to purchase Bitcoin. The platform also offers additional safeguards for both parties.
Use Meetup.com to Locate Sellers. If you prefer not to engage in direct peer-to-peer transactions, consider using Meetup.com to find a Bitcoin trading group. These groups meet to buy Bitcoin collectively, and you can learn from members who have experience purchasing Bitcoin from sellers.
Negotiate Prices Before Meeting. Depending on the seller, you may need to pay a fee ranging from 5-10% of the transaction value in a direct purchase. You can check the current Bitcoin exchange rate online at http://bitcoin.clarkmoody.com/ before agreeing to meet.
- Ask whether they prefer cash or online payment services. Some sellers accept PayPal, though most prefer cash as it is an irreversible payment method.
- Reputable sellers will always negotiate prices beforehand. Many are unwilling to wait long after agreeing on a price, as they fear the value of Bitcoin may fluctuate rapidly.
Meet Sellers in Busy Public Places. Avoid meeting at their homes or private locations. Exercise extreme caution if you are carrying a large amount of cash to complete the transaction.
Access Your Bitcoin Wallet. When meeting the seller, you need to access your Bitcoin wallet via a smartphone, tablet, or laptop. An internet connection is also required to confirm the successful completion of the transaction. Always verify that the Bitcoin has been transferred to your account before making the payment.
Using Bitcoin ATMs
Locate a Bitcoin ATM Near You. Bitcoin ATMs are a relatively new concept but are becoming increasingly common. You can use a Bitcoin ATM map to find one close to your location.
- Currently, many organizations worldwide, from universities to local banks, offer Bitcoin ATMs.
Withdraw Cash from Your Bank Account. Most Bitcoin ATMs only accept cash, as they are not equipped to handle debit or credit card transactions.
Insert Cash into the ATM. Then, scan the QR code of your mobile wallet or enter your account details using your phone to load Bitcoin into your wallet.
- The exchange rate at Bitcoin ATMs is typically 3-8% higher than the standard market rate.
Tips
- Be cautious about Bitcoin mining. Mining refers to creating Bitcoin by forming transaction blocks. While theoretically a way to 'earn' Bitcoin, its popularity has made mining more challenging, and it is now primarily done by large mining groups or specialized companies. You can invest in such companies, but mining Bitcoin is no longer a profitable activity for individuals.
- Be wary of anyone trying to sell you software or devices for mining Bitcoin on regular computers. These are scams, and you cannot mine Bitcoin this way.
- Secure your operating system. If you use Windows, install VirtualBox and set up a Linux virtual machine (like Debian) to handle all Bitcoin-related activities. For desktop wallets, Electrum (electrum.org) is currently the best option.
