- Bitcoins, What Are They?
- Bitcoin vs other means of exchange
- How to use Bitcoin
- Buying Bitcoins
- Selling Bitcoins
- Bitcoins ATMs & Debit Cards
- Appx. 1 – A History of Cryptocurrency
- Appx. 2 – Bitcoin Legality & Regulations
So, you’ve made your choice of a wallet and are ready to start buying Bitcoin, but it’s not like you can just go down to the bank and buy some, is it? Where do you actually get Bitcoin? How do you convert real world money into cryptocurrency?
Basically, you have two choices. Buy Bitcoin from an exchange or buy Bitcoin directly from other Bitcoiners, via online marketplaces. But there’s a small catch. Life just isn’t that easy.
Historically, you couldn’t just pull out your Visa or MasterCard or use PayPal to buy Bitcoin. Most exchanges and individuals refused to accept this method of payment because it’s all too easy for dishonest folk to reverse the transaction and leave the seller empty handed and without recourse. Buy your Bitcoin with your Visa and, once they’re in your wallet and the transaction validated by the blockchain, then just pick up the phone, call Visa and say the payment was in error, ask for a chargeback and you keep the Bitcoin and pay nothing. Okay, that’s outright deception used for financial gain, otherwise known as “fraud”, but it happens.
That’s why Bitcoin sellershave traditionally been wary of taking credit cards for Bitcoin.
Moreover, PayPal sees Bitcoin as direct competition, and has been known to ban accounts trading in them and freeze their balance. Yep, it’s a brutal world out there.
This is, however, changing. With Bitcoin blossoming in popularity and competition among exchanges heating up, more and more exchanges are willing to take major credit cards.
This is happening in part thanks to a growing body of regulation, meaning that the exchange has to ask you for a whole lot of personal information (similar to opening a bank account) for you to be able to trade.
Regulated exchanges generally have to apply two sets of rules at minimum, the so-called “know your customer” (KYC) guidelines and “anti-money laundering” (AML) rules. Okay, this reduces the risk of fraud and helps inhibit Bitcoin exchanges being used as a forum for money laundering, but at the same time it kinda defeats the original purpose of Bitcoin, namely that it is anonymous, decentralized and not controlled by any one party or institution. Bitcoin was all about taking out the middleman, not putting in a new one that’s dressed a little hipper and more tech savvy cool than your average Wall Street sleaze.
5.1. What’s an Exchange?
Yep, you guessed it, like a stock exchange, a Bitcoin exchange is a place, real or virtual, that facilitates trades between buyers and sellers. In a nut shell, the exchange is a middleman, like a real estate agent, who takes a small fee for introducing buyer and seller (of between 0.01 – 5%, often without having to leave the physical exchange office or their computer, unlike a real estate agent, who has to get off their ass to show you around and hence charges a larger commission). In a Bitcoin exchange, people set orders to buy/sell Bitcoin for a certain price and, depending on the market, the exchange connects the two when both their conditions are met, and, ideally, both live happily ever after.
So, say you want to buy Bitcoin via an exchange and you don’t mind having to give them a boat load of personal information so they can comply with their local regulations and keep a lid on fraud and money laundering. First, you deposit real money with the exchange, dollars or euros for example, which can be made in a number of ways, depending on which exchange you use. Payment methods include by credit card, wire transfer, cash at the physical exchange office, personal checks or money orders. Then you place your order and get your Bitcoin sent to your wallet. Sounds pretty easy, doesn’t it? In reality, it is.
5.2. Types of Orders
Now there are two types of exchange orders you can place, “limit orders” and “market orders”.
A limit order allows the exchange broker to buy Bitcoin for lower than the current price or sell your Bitcoin for higher than the current price within the range you specified. In other words, you’re asking the broker to get you the best deal. That is, you would never pay a higher price for the amount you specified than the limit you set. For example, you want to buy 1 Bitcoin but not for more than $10,000. The broker tries to get you the best price for 1 Bitcoin but will not pay over $10,000. When the market is stable, this is a great way to buy Bitcoin. However, when the market is extremely volatile and changing rapidly, your limit could get left behind, costing you more to cancel the order and resubmit it at a new higher or lower price.
A market order simply finds the best, matching limit order and buys or sells. For example, you want $1000 worth of Bitcoin and place a market order. The exchange simply finds someone selling the most Bitcoin you can get for $1000, the cheapest price at the time, and completes the transaction. This is the fastest way to buy Bitcoin.
Not all Bitcoin exchanges are created equal. Make sure you know the real-world identity of the exchange you are planning to use, their track record, if they are licensed (regulated) and have insurance against theft or fraud.
We’ve compiled a list below of well-known Bitcoin exchanges said by the community to be legitimate, whether they are beginner friendly and the type of payment methods they accept when you want to buy Bitcoin. It’s recommended that you compare their brokerage rates and ease of use before you get started. Again, brokerage fees can vary widely, from as low as 0.01% to 5%. It is also highly recommended that you do not keep significant amounts of funds with third-parties. In other words, don’t use the exchange like a bank to hold your funds. Exchanges are for buying and selling. Keep your money in a more secure place, like a vault!
5.3. Current Bitcoin Exchanges
Editor’s note: both the exchanges listed above, and their payment methods are subject to change.
5.4. Online Marketplaces – Going Direct
If you’re not interested in going through an exchange, the other option is to buy Bitcoins directly from anyone willing to sell them online, using any payment method you like. As opposed to regulated exchanges, which require large amounts of personal information, buying direct has far greater privacy protection, but with that, just like with unregulated exchanges, come greater risk. Bitcoin OTC, Coinbase, BitBargain, Bittylicious and Local Bitcoins are some of the most popular peer-to-peer online markets. There is also a currency exchange forum on Bitcointalk.org that provides both advice, warnings and the ability to buy and sell Bitcoin directly, without a third party.
It is highly recommended that you remain extremely cautious when buying Bitcoin over the counter.
Ask and administrator, moderator or someone you trust if you detect the slightest hint of suspicious behavior. Remember it’s a dangerous world out there and buyer beware.