This article will present an overview of some essential knowledge required before one rushes to a Bitcoin exchange and begins a journey of buying the cryptocurrency.
A good question to ask upfront would be to become clear on one’s reason for actually buying Bitcoin in the first place. There are two main reasons people may buy Bitcoin, and these two can be broken into short-term and long-term use.
Short-term use has two main functions: speculation, and use of Bitcoin as a currency to transact with.
In short-term speculation, people make use of the rapid changes in Bitcoin’s price, known as volatility, in order to make money quickly. As Bitcoin’s price has been known at times to change very quickly, – such as on December 15th, 2017, when Bitcoin jumped from its previous day’s value of $17,601 to its maximum value of $19,343, Bitcoin is known as a speculative currency. A person who invested $1,000 into Bitcoin on December 14th and sold on December 15th would have been able to sell at $1,098, which is almost a 10 percent gain in a single day. However, short-term speculators should be very careful indeed, because if this same person had bought $1,000 on December 21st and sold on December 22nd, they would have lost almost $110.
Using Bitcoin as a currency for many smaller transactions may be closer to what its creators intended. However, currently, with the high fees of Bitcoin transactions, this particular use is not recommended.
Bitcoin fees are not dependent on the amount of money sent, and are fixed whether you are sending 1 cent or a million dollars’ worth. However, the fees instead depend on how busy the network is at a given time. At the time of the huge spikes in Bitcoin’s price, the fees were between $16 to $19, and a short four days later, were at a shocking $37. As of today, with Bitcoin being on a downward trend, it costs 27 US cents for an hour-long transaction or $2.19 to have the transaction complete within ten minutes.
These reasons make Bitcoin impractical for use in many stores (as waiting 10 minutes for confirmation is a long time), and the fees make Bitcoin impractical for microtransactions, which is arguably one of the reasons that the blockchain technology has such potential.
Long-term use of Bitcoin generally indicates that the buyer believes the value will appreciate, and possibly also that the buyer believes that the volatility will eventually slow down as more and more people own Bitcoin, more cryptocurrencies exist, and the blockchain is better understood.
It is also important that you know some relevant investment terms. Investopedia is a good place to look some of these up, and Cryptocompare is a good website for cryptocurrency-specific terms. For now, it is recommended that you learn the meanings of market capitalization, bull and bear markets, altcoins, exchanges and wallets, private and public keys, as well as the aforementioned blockchain, volatility, and speculation.
An exchange is a company that will buy and sell Bitcoins and sometimes other cryptocurrencies, known as altcoins. An exchange is often the first place to begin one’s journey of trading and holding cryptocurrency. Exchanges will almost always allow buying and selling for fiat currency like USD, EUR, GBP, etc.
Some exchanges will also hold your cryptocurrency for you in an ‘account’, but you should be aware that exchanges are often targeted by hackers, as they are known to have large amounts of cryptocurrency and may therefore be worth hacker’s time and energy to steal from. Bitcoinica, Bitfloor, Mt Gox, Bitstamp, Bitfinex and NiceHash have all been hacked, in high-profile thefts that involved, in some cases, millions of dollars. For this reason, it is much better to install your own cryptocurrency wallet, which you will learn how to do in the next section.
If you are looking to use an exchange, bear in mind that most exchanges require a name and address to verify your identity, and by that avoid criminal activity on their platforms.
While choosing a wallet can involve a labyrinth of information, it shouldn’t be so. First, it is necessary to understand that there are different kinds of wallets: software wallets that run on a desktop computer, wallets that run on a mobile phone, hardware wallets that are standalone computing devices, and paper wallets that store a key on an actual piece of paper. Hardware wallets have the highest security but require an initial fee to purchase the devices. The easiest way to choose a wallet is to use a simple decision matrix.
If you are an amateur investor who is dealing with money amounting to one week’s paycheck or less, it may not be worth your while to buy a hardware wallet. In this case, the decision is simple: you can use a desktop application or a mobile application.
If you are involved in investing slightly higher amounts into cryptocurrency, it is recommended to use a hardware wallet in a USB device, such as Trezor (or its competitor Ledger), along with a compatible software wallet. Even if your chosen hardware wallet doesn’t support your chosen software wallet, you can always transfer your funds between the two, it just means you will need to pay the transaction fee each time you do.
As mentioned previously, transaction fees, along with transaction wait times, are currently one of the largest limitations to transacting with Bitcoin. It is likely that, over time, computer engineers will find solutions to this problem, as they are certainly incentivized to do through the promise of a financial reward. In this way, blockchain and Bitcoin are self-correcting technologies. Because they cannot be owned and controlled by any specific entity, they are almost guaranteed to improve over time.
While there is no way that an article of this length could tell you everything that you need to know before buying Bitcoin, hopefully it could provide you with a good beginning to your journey. Happy investing!