Despite receiving significant attention in the financial and investment world, many people do not know how to buy the cryptocurrency Bitcoin, but doing so is as simple as signing up for a mobile app.
- To buy Bitcoin, you must first sign up for a Bitcoin wallet.
- Traditional payment methods such as a credit card, bank transfer (ACH), or debit cards will buy Bitcoins on a Bitcoin exchange using a Bitcoin wallet as a depository.
- Bitcoin experiences price volatility and remains an uncertain commodity in terms of taxation and legality.
First, Sign up for a Bitcoin Wallet
Before you buy Bitcoin, you must first download a Bitcoin wallet from a site such as Blockchain.info or Coinbase, or by using a mobile app such as Bitcoin Wallet for Android or Blockchain Bitcoin Wallet for iOS. You will be required to fill out an online form with basic details, which should not take more than two minutes. Below is an example of the Coinbase account page for a Bitcoin wallet on Coinbase. The page looks similar to online banking software used by most traditional commercial bank customers.
A Bitcoin wallet should not be used for long-term storage. Instead, Bitcoin or its key should be stored in a secure wallet such as one that uses a multi-signature facility for security.
Use Regular Money to Buy Bitcoin
Once you have a Bitcoin wallet, you can use a traditional payment method such as a credit card, bank transfer (ACH), or debit card to buy Bitcoins on a Bitcoin exchange. The Bitcoins are then transferred to your wallet. The availability of the above payment methods is subject to the area of jurisdiction and exchange chosen. Below is a screenshot of the Bitcoin interface showing how to buy and sell Bitcoin and also Bitcoin Cash, Ethereum, and Litecoin, which are other popular virtual currencies. The user clicks the "Buy" tab to buy digital currency and the "Sell" tab to sell digital currency. You select which currency you are buying/selling and which payment method (your bank account or credit card) you want to use.
Remember that the Bitcoin exchange and the Bitcoin wallet are not the same things. Bitcoin exchanges are similar to foreign exchange markets. The exchanges are digital platforms where Bitcoin is exchanged for fiat currency— for example, Bitcoin (BTC) for U.S. dollars (USD). While exchanges offer wallet capabilities to users, it is not their primary business. Since wallets must be secure, exchanges do not encourage storing large amounts of Bitcoin or for long periods. Therefore, it is advisable to transfer your Bitcoins to a secure wallet. Because security must be your top priority when choosing a Bitcoin wallet, opt for one with a multi-signature facility.
There are many well-established exchanges that provide one-stop solutions with high security standards and reporting, but due diligence should be exercised when choosing a Bitcoin exchange or wallet.
How to Buy Bitcoin
A Bitcoin Wallet Is for Your Private Key, Not for Storing Bitcoin
The common assumption that Bitcoins are stored in a wallet is technically incorrect. Bitcoins are not stored anywhere. Bitcoin balances are maintained using public and private “keys,” which are long strings of numbers and letters linked through the mathematical encryption algorithm used to create them. The public key (comparable to an international bank account number or IBAN) serves as the address published to the world, and to which others may send Bitcoins.
The private key (comparable to an ATM PIN) should be a guarded secret and only used to authorize Bitcoin transmissions. Thus, it is the “private key” that is kept in a Bitcoin wallet. Some safeguards for a Bitcoin wallet include encrypting the wallet with a strong password and choosing the cold storage option; that is, storing it offline. Coinbase offers a secure "multisig vault" to host user keys.
As a user, you are free to use your Bitcoins and the private key to buy a commodity, pay for a service, or send money to friends or family. These Bitcoins are sent using the “address” of the recipient. Selling Bitcoins on the exchange will earn you the Bitcoin sale price in the local currency, which can be withdrawn.
Although Bitcoin is homogenous (the same everywhere in the world), its price varies across countries and even exchanges within the same country, giving rise to arbitrage opportunities. At one point in 2017, the Bitcoin price in South Korea was trading at a 35% premium and, in India, a 20% to 25% premium. The demand and supply conditions create aberrations in its price.
The number of places where Bitcoins can be spent is increasing rapidly and includes some large retail players as well as many small businesses and retailers. The increased acceptance of Bitcoin is boosting its footprint across the globe and is helping to secure official recognition as a legitimate mode of payment. In 2017, Japan accepted Bitcoin as a valid payment option.
Bitcoins are not stored in a wallet. Rather Bitcoin balances are maintained using public and private “keys,” which are long strings of numbers and letters linked through an encryption algorithm.
The Bottom Line
The changing regulatory stance, increasing adoption and acceptance, and investment in Bitcoin start-ups and products are cumulatively increasing confidence in Bitcoin. However, it is still in a nascent stage with price volatility and an uncertain stance regarding taxation and legality.
Investing in cryptocurrencies and Initial Coin Offerings (ICOs) is highly risky and speculative, and this article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies or ICOs. Since each individual's situation is unique, a qualified professional should always be consulted before making any financial decisions. Investopedia makes no representations or warranties as to the accuracy or timeliness of the information contained herein. As of the time of writing, the author owned no crypto.