before buying Bitcoin, you need a place to store it. In the world of cryptocurrencies, that place is called a ‘wallet,’ and they come in a variety of forms. Different kinds of wallets provide Bitcoin owners with different kind of security, storage and access options.
It is important to mention, however, that your wallet doesn’t technically store your Bitcoins. Instead, it holds private keys, essential for accessing a Bitcoin address and being able to spend the funds. Those digital keys are required to sign a transaction, and if the user loses them, they essentially lose access to their Bitcoins.
The five main types of BTC wallets are desktop, mobile, online, hardware and paper.
Types of wallets
A desktop wallet is installed on the user’s computer, providing complete control of the funds and relative budget safety. There are thick desktop wallets, which allow users to download network blocks and control their authenticity, as well as provide independent security management of their funds. On the other hand, thin wallets don’t require users to download blocks and can be easily downloaded to a portable device.
The main advantage of a mobile wallet is that the user’s funds are always on hand. It is a very convenient way of paying for goods by scanning QR-codes. In some cases, users can take advantage of their smartphone’s near-field communication feature, which allows them to just simply tap their phone against a reader and not enter any information at all. One common feature of all mobile wallets is that they are not full of bitcoin clients. This is because a full Bitcoin client has to download the entire Blockchain, which is constantly growing and requires several gigabytes of storage.
If using a web-based wallet, users’ private keys are stored online, on a server controlled by someone else and connected to the Internet. While it allows people to easily access their funds from any device anywhere in the world, there is always a risk of the server being hacked or even the organization running the service taking control of your Bitcoins. That risk, however, can be significantly reduced by implementing a variety of security measures.
Hardware wallets are dedicated to portable devices that can hold private keys and help facilitate payments. There are several different kinds of hardware wallets, but all of them allow users to carry essentially any amount of money in their pocket.
Perhaps one of the safest options for Bitcoin storage, a paper wallet is basically two QR-codes, generated using a designated service. One of them is a public key, an address that can be used to receive BTCs. The other one is a private key, using which you can spend Bitcoins stored at that address.
Where to buy Bitcoin
Buying Bitcoins is not as easy as an outsider might expect. However, the number of options is constantly increasing. Everyone can choose an option of purchasing cryptocurrency that suits their needs, some of which don’t even require Internet access or a BTC wallet.
Despite being a very new concept, Bitcoin ATMs appear in cities all over the world and their number is constantly growing. The machines charge a commission of 3% to 8% on top of the normal exchange price, but they provide users with the most private Bitcoin buying experience.
All you need to do is insert cash into the ATM, and either scan your mobile wallet QR code or receive a paper receipt with the codes and instructions on how to transfer the funds to your wallet. As Bitcoins gain popularity, such ATMs have the potential of becoming one of the most common ways of buying the cryptocurrency.
It goes without saying that Bitcoin ATMs are very unlikely to appear in countries where Bitcoin is banned or outlawed. You can find your nearest Bitcoin ATM using a designated map service, such as CoinATMRadar.
Gift cards 🎁
Bitcoins are often used to buy gift cards, as it is anonymous and can sometimes be cheaper than using cash. But gift cards themselves can be traded for BTC. All you need to do is purchase any retailer’s gift card, log into one of the Bitcoin exchanges where some sellers accept gift cards (e.g. Paxful, LocalBitcoins, etc.) and complete the purchase.
Depending on the particular seller, they might want to see an actual image of the gift code from the back of the card and a receipt from the store where it was purchased, while others will be fine with just an online or e-code. Once you open a trade, the amount of BTC that you wish to purchase will be automatically held by the website, so that it’s safe to give the seller your gift card information.
There are a lot of online retailers that sell gift cards for up to 60% of their value, hence why buying Bitcoins that way can actually save you a lot of money. Gift cards are also a great way of storing BTC, considering how its value fluctuates. However, as with any other way of buying Bitcoin, you always need to beware of scammers trying to steal money from you, so be sure to only trade with trusted sellers.
Every new potential Bitcoin buyer will find an array of various exchanges competing for their business. Choosing the right one depends on many different factors, with the location being perhaps the most important one. An exchange has to be regulated by the government as well as meet ‘know your customer’ and anti-money laundering requirements. Hence why, in order to set up an account and start trading on any currently existing exchange, you need to go through lengthy bureaucratic procedures. For example, most exchanges will require you to connect an existing bank account before you can start trading, which usually requires providing detailed personally-identifying information, thus voiding Bitcoin buyers of their anonymity.
However, exchanges do offer an unparalleled choice of trading options. Whether you’re looking for a full-blown platform for institutional traders or a simpler solution for a one-time trade, you will find an exchange that suits your needs. Moreover, most platforms can be accessed through both desktop and mobile devices, allowing users to trade from anywhere. Exchanges vary in payment options that they accept, security levels, buying limits, fees, verification requirements and so on.
Our partner Cryptoradar lets you compare different cryptocurrency exchanges and brokers based on prices, fees, features, reviews and more and helps you find the best places to buy bitcoin and more crypto, according to your needs.
Besides trading, most exchanges offer Bitcoin wallet services; however, it is probably the least reliable way of storing your funds. Despite operating as a regulated financial institution, BTC exchanges don’t offer the same level of protection as normal banks do. The trading platforms are prone to hacker attacks or can simply go out of business, often holding onto the users’ funds. So, while being the go-to option for those who wish to engage in regular operations with cryptocurrencies, the bureaucracy, potential risks and the lack of anonymity associated with Bitcoin exchanges makes it unsuitable for some traders.
If you prefer to keep your Bitcoin transactions anonymous, don’t want to deal with the banking complications and happen to live in a city, a face-to-face trade with a local seller would be the easiest way of buying Bitcoins. Among numerous websites and forums, LocalBitcoins is the most popular platform for facilitating such transactions and it also provides an escrow service in order to protect both parties and their funds even more.
Back in the day, when Bitcoin was just emerging, such transactions would often happen in sellers’ houses. These days, as BTC becomes more and more popular, people are becoming wary of scammers and take security precautions. Most of these transactions now happen in public places and both parties should take all the precautions they’d normally take when carrying and exchanging big amounts of cash. Besides, the buyer needs access to their wallet to confirm the transaction, so having a smartphone or a laptop with you and having active Internet access is another thing to consider.
Those who are not open to a one-on-one meeting can always look for a local Bitcoin meetup, where they can buy the cryptocurrency within a group environment and enrich their BTC knowledge in the process. Information on these meetings can be found on meetup.com and other similar websites.
Of course, you don’t necessarily need to meet with a seller face to face to conduct a transaction. Some sellers are open to trading over the Internet, but you need to be extremely careful, as you will be running a massive risk of losing your money. There is always an option of using payment services like PayPal that guarantee the reception of goods, but most sellers these days prefer non-reversible hard cash due to the constant fluctuation of Bitcoin’s price.
Depending on a seller, you will need to pay a five to 10% fee for privacy and convenience on top of the original exchange price. Some sellers would negotiate the overall price before the meeting, while others will only sell Bitcoins at the exact BTC rate established during the transaction. This has to be done in case Bitcoin’s value takes a dramatic shift.
An investment trust 🏦
An investment trust is a form of collective investment in which the investors’ money is pooled together from the sale of a fixed number of shares, which a trust issues when it launches. With Bitcoin appearing in the limelight of the financial world, an emergence of a BTC-focused investment trust was only a matter of time.
Bitcoin Investment Trust (BIT), the first-ever publicly traded Bitcoin-related investment vehicle, enables people to gain exposure to the cryptocurrency without having to directly buy or store it. BIT is invested exclusively in Bitcoin and gets its value solely from the price of BTC. The trust has currently reached a market value of $1.8 bln dollars as well as being up by 1,600 percent in two years. Despite the great performance numbers, some investors think that it is nothing but a bubble about to burst.
Bitcoin Investment Trust is the first of its kind, and that contributes massively to its over-inflated valuation. There have been speculations about other similarly-structured funds entering the market but BIT remains the only big player in the game. But as the cryptocurrency market is evolving, similar funds will undoubtedly enter the market, which will not only take a lot of pressure off BIT, but will solidify Bitcoin’s status as a world-renowned currency.
Difficulties of buying Bitcoin
Credit card or PayPal
It may come as a surprise, but no matter which exact trading method you’re using, it’s still not easy to buy Bitcoins with your credit card or via PayPal, depending on where you are in the world. Exchanges avoid those payment methods, requiring users to connect their bank account instead. Most private sellers tend to be wary of such transactions as well, preferring hard cash.
This is because of the so-called ‘chargebacks.’ Most transactions made using credit cards or PayPal can easily be reversed by simply calling the card-issuing company. Bitcoin transactions are irreversible, and it can be extremely hard to prove that any goods changed hands in a transfer of Bitcoins, this payment method is generally avoided.
Warnings about buying Bitcoin
Legality problems in your country
Bitcoin certainly attracts interest from law enforcement agencies, tax authorities and legal regulators. What they are trying to understand is how the cryptocurrency fits into already existing frameworks. How legal your Bitcoin activities depend on who you are, where you live and what are you doing with it. Essentially, the answer for most countries is simple: if you’re not spending your Bitcoins on anything illegal, you are not breaking any laws.
Bitcoin has been around for a while, so most governments have had enough time to decide on its legality. As of September 2017, BTC is only illegal in Vietnam, Iceland, Bolivia, Ecuador, Kyrgyzstan and Bangladesh. Some other countries have not taken an official position on the issue, while Thailand and Russia have initially outlawed all digital currencies, but backtracked soon after. Recently, Russian authorities have even considered officially recognizing Bitcoin and all other digital currencies in order to combat illegal transactions (vedomosti).
It is worth remembering that despite the proof of identity requirements that most exchanges and wallets impose on their users, those services don’t provide the same level of protection that banks do. For instance, in case the exchange goes out of business or is robbed by hackers, their insurance for users’ funds is often very limited or non-existent at all. This was the case with the infamous failed Chinese exchange Mt Gox, which officially filed for bankruptcy protection and admitted the irretrievable loss of 750,000 of its customers’ Bitcoins. As Bitcoins don’t have the legal status as a currency in most parts of the world, the authorities are usually unsure how to approach thefts. There have been cases of larger exchanges replacing their customers’ funds after a theft from the exchange itself, but at this stage of BTC’s development, they are not legally obliged to do so.
Moreover, if a theft of the cryptocurrency happens due to a security or password lapse on the user’s parts, there is no guaranteed way of getting the funds back. Some banks even refuse to work with funds that were obtained through digital currency transactions due to regulatory uncertainty.
Pieces of advice about buying Bitcoins
When trading in Bitcoins, it is essential to treat your private key (comparable to an ATM PIN) as a guarded secret, and only use it to authorize BTC transactions. The private key is kept in your wallet, so protecting it would be a smart idea. For example, you can encrypt the wallet with a strong password, back your wallet up or choosing the cold storage options, which basically means keeping it offline. Some exchanges even offer a ‘multisig vault’ option to store your keys. Multi-signature addresses allow multiple people to partially control the address with a public key. So, when someone wants to spend some of the Bitcoins stored at that address, they would need some of these people to sign their transaction in addition to themselves. The number of signatures necessary is usually agreed upon when people involved creating the address.
Finally, while most exchanges offer wallet capabilities to their users, it is very important to remember that it isn’t their primary business. Moreover, the cryptocurrency history is filled with instances of exchanges shutting down and running away with their users’ funds. For those reasons, if you decide to buy your Bitcoins from an exchange, it is recommended that you move your money to a wallet of your own and make sure that it is safe, secure and protected.